Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Number 1Financial Stability Report8.4 Developments in Financial SectorDespite different monetary and exchange rate regimes across the region, countriesresemble similar developments in their financial sectors. The financial crisis whichoriginated in the USA and was later spread to EU did not affect countries in the regiondirectly. The financial sectors in these countries were mainly affected by declining sourcesof financing through diminished foreign direct investments and cut in remittances.Consequently, the loan growth was substantially decreased which led to slowing domesticdemand and lower economic growth. Interest rates remained on relatively high levelsaveraging around 14 % for loans and around 5 % for deposits.The economic growth decline in the SEE countries has been associated with the rise ofunemployment and considerable decline of the international trade and capital inflows.Starting from low levels of economic development, the declines in the economic growth arelikely to be greater in the SEE countries than in the advanced economies where the crisisactually originated. By 2010, the economic recovery is being expected to have sluggishpositive movement of the real economic activity in the advanced economies, while theeconomic recovery in the SEE countries is still uncertain and at most gradual. As to thefinancial sector, the SEE economies have been less affected by the financial contagion fromthe world financial crisis because their banking activities are mainly based on traditionalbanking models with literally no exposure to toxic assets. Nonetheless, the loan growth inall SEE countries has been decreased as banks started to reduce their loans by introducingnew lending policies, and thus, increasing their lending rates. Partly as a reaction to a riseof non-performing loans (Kosovo, Albania, and Montenegro) while others (Serbia andMacedonia) rose lending rates to protect their currencies from substantial depreciation.Although an increase in lending rates contributed to slowdown of domestic demand, it willbe claimed later that higher interest rates are not dominating factor in determiningdevelopments in aggregate demand in these countries.Although all SEE countries aspire to enter the EU, except of Bulgaria which is already inthe EU, these countries are already linked to the EU through the ownership of theirbanking sectors as shown in Table 12.Table 12. The structure of ownership of the banking sector, in percentDescription Kosovo Macedonia Albania Bulgaria Serbia MontenegroForeign ow nership 91.5% 93.1% 93.6% 83.9% 75.3% 84.5%Domestic ow nership 8.5% 6.9% 6.4% 16.1% 24.7% 15.5%Source: EBRD Transition Report 2009 and central banks of the respective countires.The only EU country in the region – except Bulgaria – is Greece which is also the countrywhich is the most problematic in terms of its macroeconomic stability. In four of the SEEcountries: Albania, Macedonia, Serbia, and Bulgaria, the Greek banks are present, whichmight be point of concern in terms of financial stability in these economies. One obviousconsequence of the financial crisis in these financial sectors was an increase of depositinterest rates confirming the hypothesis that banks aggressively started to look for sourcesfrom domestic households. The effect of financial and economic turmoil in Greece was themost pronounced in Bulgaria where the presence of Greek banks is the highest in the70 |