Central and East European Bank Responses to the Financial ‘Crisis’: Do Domestic Banks Perform Better in a Crisis than their Foreign-Owned Counterparts?

Abstract

In the context of transition, nine out of the 10 post-communist countries that ultimately joined the European Union reluctantly privatised the bulk of their banking sectors with foreign capital. The financial crisis of 2008–2009 therefore sparked fears that foreign banks would remove their operations from their Central and East European markets because of a ‘home bias’ in lending. Such fears were predicated on the widely held beliefs that banks' loyalties lie with their home markets and that it is therefore desirable to protect domestic bank ownership to help combat an economic downturn. This essay casts doubt on the value of banking sector protectionism by comparing foreign and domestic bank behaviour in Central and Eastern Europe during the crisis. The essay finds no consistent relationship between domestic control and either limited economic vulnerability or countercyclical lending.

Notes

I would like to thank Jan Drahokoupil, Martin Myant and two anonymous reviewers for their comments on earlier drafts of this paper. I am also grateful to Stephen Bloom for his input on the Latvian section of the article. Erica Fein, Balazs Martonffy, and Gosia Pawlak all provided invaluable research assistance. The Faculty Research Fund and the Professional Research Opportunities Fund at the University of Denver, as well as the Colorado European Union Center of Excellence at the University of Colorado at Boulder, provided field research support.

¹ Also see De Haas et al. (2012, p. 13) for the relatively stronger countercyclical role of state-owned banks when examining the larger ‘emerging Europe’ region, which includes 30 countries.

² Also see the work by Epstein (2012).

³ On China's banks, see Barboza (2011, p. A1). On China's support for green energy technology, see Bradsher (2010, p. A1).

⁴ For example, ‘Athens … ordered Greek banks to pull out of the Balkans’ (as given in Engdahl (2009)).

⁵ The information on government requirements attached to bank bail-outs (except for Germany) comes from IIF (2009) and ‘Homeward Bound’, The Economist, 5 February 2009. The information on Germany is from the author's interview with three Commerzbank bankers (Frankfurt, 15 June 2011).

⁶ See King (2009). For similar conclusions, see Engdahl (2009), Champion et al., (2009) and Cox and Garnham (2009). Industry reports were also negative: see Citigroup, ‘Western Europe's Banks: Eastern Europe's Problem?’, 13 October 2008; Deutsche Bank, ‘CEE Banking Systems—Risks of a Systemic Banking Crisis?’, 15 October 2008; and Merrill Lynch, ‘A Review of Exposures to CEE’, 27 October 2008. Only the Economist was more sanguine, arguing that it was unlikely that a Western bank would ‘pull the plug’ on a Central and East European subsidiary: ‘The Whiff of Contagion: Ex-Communist Economies’, The Economist, 28 February 2009, p. 29.

⁷ Allied Irish Bank and Volksbank of Austria are two examples.

⁸ Author's interview with a former Polish Deputy Minister for Foreign Affairs, Warsaw, 22 June 2011.

⁹ Author's interview with a PKO BP management board member, Warsaw, 22 June 2011.

¹⁰ Author's interview with a former chief economist at a foreign-owned bank in Poland, Warsaw, 22 June 2011.

¹¹ Author's interview with the PKO BP management board member. For 2009, PKO BP's assets increased by 17%, while its deposit base grew by 22% (PKO BP 2010a, p. 4).

¹² Author's interview with the former chief economist at a foreign-owned bank in Poland, Warsaw, 22 June 2011.

¹³ Buckley (2011) and ‘Latvia Weighs Human Cost of its Austerity Programme’, Financial Times, 6 November 2011.

¹⁴ See Bakker and Gulde (2010) on this dynamic in all the countries with currency boards.

¹⁵ Author's interviews with Hungarian bankers, Budapest, 20 June 2011.

¹⁶ Author's interviews with Hungarian bankers, Budapest, 20 June 2011.

¹⁷ ‘Orbán és Csányi a bankadóról’, Népszabadság Online, 8 July 2010, available at: http://nol.hu/gazdasag/egy_asztalnal_orban_viktor_es_csanyi_sandor, accessed 20 February 2013. Hungarian bankers employed by foreign-owned banks speculate that Csányi was consulted on the bank levy bill before it was passed. Author's interviews with Hungarian bankers, Budapest, 20 June 2011.

¹⁸ ‘Economic Issues: The Economic Crisis Interrupted Slovenia's Efforts in Achieving the Strategic Objectives and Revealed Structural Maladjustment of its Economy’, UMAR Economic Issues, 13 August 2010; ‘Impact of the Crisis on the Credit Market in Slovenia’, Economic Issues 2011, pp. 89–116; and Bank of Slovenia (2009) ‘Stability of the Slovenian Banking System’ (Ljubljana, Bank of Slovenia).

¹⁹ The quotation is from Economic Issues 2011, p. 89. Also see p. 92 of the same report on low credit activity in Slovenia, in addition to Cerni (2012).

²⁰ Slovenian Press Agency, ‘Slovenia to Slash Majority Stake in NLB to 25%’, 29 February 2012. Also see ‘‘Economic Issues: The Economic Crisis Interrupted Slovenia's Efforts in Achieving the Strategic Objectives and Revealed Structural Maladjustment of its Economy’, UMAR Economic Issues, 13 August 2010, p. 4.