Implications of the Global Financial Crisis on the Banking Sector in Eastern Europe and Baltic States

Abstract

In 2008-09 the banking sectors of four Central and East European States and three Baltic States have experienced a large-scale financial crisis in the EU for the first time since becoming foreign-owned. Amongst the new EU member states Baltic States and Hungary were the worst affected economies. The paper first explores why the extent of crisis varied among these seven states by distinguishing major differences in the pre-crisis bank lending practices which reflect different macroeconomic developments and exchange rate policies in these states. Based on the analysis of bank performance indicators since 2008 and my interviews with representatives of major banks active in the region, the important role of foreign banks in mitigating the risks of financial contagion is outlined. The implication from the crisis is examined mainly from the perspective of the financial supervision and regulation in the enlarged EU. By inspecting the concrete experience of financial supervision authorities in the Baltic States the paper shows why the host country supervisors were not able to curb excessive lending and risk-taking by large Scandinavian banks. Since it is expected that the new EU regulatory and supervisory framework will reinforce the financial stability in the case of large cross-border banking groups, the paper addresses the issues in the financial crisis prevention, management are resolution in the new EU member states which will improve based on the new EU regulatory and supervisory framework for credit institutions.