Banking Sector & Capital Flows

19/10/2016 1

Banking Sector & Capital Flows

Debora Revoltella

Director Economics Department, European Investment Bank

Warsaw 14th October 2016 - 6th Annual NBP Conference on the Future of the European Economy (CoFEE)

19/10/2016 2

External sources of finance (1)

Evolution of capital outflows and inflows in the EU

(level, USD trillions, lhs, and net flows in % GDP, rhs, 4-qtr moving average)

“Core countries” include AT, BE, DE, DK, FI, FR, LU, SE, UK. “Vulnerable member states” (VMS) includes CY, GR, SP, IE, IT, SLO, PT. “Cohesion countries” include BG, CR, ES,

HU, LI, LT, ML, PL, ROM, SK.

EU Core countries

Vulnerable countries Cohesion countries

-400

0

400

800

1200

1600

2000

2400

2800

3200

01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1

Foreign funding

Gross domestic savings

Gross fixed investment

-400

0

400

800

1200

1600

2000

2400

01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1

Foreign funding



-200

0

200

400

600

800

1000

01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1

Foreign funding

Gross domesctic savings


-100

0

100

200

300

400

01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1

Foreign funding



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External sources of finance (2) – investment

financingDomestic vs external source of finance for domestic investment

(EUR billions, annual flows)



19/10/2016 4

External sources of Finance by asset type (3)



Evolution of capital inflows and outflows in the EU - (% GDP)

Note: Difference between average annual flows prior to the crisis (2005Q1-2007Q2), and after (2012Q1-2014Q4)

Source: IMF balance of payments statistics

Portfolio

Equity

Portfolio

Debt

Direct

Investment

Other

investmentTotal

Portfolio

Equity

Portfolio

Debt

Direct

Investment

Other

investmentTotal

CORE -1.0 -5.3 -4.0 -19.8 -30.1 -0.7 -6.6 -2.0 -21.1 -30.4

VUL 0.8 -6.2 -2.9 -10.9 -19.2 1.4 -14.1 0.1 -12.2 -24.8

COH -0.4 -0.1 -2.0 -0.7 -3.2 0.5 -0.2 -3.4 -4.2 -7.3

EU -0.5 -5.6 -3.9 -17.6 -27.5 -0.2 -8.3 -1.5 -18.8 -28.7

Outflows Inflows

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Cross-border banks in CESEE

Traditional banking model :

relatively high capitalized subsidiaries (due to retained earnings to

finance future growth)

fast lending growth financed through intra-group funding from the

parent country

The crisis has led to a transformation of the banking model:

capital in the subsidiaries preserved, but more repatriation of profits

transformation of the funding model towards domestic funding sources

local NPLs first, as well as parents NPLs and capital position lately

emerging as a constraint

The EIB Bank Lending survey, developed in the context of the Vienna

Initiative, an useful instrument to assess dynamics

19/10/2016

Groups: Commitment to the region

Groups’ intensions on aggregate operations in

CESEE

7% 7%

29%

57%

#N/A2%

24%

33%

30%

10%

ReduceOperations

Selectivelyreduce

operations

Mantain thesame level of

operationsvia

subsidiaries

Selectivelyexpand

operations incertain

countriesExpand

operations

2016-H2 2013-2014

ROA of your CESEE operations - % of

responses with ROA lower of overall group ROA

0%

10%

20%

30%

40%

50%

60%

Apr'13 -Sep'13

Oct'13 -Mar'14

Apr'14 -Sep'14

Oct'14 -Mar'15

Apr'15 -Sep'15

Oct'15 -Mar'16

Apr'16 -Sept'16

Oct'16 -Mar'17

Question: Longer-term strategic approach (beyond 12 months): Looking at

operations via subsidiaries in CESEE, your group intends to…Question: Profitability of the strategy in the CESEE region: is ROA of your CESEE

operations higher/lower/equal to that for the overall group?

