The impact of deleveraging on Central and East European banking sector

Abstract

The financial crisis of 2007-2009 substantially weakened Western-European banking groups. As large EU banks experienced market and regulatory pressure to improve their balance sheets and strengthen their capital position, this triggered a process of deleveraging. The aim of this paper is to analyze the impact of the latter on the banking sector in CEE, a region which since 2009 has been shown to be particularly vulnerable to this process owing to the strong dependence of local banks there on their Western European parents. The principal research question is whether large CEE market players did in fact revise the approach they previously had towards their subsidiaries and in so doing reduce their involvement in the region. To answer this question, the geographical distribution of their asset reduction underwent an empirical analysis, conducted over the 2008-2013 period for six WE banking groups and their CEE subsidiaries. This confirmed a modest reduction in cross-border exposures in CEE, although much smaller than in developed countries. The scale of funding reductions was also found to vary significantly across CEE countries.