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Financial stability challenges in candidate countries managing the transition to deeper and more market-oriented financial systems

Author

Listed:
  • Winkler, Adalbert
  • Schokker, Hubert
  • Cocozza, Emidio
  • Herzberg, Valerie
  • Móré, Csaba
  • de Lannoy, Anthony
  • Gardó, Sándor
  • Chmielewski, Tomasz
  • Polgár, Éva Katalin
  • Habib, Maurizio Michael
  • Bracke, Thierry
  • Zumer, Tina
  • Geis, André
  • Backé, Peter

Abstract

This paper reviews financial stability challenges in the EU candidate countries Croatia, Turkey and the former Yugoslav Republic of Macedonia. It examines the financial sectors in these three economies, which, while at very different stages of development and embedded in quite diverse economic settings, are all in a process of rapid financial deepening. This manifests itself most clearly in the rapid pace of growth in credit to the private sector. This process of financial deepening is largely a natural and welcome catching-up phenomenon, but it has also increased the credit risks borne by the banking sectors in the three economies. These credit risks are compounded by the widespread use of foreign currency-denominated or -indexed loans, leaving unhedged bank customers exposed to potential swings in exchange rates or foreign interest rates. Moreover, these financial risks form part of a broader nexus of vulnerabilities in the economies concerned, in particular the external vulnerabilities arising from increasing private sector external indebtedness. That said, the paper also finds that the authorities in the three countries have taken several policy actions to reduce these financial and external vulnerabilities and to strengthen the resilience of the financial sectors. JEL Classification: F32, F41, G21, G28

Suggested Citation

  • Winkler, Adalbert & Schokker, Hubert & Cocozza, Emidio & Herzberg, Valerie & Móré, Csaba & de Lannoy, Anthony & Gardó, Sándor & Chmielewski, Tomasz & Polgár, Éva Katalin & Habib, Maurizio Michael & Br, 2008. "Financial stability challenges in candidate countries managing the transition to deeper and more market-oriented financial systems," Occasional Paper Series 95, European Central Bank.
  • Handle: RePEc:ecb:ecbops:200895
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecbocp95.pdf
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    References listed on IDEAS

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    Cited by:

    1. Adalbert Winkler, 2012. "The Financial Crisis: A Wake-up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies?," Chapters,in: Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia, chapter 7 Edward Elgar Publishing.

    More about this item

    Keywords

    banking sector; capital inflows; emerging markets; Europe; vulnerability indicators;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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