Banking sectors in central and eastern Europe have some of the highest foreign ownership rates in the world, but risks from eurozone parents could be curtailed by deleveraging since 2008.
It is no surprise to find central and eastern European (CEE) countries dominating the top 10 countries with the highest rates of foreign bank ownership, contributing six of the total. In the case of Estonia, the country with the highest rates of foreign ownership, this phenomenon also coincides with very heavy bank penetration – total assets are almost 180% of gross domestic product (GDP).
Outside the CEE region, several of the countries on this list are distinctive cases. The New Zealand financial sector has long been closely integrated with Australia, while the Swaziland economy is highly dependent on South Africa, with the South African rand accepted as legal tender. Similarly, El Salvador is a dollarised economy, altering the dynamics of foreign funding. Of course, three of the CEE countries, Kosovo, Estonia and Slovakia, have all adopted the euro, while the Lithuanian currency is pegged to the euro.
Mexico is a more complex story, with a range of Spanish and US banks active in the country accounting for just over 80% of local assets. But the risks are partly offset by the fact that Mexican banks are capable of funding themselves locally. Among the foreign-owned subsidiaries, the aggregate loan-to-deposit (LTD) ratio is less than 80%.
The impact of eurozone disruption
In the CEE region, some foreign-owned banks are also self-funding, reducing the risks from any continued disruption to eurozone banks. The European Bank for Reconstruction and Development (EBRD) has compiled data on the dependence of CEE countries on eurozone short-term lending (see chart 2). Based on this indicator, the Slovak Republic is at risk, with credit from the eurozone accounting for 45% of GDP. But much of this may be lending directly to local companies, rather than via the financial sector, which runs a healthy LTD ratio of 87%.
The Baltic countries still have relatively high LTD ratios of about 100% or more, but the economies as a whole have very low levels of external debt. And those LTDs are far reduced from the heady days of the boom pre-2008, when the figure for foreign banks in Estonia was 188%, and for Lithuania 163%. In general, heavy deleveraging by foreign-owned subsidiaries in the CEE region since 2008 has reduced the risks of a funding crunch this time around.
The most at-risk on this list would appear to be Croatia, where total external debt levels are relatively high and the LTD ratio among foreign subsidiaries is still well over 100%. For other, better-funded countries, a further question will be whether parents can replenish capital in the event of local losses. Most of the foreign-owned subsidiaries remain in profit in this sample, with particularly good returns-on-assets of more than 2% in Estonia, Kosovo and Mexico – and more than 3% in Swaziland. Losses are still ongoing in Lithuania, but the main foreign parents here are well-capitalised Swedish banks who are one step removed from the eurozone woes.
