The refinancing of CESEE banking sectors: What has changed since the global financial crisis?

We systematically analyze the liability structure of banking sectors in Central, Eastern and Southeastern Europe (CESEE) in a cross-country perspective over a decade (2008–2018). The refinancing structures have materially transformed since the start of the global financial crisis (GFC), as witnessed by a marked decline of net foreign liabilities (NFL) in % of GDP in various countries. Turkey represents a notable exception from this general trend, as its banking sector has accumulated net foreign liabilities – to an extent comparable to the levels seen in some CESEE EU Member States before the GFC. The general NFL reduction was in some cases partly driven by a shrinking credit stock (in % of GDP or even nominally) and, in almost all cases, partly or fully driven by increasing domestic deposits. Hence, most CESEE banking sectors saw a shift in their funding structure from net foreign liabilities to domestic deposits. At the same time, the share of overnight deposits in total liabilities increased considerably in many countries. It is also noteworthy that the gaps between foreign currency loans and foreign currency deposits narrowed or even disappeared, so that foreign currency loans no longer surpass foreign currency deposits at the current stage (or only slightly so). Looking ahead, deposits will likely continue to grow (as long as the high nominal wage growth is maintained), but banks in the EU will have to adapt their funding structure to the new regulatory environment by issuing bonds that are eligible under the minimum requirement for own funds and eligible liabilities (MREL). Hence, the role of debt securities is expected to increase from a very low level.