foreign credit institutions only accounted for approximately 20% at the most and, hence, constituted a subordinate position.
Since the development of total assets of the Czech Republic’s banking sector was characterised by a disproportionately high volatility, the analysis of this balance sheet item for emerging Europe has focused on the remaining group of new member states.
Within this group, the amount of foreign banks’ total assets followed a steady course during the time of the financial crisis. From 2009 to 2012, foreign-owned assets did not increase, as in the years before, but they were not reduced in the eastern periph-ery, either.
Internal capital markets within cross-border banking groups seem to be in existence.
Whereas foreign subsidiaries and branches in emerging Europe have annually grant-ed a smaller amount of loans than they have receivgrant-ed as deposits, their parent banks in Western Europe have continuously granted more loans than they have in return re-ceived as deposits. Thus, it can be assumed that multinational banks apparently uti-lise internal capital markets for the transfer of liquidity between the different parts of the company. As compared to this, the amount of total loans and the amount of total deposits of stand-alone domestic credit institutions in Eastern Europe have been al-most identical within the same timeframe.
Lending by foreign-owned affiliates has remained relatively stable in emerging Eu-rope. In 2012, the level of foreign banks’ total loans was the same as in the beginning of the observation in 2007. However, the total deposits received by foreign banks have increased by 10% from 2007 until 2012, which has led to the described gap be-tween loans and deposits.
As a conclusion of the empirical analysis, the behaviour of multinational banking groups in Eastern Europe during the past turbulent six years can be characterised as neutral. The sta-tistics do not indicate that foreign-controlled subsidiaries and branches have withdrawn large amounts of capital. Instead, total assets of foreign banks in the new member states, excluding the Czech Republic, and the total loans granted by foreign banks in all ten new member states maintained at a constant level. Furthermore, since the number of multina-tional banks’ foreign affiliates remained stable and has even slightly increased, the long-term interest of these companies in the eastern region becomes evident. Nevertheless,
cross-border banks have neither been highly supportive within the crisis through, for in-stance, the provision of additional liquidity. Moreover, the existence of internal capital markets in combination with the significantly high market share of foreign subsidiaries and branches constitutes a factor of vulnerability for the member states in emerging Europe and, hence, emphasises the need for efficient supranational regulation and supervision.
On the basis of the empirical results, the assessment of the prevailing regulatory and su-pervisory system as well as of the current proposals concerning future reforms has generat-ed the following insights:
The main shortcomings during the financial crisis have been the lack of coordination between national authorities of the member states and the absence of a transnational institution, which has the scope and the abilities to efficiently regulate and monitor cross-border banking groups.
Regulation and supervision based on home country control disregards the substantial impact of cross-border banks on the banking sectors of the host economies, especial-ly in developing countries. An alternative would be effect-based jurisdiction, as pro-posed by Pistor (2010). This approach would enable the respective member states to regulate those multinational banking groups, which have a material effect on their economy, regardless of the home base of the parent bank.
The existence of internal capital markets within multinational banking groups raises the need for stricter regulatory and supervisory instruments concerning intra-group asset transfer. In this regard, it is vital to enhance the existing disclosure obligations of cross-border banks, in order to recognise extensive withdrawals of liquidity across borders, which constitute a potential threat for the economic health of a member state, in sufficient time.
Since foreign-owned subsidiaries and branches maintained their activities at an ap-propriate level in emerging Europe during the previous turbulent years, radical re-forms, such as ring-fencing or the imposition of a certain organisational form for for-eign operations, should be handled with care. Along these lines, the design of new regulatory measures should always consider the right balance between costs and effi-ciency.
Instead, more indirect solutions are recommendable, including a cross-border resolu-tion framework for multinaresolu-tional banks, effective burden-sharing arrangements be-tween home and host authorities, a transnational supervisory authority with legally binding powers, adequate information-sharing mechanisms between national authori-ties, enhancement of capital and liquidity regimes, as well as comprehensive risk governance and risk management by multinational banking groups.
