Big European banks could reduce assets by the end of 2013 with up to $3.8 billion, representing 10% of the total, according to the most pessimistic scenario of IMF on crisis policies in the euro area. Eastern Europe is the most vulnerable emerging region. The Fund examines, in the Global Financial Stability report, three scenarios for reducing exposure of 58 large banks in the period September 2011 – end of 2013, according to the policies adopted by eurozone leaders on the crisis.
The most pessimistic analysis, which takes into consideration anti-crisis policies less effective than current ones, estimates asset sales and the reducing of credit totaling $3.8 billion. In a scenario based on maintaining current policies, considered most likely by the IMF, banks would be forced to reduce assets by $2.6 billion, equivalent to 7% of assets, while in case of complete anti-crisis policies, that would restore stability in the financial sector, the exposure drop would amount to $2.2 billion, or 6% of assets.
European banks have decided to reduce their assets due to debt crisis, an important reason being the tougher capital adequacy requirements imposed by the European Banking Authority. Credit institutions must arrive by midyear to a capital adequacy ratio of 9%. Since stock prices of large banks in Europe showed strong declines in recent years, due to the debt crisis, a lot of banks that do not meet this threshold have preferred to reduce assets to avoid attracting additional capital.
Emerging Europe will feel the strongest the impact of assets reducing even though banks in other regions than the euro area will probably intervene to fill the gap left, at least in the scenario that takes into account the current maintenance policy crisis, notes IMF. Eastern Europe is by far the most vulnerable to a slowdown in economic activity in the euro area, with the strongest links to monetary union and highest external financing needs. At the same time, the room for maneuver on policy, such as international reserves and fiscal measures is lower than in Asia or Latin America, and in many cases lower than in 2008.
As the pressure increased on banks’ financing and governments in the euro area in the second half of last year, Western parent banks decreased cross-border financing for transactions in emerging Europe. In the period ahead, banks will raise their credit balance in the region very modestly, because of pressures on funding and capital, a situation involving a stagnation or even a decline in lending in many vulnerable countries.
Lending standards were tightened considerably as the impact of concerns in the euro area keeps interest at a high level on the interbank market and thus increase borrowing costs to customers. According to the IMF’s baseline scenario, in which the banks would relinquish assets of $2.6 billion, the impact on the emerging Europe in the EU, like Romania, Bulgaria, Hungary and Poland, could amount to 4% of the total of credits for the private sector, with a lesser effect on the Baltic countries.
In the worst case scenario, of a deepening crisis in the euro area, where banks would give priority to the home lending market and capital consolidation, the impact of emerging economies of the EU should reach about 6% of the outstanding loans to the private sector. Market segments most vulnerable to the assets drop by the banks include lending local authorities and SMEs, as these loans generate lower income from fees and don’t bring in sales of other financial products, writes IMF.
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