19/10/2016 1
Banking Sector & Capital Flows
Debora Revoltella
Director Economics Department, European Investment Bank
Warsaw 14th October 2016 - 6th Annual NBP Conference on the Future of the European Economy (CoFEE)
19/10/2016 2
External sources of finance (1)
Evolution of capital outflows and inflows in the EU
(level, USD trillions, lhs, and net flows in % GDP, rhs, 4-qtr moving average)
“Core countries” include AT, BE, DE, DK, FI, FR, LU, SE, UK. “Vulnerable member states” (VMS) includes CY, GR, SP, IE, IT, SLO, PT. “Cohesion countries” include BG, CR, ES,
HU, LI, LT, ML, PL, ROM, SK.
EU Core countries
Vulnerable countries Cohesion countries
-400
0
400
800
1200
1600
2000
2400
2800
3200
01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1
Foreign funding
Gross domestic savings
Gross fixed investment
-400
0
400
800
1200
1600
2000
2400
01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1
Foreign funding
Gross domestic savings
Gross fixed investment
-200
0
200
400
600
800
1000
01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1
Foreign funding
Gross domesctic savings
Gross fixed investment
-100
0
100
200
300
400
01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1
Foreign funding
Gross domestic savings
Gross fixed investment
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External sources of finance (2) – investment
financingDomestic vs external source of finance for domestic investment
(EUR billions, annual flows)
“Core countries” include AT, BE, DE, DK, FI, FR, LU, SE, UK. “Vulnerable member states” (VMS) includes CY, GR, SP, IE, IT, SLO, PT. “Cohesion countries” include BG, CR, ES,
HU, LI, LT, ML, PL, ROM, SK.
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External sources of Finance by asset type (3)
“Core countries” include AT, BE, DE, DK, FI, FR, LU, SE, UK. “Vulnerable member states” (VMS) includes CY, GR, SP, IE, IT, SLO, PT. “Cohesion countries” include BG, CR, ES,
HU, LI, LT, ML, PL, ROM, SK.
Evolution of capital inflows and outflows in the EU - (% GDP)
Note: Difference between average annual flows prior to the crisis (2005Q1-2007Q2), and after (2012Q1-2014Q4)
Source: IMF balance of payments statistics
Portfolio
Equity
Portfolio
Debt
Direct
Investment
Other
investmentTotal
Portfolio
Equity
Portfolio
Debt
Direct
Investment
Other
investmentTotal
CORE -1.0 -5.3 -4.0 -19.8 -30.1 -0.7 -6.6 -2.0 -21.1 -30.4
VUL 0.8 -6.2 -2.9 -10.9 -19.2 1.4 -14.1 0.1 -12.2 -24.8
COH -0.4 -0.1 -2.0 -0.7 -3.2 0.5 -0.2 -3.4 -4.2 -7.3
EU -0.5 -5.6 -3.9 -17.6 -27.5 -0.2 -8.3 -1.5 -18.8 -28.7
Outflows Inflows
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Cross-border banks in CESEE
Traditional banking model :
relatively high capitalized subsidiaries (due to retained earnings to
finance future growth)
fast lending growth financed through intra-group funding from the
parent country
The crisis has led to a transformation of the banking model:
capital in the subsidiaries preserved, but more repatriation of profits
transformation of the funding model towards domestic funding sources
local NPLs first, as well as parents NPLs and capital position lately
emerging as a constraint
The EIB Bank Lending survey, developed in the context of the Vienna
Initiative, an useful instrument to assess dynamics
19/10/2016
Groups: Commitment to the region
Groups’ intensions on aggregate operations in
CESEE
7% 7%
29%
57%
#N/A2%
24%
33%
30%
10%
ReduceOperations
Selectivelyreduce
operations
Mantain thesame level of
operationsvia
subsidiaries
Selectivelyexpand
operations incertain
countriesExpand
operations
2016-H2 2013-2014
ROA of your CESEE operations - % of
responses with ROA lower of overall group ROA
0%
10%
20%
30%
40%
50%
60%
Apr'13 -Sep'13
Oct'13 -Mar'14
Apr'14 -Sep'14
Oct'14 -Mar'15
Apr'15 -Sep'15
Oct'15 -Mar'16
Apr'16 -Sept'16
Oct'16 -Mar'17
Question: Longer-term strategic approach (beyond 12 months): Looking at
operations via subsidiaries in CESEE, your group intends to…Question: Profitability of the strategy in the CESEE region: is ROA of your CESEE
operations higher/lower/equal to that for the overall group?
