Housing Finance in the Euro Area

This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy

The Refinancing Structure of Banks in Selected CESEE Countries

Since the onset of the global financial market turbulence in mid-2007 there have been concerns whether and to what extent the unfolding liquidity squeeze may affect banks in Central, Eastern and Southeastern Europe (CESEE). In this note, we present systematic regional and cross-country information about the refinancing structure of the banking sector in selected CESEE countries as at end-2007 and mid-2008 (most recent data, depending on data availability). Thus, we focus on the situation of banks in these countries before external funding conditions deteriorated significantly for some of them, which happened in the second half of 2008 and has become particularly evident since mid-September. We benchmark the region against the euro area, and – where appropriate – against non-European emerging market economies. This exercise is to contribute to a better understanding of the risks to these countries emanating from the global liquidity squeeze, which may turn out to be more persistent and more relevant for the CESEE region than assumed when the turbulence began to unfold in mid-2007.financial stability, banking sector, Central and Eastern Europe, refinancing

The Croatian Banking System

This paper provides an analysis of the stability of the Croatian banking sector. After the banking crisis of 1998, the Croatian banking system underwent a deep transformation process; foreign investors gained a dominating market share of more than 90% of total assets, with Austrian banks holding 43% thereof. Compared to other Central and Eastern European countries (CEECs), the degree of banking intermediation is relatively high in Croatia. In recent years, lending to the private sector and in particular to households has risen whereas lending to the general government has declined. Foreign currencies continue to play an important role in the Croatian banking sector, in particular on the liabilities side of banks balance sheets. While maintaining a large negative net foreign currency position on their balance sheets (with an increasing portion of net liabilities to nonresidents), Croatian banks overall net foreign currency position seems to be marginally positive. Still, foreign currency(-indexed) lending represents a credit risk as it entails an indirect exchange rate risk. Asset quality, by contrast, has improved significantly over the past five years, the capital adequacy ratio is on a relatively high — albeit declining — level, and real return on equity (ROE) is now as high as the profitability levels observed in other CEECs.Banks

Main Features of Recent Banking Sector Developments in Selected Southeastern European Countries

The purpose of this paper is to provide a comparative stock-taking exercise of recent banking sector developments in four current EU candidate countries (CC-4), namely the two acceding countries Bulgaria and Romania and the two negotiating candidates Croatia and Turkey. The paper finds that a strong increase in foreign liabilities allowed boosting domestic lending in particular to households. At the same time, banks’ credit risk that results from nonbanks’ foreign exchange exposure has significantly increased. Although in recent years (1) banks’ profitability has increased, (2) their share of nonperforming assets has declined and (3) their capital adequacy ratios can currently be considered as still sufficiently high (despite the recent domestic credit expansion), considerable risks to macroeconomic and macrofinancial stability may arise if foreign liabilities and domestic credit growth continue to increase at such a rapid pace in the future.Banks

Credit Growth in Central and Eastern Europe Revisited

This short study builds on earlier work by Égert, Backé and Zumer that analyzes data up to the end of 2004 and presents updated results on the deviations of private sector credit-to-GDP levels from their estimated equilibrium levels in the ten new Central, Eastern and Southeastern European EU Member States and in Croatia. The study uses new data on lending and its determinants until end-2006, which show that the levels of private sector credit to GDP continued to catch up with their long-run equilibrium levels in 2005 and 2006. Moreover, in a few countries, credit levels have already become fairly elevated relative to the underlying fundamentals. The paper discusses implications for policymaking in European emerging economies on the basis of these developments, focusing on the contributions the most important policy domains can make to managing dynamic financial sector deepening and its implications for macroeconomic developments.

Walking the Tightrope: A First Glance on the Impact of the Recent Global Financial Market Turbulence on Central, Eastern and Southeastern Europe

The Central, Eastern and Southeastern European (CESEE) countries have, to some extent, felt the impact of the international financial market turbulence observed since July 2007. While CESEE markets tended to follow the negative global investor sentiment in general, they performed relatively well compared to other emerging markets. Overall, increases in risk premiums and asset price losses were rather contained in the region, which may reflect a positive impact on investor judgment induced by EU convergence. However, the fact that the financial turmoil had a stronger impact on countries with weaker economic fundamentals and/or insufficient policy credibility shows that correcting overly large economic imbalances remains imperative in a relatively fragile international environment.Financial markets; economic vulnerabilities; Central, Eastern and Southeastern Europe; CESEE

Can Banking Intermediation in the Central and Eastern European Countries Ever Catch up with the Euro Area?

This paper focuses on the private credit flow-to-GDP ratio for measuring and comparing the degree of banking intermediation, which complements the widely used stock-flow measure. The authors find that, on the basis of this flow-flow measure, the current degree of banking intermediation in most Central and Eastern European countries (CEECs) is significantly closer to the euro area average than suggested by the traditional stock-flow measure. Nevertheless, the longer-term average of annual figures of the recent past indicates that most CEECs still have some way to go to catch up with intermediation in the euro area in a persistent manner, even on the basis of the flow-flow measure. Furthermore, the authors analyze the implications of the different concepts of convergence in the degree of banking intermediation. According to simulations, maintaining a flow-flow ratio in the CEECs equal to the euro area average of the past ten years (i.e. given full convergence in the flow-flow ratio) will also lead to convergent stock-flow ratios. However, this will only be the case at a rather late point in time, i.e. not before the end of this century, and will thus come considerably later than convergence in GDP per capita at purchasing power parity (PPP). On the other hand, for the CEECs to simultaneously achieve convergence in the stock-flow ratio and in per capita income levels, the flow-flow ratios would have to significantly and persistently exceed the euro area average of the period from 1994 to 2003 for a period of between 15 and 50 years, depending on the respective country. Drawing on the experience of major catching-up economies in the past 50 years worldwide, the authors do not completely exclude, but take a rather skeptical view on, the possibility of realizing in a sustainable manner the high level of the flow-flow ratio that would be required for the simultaneous convergence in the stock-flow ratio and in per capita income levels.