Receding Tide or Gathering Tsunami? Cross-border lending in Emerging Europe
Over the past 10 years, the liberalization of financial sectors in both emerging and developed economies has led to a corresponding increase in cross-border lending to heights never before seen in the world economy. However, this rebound in cross-border lending has been threatened of late by both market turmoil and, perhaps more seriously, by regulatory plans emanating from Western Europe.
A new report by Senior Research Fellow Dr. Christopher A. Hartwell from the Institute for Emerging Market Studies (IEMS)-Moscow School of Management SKOLKOVO examines recent trends in cross-border lending in the CESE countries and traces the effects of proposed regulations on lending in the region.
The findings of the report include:
The ongoing Eurozone crisis has shown once again the sensitivity of cross-border lending to broader macroeconomic trends;
Regulations mainly from Austria increasing capital surcharges has led to de-leveraging of assets in the CESE countries, decreasing further credit available;
The higher the levels of financial liberalization in a particular CESE country, the higher the levels of credit and foreign bank claims – and correspondingly deeper capital markets.
The report concludes that more financial liberalization will help the CESE countries to weather future financial shocks. Moreover, if Europe continues to issue edicts to guard against most forms of risk, regulations might just force a reallocation of risk appetite from Austrian and Italian banks to Polish and Russian ones.