19/10/2016 7

Groups: Exposure to CESEE - by instrument

Question: Group’s exposure to CESEE: Concerning cross-border operations to CESEE countries, your group did/intends to…

14% 21%

57%64%

29%14%

Last 6 Months Next 6 MonthsReduce exposureMaintain the same level of exposureExpand exposure

14% 21%36%

43%

50% 36%

Last 6 Months Next 6 Months

21% 14%

79% 86%

Last 6 Months Next 6 Months

Groups' total exposure to CESEE

Exposure to subsidiaries

Intra-group funding

Capital

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Subsidiaries: Cumulated demand and supply

dynamics – an increasing perceived gap

Cumulated net percentages - supply and demand

Questions: Credit Supply: bank's (local subsidiary)’s credit standards applied when assessing credit applications (options: eased, unchanged, tightened); Credit Demand:

demand for loans or credit lines to enterprises and households (options: increased, stable, decreased)

30

50

70

90

110

130

150

170

190

May'12- Oct'12

Oct'12 -Mar'13

Apr'13-Sep'13

Oct'13 -Mar'14

Apr'14 -Sept'14

Oct'14-Mar'15

Apr'15 -Sep'15

Oct'15 -Mar'16

Apr'16-Sep'16

Supply Demand

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Determinants of supply (constraints)

Question: Factors affecting your bank's credit standards (credit supply). Have the following domestic and international factors contributed to tightening (easing) your

credit standards over the past six months, and do you expect them to contribute to tightening (easing) your credit standards over the next six months?

Net percentages; positive figures indicate a positive contribution to supply conditions

18%

11% 11%

-11%

-22%

-2%

15%

-15%

-2%-6%

-17%

12%

5%10%

-9%

-24%

-2%

17%

-11%

-4%-6%

-4%

-13%

Local Mk.Outlook

Local bankOutlook

Local bankfunding

Local bankcapital

constraints

Change inlocal

regulationLocal NPLs

figuresGroup

outlookGlobal Mk.

OutlookGroup

fundingEU

regulation

Groupcapital

constraintsGroup NPLs

figures

Domestic Factors International Factors

Last 6 months Next 6 Months 2013 H1

13%

-1%

12%

1%

Domestic International

Last 6 months Next 6 Months

2013 H1

Domestic factors: capital and regulation, only marginally NPLs

International factors: mostly negative, with more pronounced negative

contributions from Group NPLs and global outlook

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Recent research findings on cross border banking

Subsidiaries' lending behavior is strongly influenced by parents' financial

conditions, particularly in Central and Eastern Europe (Jeon et al., 2013)

Existence of internal capital markets within international banking groups -

spur growth and transmit cross border financial weaknesses (Houston

and James, 1998; De Haas and Van Lelyveld, 2010)

Recent research - Gattini and Zagorisiou (2016)

Subsidiary banks provide an extra boost to credit growth at the

domestic level; whilst domestic and subsidiary banks contracted credit

similarly after the financial crisis

Funding costs are transmitted from home to host markets

Parents’ asset quality predictor of credit growth at subsidiary level

Parents’ economic capital position matters - suggesting a rather

centralized management of capital levels

Parents’ excessive risk taking matters: excessive credit expansion

coupled with a reduction of economic capital ratios jeopardizes

subsidiaries' lending capacity

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Summing up….

The region benefited from capital inflows as a driver of stronger growth

then the one allowed by the limited domestic savings

Structural funds, FDIs and cross-border banks have been key drivers

What could be the model for the future?

FDI (?)

Capital Market Union, as a means for real integration into the

European single financial market (?)

Equity investment (private equity and venture capital) (?)

Bond Market (?)

Cross-border banking (?)

19/10/2016 12

Vienna Initiative future work

• Continuous monitoring: Deleveraging and Credit Monitor, Bank lending

Survey and NPL Monitor

New work plan / enhanced focus for Vienna Initiative 2.0 – future work

streams:

• Future financial sector development in CESEE and the role of cross-

border banking

• Capital Markets Union and new model for capital flows

• Investment in CESEE

• Specific regulatory issues, country and regional basis

• Full Forum in Luxembourg Q1 2017

19/10/2016 13

Thank you

Banking Sector & Capital Flows

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