TEST OF STRENGTH IS PASSED

The situation facing the global financial market and the economy is improving gradually, but we must not forget that the world's economic difficulties are systemic in nature. The end of measures towards fiscal and monetary stimulation in both developed and developing countries poses serious risks to the sustainability of economic recovery and the stability of the financial sector. Thus a new wave of crisis is possible in the short term.

Meanwhile, the lessons of the crisis period have shown that market regulators need to review common approaches to public and corporate finances and correct the management of individual groups of market participants in their specific activities. And the banking sector, as the most vulnerable sector in this context, should be a pioneer of reform and change.

In an interview with Region plus, Istvan Lengyel, Secretary-General of BACEE (the Banking Association for Central and Eastern Europe) shared his views on the current situation in the banking markets of the CIS, Central and Eastern Europe, and assessed the future.

- How do you assess the situation in the banking markets of the CIS, Central and Eastern Europe in the post-crisis period? Which markets proved to be most stable during the crisis and what measures are needed to ensure stability in coming years?

- Foreign capital constitutes a very high proportion of the banking market of Central and Eastern Europe. Apart from Slovenia, where the share of foreign capital is about 30 per cent, in other countries this figure reaches 50 to 95 per cent. This determines the fate of the banking sector, which consists of subsidiaries of foreign banks. Roughly, if Western banks feel good, our banks also feel good. Therefore, stability in our banking sector largely depends on the stability of banks in the EU.

At the moment, banks in the EU are being stabilised by states and the European Central Bank, which provides liquidity, i.e. very cheap money in unlimited amounts. Ultimately, this has a positive impact on our banks, although there is still a risk that this policy might change.

In addition, there is the Vienna initiative on collaboration to ensure the stability of banking systems in our countries; this was adopted after the onset of the global financial crisis at a meeting of Western banks, the most active banks in Central Europe, representatives of EU governments, regulatory bodies and the International Monetary Fund. To support this initiative, the IMF gave large loans, where necessary, and the governments of Western states supported their banks in many ways, while the governments of our countries also took measures to stabilize economies, provide deposit insurance etc. The current stability of the banking markets in Central and Eastern Europe is a result of these efforts. And I am more than confident that if the situation changes for the worse, there will be a corresponding response from the outside. Stability in our banks is in the interests of the European Union.

With regard to CIS markets, in some countries, for example, in Kazakhstan and Russia, there were serious problems in the banking sector. Overall, however, the banking sector in the Commonwealth countries came through the crisis relatively well.

Today banks' main task is to create reserves for problem loans. The fact is that lending is currently growing much more slowly than previously, because the volume of the economy shrank substantially in many countries because of the crisis. This indicates that the profitability of many clients declined and creditworthiness deteriorated. This situation will last for a couple of years. In general, I think the stability of the banking system is secured, despite the fact that banking development will be slower than before, although some countries, if they can solve the problem of domestic capital accumulation, can expect a fairly rapid growth in the banking sector.

In particular, in Azerbaijan and Kazakhstan, one of the problems is that a very significant amount of funds is financed from public sources. Although it is good that funds are accumulated, the main question is how the banking sector will be involved in this process. If this does not involve the banking sector, its volume will remain low. I think that cooperation will be established, because large government agencies are not able to trace clients as well as banks can.

- What measures, in addition to the creation of reserves, do you consider to be most effective in the post-crisis period?

- The creation of reserves is a requirement of supervisory bodies. The way out of the situation must be by transition to a different model for the banking sector - from extensive to intensive. The intensive mode of development lies, in my view, in the fact that if a bank cannot attract more clients because their number is finite, if everyone already has a credit card and a bank account, there remains only one way - to sell more products and make greater use of available opportunities.

Banks' main objective should be to attract the greatest number of customers with accounts, because you can make a risk assessment of each client via their accounts. The removal of utility payments and payments to mobile operators from the banking sector is very harmful to banks, not so much in terms of turnover, but in terms of information. Information about a client's ability to pay for public services is very important, and the absence of such information makes the process of granting loans difficult.

- What supervisory measures are the central banks of CIS countries taking in Central and Eastern Europe today? Are approaches to the regulation of banking systems becoming tougher?

- Amid the global crisis, the central banks held onto their supervisory functions, but foremost was the preservation of stability and support, and new initiatives appeared in response to the crisis, including the requirements of the Basel Committee (Basel-3). In Central and Eastern Europe there is practically no independent policy, we are moving alongside Western Europe. Not only did some countries not tighten requirements, they even relaxed them. I think that this policy is temporary, and central banks will return to their normal regulation of banking systems. The only problem with this process might be that the tightening of policy in relation to banks leads to an outflow of business from the country. As happened, say, in Croatia, when they began to restrict credit growth; this resulted in loans going to Western banks, which began to issue loans directly fom their head offices rather than through Croatian subsidiary banks. The same phenomenon was observed in Serbia.

This suggests that it is inappropriate for central banks to toughen requirements.

- What is the probability of a new mortgage crisis emerging in response to recent events on the US mortgage market? It is known that US banks confiscate property from defaulters who fail to amortize their mortgages. It is believed that in total, the new crisis may affect the portfolio of mortgage loans, worth from $134 to $154 billion.

- There is great uncertainty on financial markets as a whole. An example of this is Greece, although more and more weaknesses appear there. I do not expect an overly large number of problems, but there is no doubt that it will adversely affect the market situation. Hundreds of billions of dollars have been spent on improving the global financial system, but I would not rule out a new wave of crisis, although not on such a large scale. And this may adversely affect our countries.

- In that case, can we say that the post-crisis period has begun?

- This is relative. Crisis can be defined as follows: if GDP declines for the next two quarters, it indicates a crisis situation, if this is not observed, then it is formally assumed that the crisis is over. From this perspective, many of the region's countries overcame the crisis in 2010. On the other hand, how strong and powerful will this growth be and how will various global processes affect it? The recovery process is dragging on, but I think we're still recovering from the crisis, perhaps, in a zigzag way but, in general, things are getting better.

- How would you rate Azerbaijan's banking sector? Are banks from Central and Eastern Europe interested in getting into the Azerbaijani banking market?

- On the whole, the country's banking system showed itself in a positive light. Some banks had problems, but there was no systemic crisis in the banking sector in Azerbaijan. I think the word "crisis" can be forgotten soon, as a result of the rapid economic growth expected.

Collaboration with our banks mainly involves trade finance and investment projects. We have not yet received any appeals for advice on the establishment of banks' subsidiaries in Azerbaijan. Western banks always want to take a fairly large market share, but this is very difficult in Azerbaijan, so foreign banks are less interested in entering the Azerbaijani banking market.

At a time when Western banks are busy dealing with their own problems, entry into other markets is unlikely. Although I do not exclude that in the near future, perhaps even next year, this possibility will be raised.

- One of the topics discussed at the 3rd Baku International Banking Conference "Financial Institutions - The Basis of Structural Modernization of Economies in CIS States" was greater use of the national currencies of Commonwealth states to service mutual economic relations. What do you think is of greater importance today - using national currencies in calculations or introducing a single currency to the CIS in view of the current fluctuations in the euro/dollar pairing?

- In a normal economy, fluctuations will occur between the rouble and the tenge, or between the rouble and the manat. I cannot imagine a rate fixed for a decade. Of course, this would require greater stability in the economic system, but I think that a market-based economy will always experience such fluctuations. Replacing the euro/dollar pairing in the CIS with a single currency - the rouble - is a good idea, and if it is supported by the market, it should be developed further. However, this should not happen through legislation, and the market should prove the viability of the idea.