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Financial stability challenges for EU acceding and candidate countries: making financial systems more resilient in a challenging environment

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  • IRC Expert Group of the ESCB

Abstract

This Occasional Paper reviews financial stability challenges in countries preparing for EU membership with a candidate country status, i.e. Croatia (planned to accede to the EU on 1 July 2013), Iceland, the former Yugoslav Republic of Macedonia, Montenegro and Turkey. It follows a macro-prudential approach, emphasising systemic risks of financial systems as a whole. After recalling that some EU candidate countries went through a pronounced boom-and-bust credit cycle in recent years, the paper identifies current challenges for the bank-based financial sectors as mainly stemming from: (i) high or rising domestic credit risk; (ii) unhedged borrowing in foreign currencies; and (iii) strains related to the euro area debt crisis, which is impacting the EU candidate countries via a number of channels. The main channels of transmission of the euro area debt crisis to the EU candidate countries operate via: (i) trade and foreign direct investment; (ii) an increased market focus on sovereign risk; and (iii) “deleveraging”, e.g. via a decline of external funding to local subsidiaries of EU parent banks. A macro-stress-test exercise performed by the national authorities of the EU candidate countries in February 2012 suggests that large capital buffers can absorb a shock to credit quality stemming from a drop in economic activity in the EU and renewed strains from the euro area debt crisis. With respect to supervisory practices, the paper finds that the EU candidate countries have made good progress, but some gaps with respect to international and EU standards remain. JEL Classification: E43, G21

Suggested Citation

  • IRC Expert Group of the ESCB, 2012. "Financial stability challenges for EU acceding and candidate countries: making financial systems more resilient in a challenging environment," Occasional Paper Series 136, European Central Bank.
  • Handle: RePEc:ecb:ecbops:20120136
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp136.pdf
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    References listed on IDEAS

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    1. Sabine Herrmann & Dubravko Mihaljek, 2010. "The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises," BIS Working Papers 315, Bank for International Settlements.
    2. Stijn Claessens & Neeltje Horen, 2014. "Foreign Banks: Trends and Impact," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 295-326, February.
    3. Celeska, Frosina & Gligorova, Viktorija & Krstevska, Aneta, 2011. "Macroprudential regulation of credit booms and busts : the experience of the National Bank of the Republic of Macedonia," Policy Research Working Paper Series 5770, The World Bank.
    4. Jesús Crespo Cuaresma & Jarko Fidrmuc & Mariya Hake, 2011. "Determinants of Foreign Currency Loans in CESEE Countries: A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 69-87.
    5. Elisabeth Beckmann & Thomas Scheiber & Helmut Stix, 2011. "How the Crisis Affected Foreign Currency Borrowing in CESEE: Microeconomic Evidence and Policy Implications," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 25-43,112-1.
    6. Beck, Roland & Jakubik, Petr & Piloiu, Anamaria, 2013. "Non-performing loans: what matters in addition to the economic cycle?," Working Paper Series 1515, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    banking sector; emerging; Europe; macro-prudential approach; markets; vulnerability indicators;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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