The conducted analysis of western multinational banks’ activities in emerging Europe dur-ing the financial crisis and of the corresponddur-ing regulatory measures generates further ide-as for future research. On the one hand, the impact of geographical and cultural proximity of the home and host countries on the behaviour of cross-border banks and their affiliates, especially in times of crisis, constitutes one potential field of examination. Furthermore, an important area for future research is the analysis of how and to what extent western politi-cians influence the investment decisions of their domestic multinational banks, for instance through imposing conditions on state aid programmes. Eventually, it would be important to investigate, which structural changes and which governmental actions would be necessary in Eastern Europe to strengthen the local banking sector and, hence, to become less de-pendent on western multinational banking groups.
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A
PPENDIXFigure 3.1: GDP growth rate, unemployment rate, and inflation rate in the new member states (NMS) from 2006 to 2012 (Data source: Eurostat)
Figure 3.2: GDP growth rate, unemployment rate, and inflation rate in Western Europe (EU17) and the GDP growth rate of the new member states (NMS) from 2006 to 2012 (Data source: Eurostat)
2006 2007 2008 2009 2010 2011 2012
GDP growth rate (NMS) 7.47 6.97 2.72 -8.11 1.65 3.55 1.26 Unemployment rate (NMS) 8.27 6.66 6.35 10.21 12.23 11.18 10.86 Inflation rate (NMS) 4.30 5.43 8.28 2.62 2.32 3.87 3.49
-10%
-5%
0%
5%
10%
15%
Data in percent
2006 2007 2008 2009 2010 2011 2012
GDP growth rate (EU17) 3.58 3.66 0.43 -4.18 1.76 0.95 -0.78 Unemployment rate
(EU17) 6.74 6.21 6.24 8.18 8.89 9.24 10.47
Inflation rate (EU17) 2.29 2.09 3.59 0.58 1.91 2.93 2.48 GDP growth rate (NMS) 7.47 6.97 2.72 -8.11 1.65 3.55 1.26
-10%
-5%
0%
5%
10%
15%
Data in percent
Figure 3.3 (left): Ratio of domestic and foreign banks in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
Figure 3.3 (right): Total number of domestic and foreign banks in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
2007 2008 2009 2010 2011 2012
Domestic banks (NMS) 811 789 794 786 785 775
Foreign banks (NMS) 235 246 256 258 252 244
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Data: Number of banks
2007 2008 2009 2010 2011 2012
Domestic banks (NMS) 811 789 794 786 785 775
Foreign banks (NMS) 235 246 256 258 252 244
0 100 200 300 400 500 600 700 800 900
Data: Number of banks
Number of banks
Figure 3.4 (left): Percentage fluctuations of domestic banks in Western Europe (EU17) and of foreign banks in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
Figure 3.4 (right): Total number of domestic banks in Western Europe (EU17) and of foreign banks in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
2008 2009 2010 2011 2012
Domestic banks (EU17) 2.30 -1.73 -3.92 -1.32 -2.48
Foreign banks (NMS) 4.68 4.07 0.78 -2.33 -3.17
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Data in percent
2007 2008 2009 2010 2011 2012
Domestic banks (EU17) 3,049 3,119 3,065 2,945 2,906 2,834
Foreign banks (NMS) 235 246 256 258 252 244
0 500 1,000 1,500 2,000 2,500 3,000 3,500
Number of banks
Data: Number of banks
Figure 3.5: Total assets of domestic and of foreign banks in the new member states (NMS) from 2007 to 2012 (in- and excluding the Czech Republic (CZ); data source: ECB statistics)
Figure 3.6: Ratio of domestic banks’ total assets to foreign banks’ total assets in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
2007 2008 2009 2010 2011 2012
Domestic banks (NMS) incl.
CZ 183.00 194.81 321.90 324.64 317.17 258.84
Foreign banks (NMS) incl.
CZ 548.00 633.05 534.30 553.33 515.77 661.56
Domestic banks (NMS) excl.
CZ 179.00 188.77 225.90 224.87 231.44 245.81
Foreign banks (NMS) excl.
