Table of Contents

European Integration in a Global Economy

European Integration in a Global Economy

CESEE and the Impact of China and Russia

Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald

The expert contributors focus on global imbalances and accompanying policy challenges, competitiveness and trade, the sustainability of current growth strategies, and banking and financial stability in the light of the global economic and financial crisis. They provide a multi-disciplinary assessment, combining the views of high-ranking central bankers, policymakers, commercial bankers and academics, and demonstrate that a broad view of European economic integration is crucial given that spillovers and contagion were major issues of the recent economic crisis.

Chapter 19: Banking and financial stability in the light of the crisis

Dejan Šoškić

Subjects: economics and finance, international economics, money and banking

Extract

Question: It’s always very interesting to hear what banks want to get, but what is the official side willing to give? _o_ki_: Let me respond to this question with reference to the crisis in 2007 and 2008. On an international level, the policy response consisted essentially of the provision of supporting instruments by the IMF and of the Vienna Initiative, which has basically substantially decreased the funding risk for many of the subsidiaries and branch offices of Western banks in Central, Eastern and South- Eastern Europe. Those were the two very important instruments on the international side, which have, I would say, induced and stabilized the financial situation in Central, Eastern and South- Eastern Europe. What is also important is the recapitalization of financial institutions that has occurred through various channels through international financial institutions. That has provided additional long- term financing for some of the banks and therefore stabilized their financial position. But from the point of view of Serbia I would like to add something that was, let’s say, a more country- specific side of circumstances and measures that have helped. First of all, for instance, Serbia had subsidiaries rather than branch offices of Western banks. That has, in our view, proven to be a very important difference concerning the potential spillover effects and in terms of preserving the overall financial stability of our financial system. Second, we had a relatively conservative banking portfolio structure. We have not been, as many other banks unfortunately have, exposed to the complex financial instruments, mortgage- backed securities, collateralized debt obligations, and also we have not had so many instruments that would induce leverage within the banks, meaning mainly derivative instruments. So, this, let’s say conservative, structure of banks’ balance sheets has proven to have been very useful. Furthermore, we had an immediate response from the government of the Republic of Serbia in the sense that there was a substantial increase in deposit insurance, up to €50 000 per deposit holder, which prevented any excessive banking panic. We also introduced the waiver of taxes on bank deposits and that has also helped. Still, in the first wave of the crisis at the end of 2008, we experienced what you might call a real- life stress test because on some not so favourable news in the media, deposit holders tried to withdraw their deposits and all their deposits were honoured in a timely manner. That was a stress test which, I believe, has also been useful in order to overcome the potential lack of confidence in the following years. And I’m glad to say that until now, the overall confidence of deposit holders in the banks in my country has been preserved. Throughout the period from the beginning of 2009 we have had a gradual increase in deposits and at the time this book goes to press deposits have rebounded to well above pre- crisis levels. All in all, there has been a mixture of internationally induced measures and country- specific policies, which have helped to preserve financial stability, especially in the case of Serbia.

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