ECB Assesses Financial Stability Challenges for EU Candidate Countries
ECB published occasional paper that reviews and assesses financial stability challenges in countries preparing for EU membership. These countries are Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia, and Turkey. The paper mainly focuses on the period since 2016 and on the banking sectors, which dominate financial systems in this group of countries. The paper includes a special feature that looks at maturity mismatches in detail, including at the level of sectors and currency of denomination.
Banks dominate the financial sectors of EU candidate countries and potential candidates and the majority of the banks in the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia) are owned by foreign banks. These are mainly EU-headquartered banks, which have, however, been losing market share to other foreign banks since 2014. The non-bank financial sector is generally very small in EU (potential) candidates. For the Western Balkans, the paper analyzes recent trends in financial intermediation as well as the main challenges that have been identified in the past. Asset quality continues to improve, but the share of non-performing loans, or NPLs, is still high in some countries, while regulatory, legal, and tax impediments are still to be resolved in most cases. High unofficial "euroisation" is a source of indirect credit risk for countries with their own national legal tender and this calls for continued efforts to promote the use of domestic currencies in the financial system.
Compared with certain EU countries, banking systems in EU candidate countries and potential candidates seem less prone to financial stress from maturity mismatches, but related risks should be closely monitored. While maturity mismatches are less pronounced in the region than in the selected EU countries, the funding of long-term lending via long-term deposits has declined in recent years. In addition, maturity mismatches appear most problematic in foreign currencies, where the central bank cannot fully act as a lender of last resort. This strengthens the case for promoting the use of domestic currencies.
The paper mentions that Turkey has experienced periods of heightened financial stress recently, with strong currency depreciation, falling equity price, and increasing yields. This follows economic overheating, which was partly due to buoyant credit growth supported by policy stimuli and the expansion of the credit guarantee fund. While the banking system in Turkey appears to have buffers to absorb shocks, there are considerable financial stability risks owing to significant foreign-exchange borrowing in the corporate sector, rising credit risk, and high rollover needs of banks in the wholesale market.
Related Link: Occasional Paper (PDF)
Keywords: Europe, EU, Turkey, Banking, Financial Stability, NPLs, Western Balkans, Credit Risk, ECB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
