European Central Bank Governing Council member Ewald Nowotny said strong loan growth in some eastern European countries needs close monitoring by regulators to avoid another bubble like the one that burst in 2009.
It was difficult to tell whether some former communist states’ economies had been overheating or converging with western neighbors before the recession that started in most of eastern Europe in 2009, Nowotny, the Austrian central bank’s governor, told journalists on the sidelines of a conference in Vienna. That process may still blur the picture, he said.
“It was rather difficult to distinguish what was the catching-up process and what was a bubble,” Nowotny said. “The medium-term perspective is still a catching-up process. We do have room for financial deepening. But we do have also some countries where we see that we have very high growth of demand, where we have to be very careful.”
Western European lenders led by Austria’s Raiffeisen Bank International AG (RBI), Erste Group Bank AG (EBS) and UniCredit Bank Austria AG (UCG) bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. In many countries, banks lent to households in euros or Swiss francs to bypass higher local interest rates, exacerbating the economic downturn when the region’s currencies weakened. Bad loans have shot up since 2009 and are weighing on bank balance sheets.
The European Union’s eastern members that aren’t using the euro -- including Poland, Hungary, the Czech Republic, Bulgaria, Romania and Croatia -- should consider joining the ECB-led joint bank supervision, Nowotny said. That could limit fragmentation that diverts capital and liquidity from where they are needed most, a criticism that has been made by banks including UniCredit and Raiffeisen.
“It’s my conviction that ring-fencing will not help us move forward,” Nowotny said. “Regulatory and supervisory measures with regard to capital and liquidity in individual countries should be taken in a European spirit.”
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