CZ 413.00 491.59 485.90 509.03 476.08 496.52
0 100 200 300 400 500 600 700
EUR bn
Data in EUR bn
2007 2008 2009 2010 2011 2012
Foreign banks (NMS) incl. CZ 548.00 633.05 534.30 553.33 515.77 661.56 Domestic banks (NMS) incl. CZ 183.00 194.81 321.90 324.64 317.17 258.84
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Data in EUR bn
Figure 3.7: Ratio of domestic banks’ total assets to foreign banks’ total assets in Western Europe (EU17 and in the new member states (NMS) in 2012 (Data source: ECB statistics)
Figure 3.8: Ratio of domestic banks’ total assets to foreign banks’ total assets for each of the new member states (NMS) in 2012 (Data source: ECB statistics)
NMS EU17
Foreign banks 661.56 7,377.03
Domestic banks 258.84 35,213.05
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Data in EUR bn 2012
BG CZ EE HU LT LV PL RO SI SK
Foreign banks 31.00 165.04 19.89 62.39 20.60 16.99 207.50 74.60 14.46 49.09 Domestic banks 11.13 13.03 0.74 44.94 1.21 10.71 127.57 8.46 34.58 6.47
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Data in EUR bn 2012
Data in EUR bn
Figure 3.9: Growth rates of total assets of domestic banks in Western Europe (EU17) and of foreign banks in the new member states (NMS) from 2008 to 2012 (Data source: ECB statistics)
Figure 3.11: Total loans and total deposits of domestic and of foreign banks in the new member states (NMS) from 2007 to 2012 (Data source: ECB statistics)
2008 2009 2010 2011 2012
Domestic banks (EU17) 15.24 -8.49 -0.08 3.70 -1.04
Foreign banks (NMS) excl.
CZ 19.03 -1.16 4.76 -6.47 4.29
-10%
-5%
0%
5%
10%
15%
20%
25%
Data in percent
2007 2008 2009 2010 2011 2012
Total loans foreign banks
(NMS) 446.51 478.60 439.40 453.56 438.48 446.10 Total loans domestic banks
(NMS) 128.77 146.10 162.90 169.44 172.15 177.45 Total deposits foreign
banks (NMS) 446.63 500.50 487.10 512.29 484.93 500.37 Total deposits domestic
banks (NMS) 146.38 144.00 163.30 169.78 174.32 187.41 0
100 200 300 400 500 600
EUR bn
Data in EUR bn
2007 2008 2009 2010 2011 2012
Domestic banks (EU17) 32,562.00 37,525.66 34,341.40 34,313.31 35,584.42 35,213.05 Foreign banks (NMS)
excl. CZ 413.00 491.59 485.90 509.03 476.08 496.52
Figure 3.12: Growth rates of total loans and total deposits of foreign banks in the new member states from 2008 to 2012 (Data source: ECB statistics)
Figure 3.13: Total loans and total deposits of domestic banks in Western Europe (EU17) from 2007 to 2012 (Data source: ECB statistics)
2008 2009 2010 2011 2012
Total loans foreign banks (NMS) 7.19 -8.19 3.22 -3.32 1.74 Total deposits foreign banks
(NMS) 12.06 -2.68 5.17 -5.34 3.18
-10%
-5%
0%
5%
10%
15%
Data in percent
2007 2008 2009 2010 2011 2012
Total loans domestic banks
(EU17) 19,002.65 21,242.70 15,721.90 19,229.50 19,881.52 19,646.82 Total deposits domestic
banks (EU17) 17,024.92 17,811.70 13,587.20 17,183.12 17,328.50 17,925.40 0
5000 10000 15000 20000 25000
EUR bn
Data in EUR bn
Figure 3.14: Ratio of total loans to total deposits of foreign banks in the new member states (NMS) in 2010 (Data source: ECB statistics)
BG CZ EE HU LT LV PL RO SI SK
Total deposits foreign banks 24.88 126.12 25.96 61.42 15.85 16.75 133.75 56.15 12.78 38.63 Total loans foreign banks 24.96 95.82 22.88 51.85 16.91 16.43 130.79 46.22 12.55 35.15
0%
25%
50%
75%
100%
Data in EUR bn 2010