Western Banks’ Withdrawal From East Eases: Vienna Group

Western banks slowed their retreat from emerging Europe in the third quarter, the Vienna Initiative group of international lenders and regulators said.

Western banks cut their exposure in the region by 0.5 percent of gross domestic product between June and September when excluding Russia and Turkey. That was the fifth quarterly reduction and it brought the cumulative amount withdrawn since mid-2011 to 4.6 percent of GDP, the group said today in an e-mailed statement.

The slump in the euro region, the top destination for emerging Europe’s exports and the main source of its investment and bank financing, has slowed growth and cut access to capital. Foreign lenders, including Erste Group Bank AG, which own about three-quarters of banks in the continent’s east, are trimming financing and capital to their units as stricter regulations require them to repair balance sheets.

Funding reductions “moderated further in the third quarter of 2012, but did not stop or reverse,” the Vienna Initiative said. “The slowdown of de-leveraging in the third quarter likely reflects improved financing conditions for cross-border banking groups based in western Europe.”

Including Turkey and Russia the reduction in funding was less than 0.1 percent of GDP, the group said in its quarterly de-leveraging monitor. While Hungary and Slovenia had funding reductions of 2 percent of GDP or more, Slovakia and Montenegro received large inflows, it said.

Rebalancing Funding

“Banks are in the process of rebalancing the funding of their subsidiaries toward local sources, in an effort to roll back the excesses of the boom period,” the group said.

The Vienna Initiative group of banks, regulators and policy makers helped prevent an east European financial collapse in 2008 and 2009 by persuading western banks to stay invested in the region and roll over financing when needed. The group includes international financial institutions, such as the International Monetary Fund, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development.

The group also said the high rate of non-performing loans needs to be addressed in some countries in the region.

“It will be critical to clean balance sheets from non-performing loans, which can act as a drag on new credit provision,” it said.

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