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Groups: Exposure to CESEE - by instrument
Question: Group’s exposure to CESEE: Concerning cross-border operations to CESEE countries, your group did/intends to…
14% 21%
57%64%
29%14%
Last 6 Months Next 6 MonthsReduce exposureMaintain the same level of exposureExpand exposure
14% 21%36%
43%
50% 36%
Last 6 Months Next 6 Months
21% 14%
79% 86%
Last 6 Months Next 6 Months
Groups' total exposure to CESEE
Exposure to subsidiaries
Intra-group funding
Capital
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Subsidiaries: Cumulated demand and supply
dynamics – an increasing perceived gap
Cumulated net percentages - supply and demand
Questions: Credit Supply: bank's (local subsidiary)’s credit standards applied when assessing credit applications (options: eased, unchanged, tightened); Credit Demand:
demand for loans or credit lines to enterprises and households (options: increased, stable, decreased)
30
50
70
90
110
130
150
170
190
May'12- Oct'12
Oct'12 -Mar'13
Apr'13-Sep'13
Oct'13 -Mar'14
Apr'14 -Sept'14
Oct'14-Mar'15
Apr'15 -Sep'15
Oct'15 -Mar'16
Apr'16-Sep'16
Supply Demand
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Determinants of supply (constraints)
Question: Factors affecting your bank's credit standards (credit supply). Have the following domestic and international factors contributed to tightening (easing) your
credit standards over the past six months, and do you expect them to contribute to tightening (easing) your credit standards over the next six months?
Net percentages; positive figures indicate a positive contribution to supply conditions
18%
11% 11%
-11%
-22%
-2%
15%
-15%
-2%-6%
-17%
12%
5%10%
-9%
-24%
-2%
17%
-11%
-4%-6%
-4%
-13%
Local Mk.Outlook
Local bankOutlook
Local bankfunding
Local bankcapital
constraints
Change inlocal
regulationLocal NPLs
figuresGroup
outlookGlobal Mk.
OutlookGroup
fundingEU
regulation
Groupcapital
constraintsGroup NPLs
figures
Domestic Factors International Factors
Last 6 months Next 6 Months 2013 H1
13%
-1%
12%
1%
Domestic International
Last 6 months Next 6 Months
2013 H1
Domestic factors: capital and regulation, only marginally NPLs
International factors: mostly negative, with more pronounced negative
contributions from Group NPLs and global outlook
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Recent research findings on cross border banking
Subsidiaries' lending behavior is strongly influenced by parents' financial
conditions, particularly in Central and Eastern Europe (Jeon et al., 2013)
Existence of internal capital markets within international banking groups -
spur growth and transmit cross border financial weaknesses (Houston
and James, 1998; De Haas and Van Lelyveld, 2010)
Recent research - Gattini and Zagorisiou (2016)
Subsidiary banks provide an extra boost to credit growth at the
domestic level; whilst domestic and subsidiary banks contracted credit
similarly after the financial crisis
Funding costs are transmitted from home to host markets
Parents’ asset quality predictor of credit growth at subsidiary level
Parents’ economic capital position matters - suggesting a rather
centralized management of capital levels
Parents’ excessive risk taking matters: excessive credit expansion
coupled with a reduction of economic capital ratios jeopardizes
subsidiaries' lending capacity
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Summing up….
The region benefited from capital inflows as a driver of stronger growth
then the one allowed by the limited domestic savings
Structural funds, FDIs and cross-border banks have been key drivers
What could be the model for the future?
FDI (?)
Capital Market Union, as a means for real integration into the
European single financial market (?)
Equity investment (private equity and venture capital) (?)
Bond Market (?)
Cross-border banking (?)
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Vienna Initiative future work
• Continuous monitoring: Deleveraging and Credit Monitor, Bank lending
Survey and NPL Monitor
New work plan / enhanced focus for Vienna Initiative 2.0 – future work
streams:
• Future financial sector development in CESEE and the role of cross-
border banking
• Capital Markets Union and new model for capital flows
• Investment in CESEE
• Specific regulatory issues, country and regional basis
• Full Forum in Luxembourg Q1 2017
19/10/2016 13
Thank you
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