Financial stability challenges in EU candidate countries - Financial systems in the aftermath of the global crisis
AbstractThis paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage. JEL Classification: E3, E52, E58
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Bibliographic InfoPaper provided by European Central Bank in its series Occasional Paper Series with number 115.
Date of creation: Jul 2010
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Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-06 (All new papers)
- NEP-BAN-2010-08-06 (Banking)
- NEP-CBA-2010-08-06 (Central Banking)
- NEP-EEC-2010-08-06 (European Economics)
- NEP-TRA-2010-08-06 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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