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The Euroization of Bank Deposits in Eastern Europe

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In Eastern Europe a substantial share of bank deposits are denominated in foreign currency. Deposit euroization poses key challenges for monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency induced credit risk. Policymakers disagree on whether Eastern European countries should tackle deposit euroization with “dedollarization” policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of “dedollarization” policies requires a clear understanding of which households hold foreign currency deposits and why they do so. Based on survey data covering 16,375 households in ten countries in 2011 and 2012, we provide the first household-level analysis of deposit euroization in Eastern Europe. We examine how households’ preferences for and holding of foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations, network effects and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Eastern Europe can be partly tackled by prudent monetary and economic decisions by today’s policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a “habit” in the region. Second, we find that deposit euroization is still strongly influenced by households’ experiences of financial crises in the 1990s.

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  • Martin Brown & Helmut Stix, 2014. "The Euroization of Bank Deposits in Eastern Europe," Working Papers 197, Oesterreichische Nationalbank (Austrian Central Bank).
    • Handle: RePEc:onb:oenbwp:197
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    Cited by:

    1. Pierre LESUISSE, 2017. "External Monetary Shocks to Central and Eastern European Countries," Working Papers 201705, CERDI.
    2. Bošnjak Mile & Kordić Gordana & Bilas Vlatka, 2018. "Determinants Of Financial Euroisation In A Small Open Economy: The Case Of Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(218), pages 9-22, July – Se.
    3. Valentina-Ioana Mera & Monica Ioana Pop Silaghi & Camélia Turcu, 2020. "Economic Sentiments and Money Demand Stability in the CEECs," Open Economies Review, Springer, vol. 31(2), pages 343-369, April.
    4. Pierre Lesuisse, 2019. "External Monetary Shocks to Central and Eastern European Countries," Working Papers halshs-01467330, HAL.
    5. Olta Manjani, 2015. "Estimating the Determinants of Financial Euroization in Albania," IHEID Working Papers 07-2015, Economics Section, The Graduate Institute of International Studies.
    6. Krogstrup, Signe & Tille, Cédric, 2018. "Foreign currency bank funding and global factors," Kiel Working Papers 2104, Kiel Institute for the World Economy (IfW Kiel).
    7. Tille, Cédric & Krogstrup, Signe, 2015. "On the roles of different foreign currencies in European bank lending," CEPR Discussion Papers 10845, C.E.P.R. Discussion Papers.
    8. Valerija Botric & Tanja Broz, 2017. "Gender Differences in Financial Inclusion: Central and South Eastern Europe," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 15(2), pages 209-227.
    9. Smaranda Pantea, 2022. "Self-employment in the EU: quality work, precarious work or both?," Small Business Economics, Springer, vol. 58(1), pages 403-418, January.
    10. AIBA, Daiju & 相場, 大樹, 2016. "Financial Dollarization: Evidence from a Survey on Branches of Cambodian Financial Institutions," Discussion Papers 2016-09, Graduate School of Economics, Hitotsubashi University.

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