IFI Partnership for Bank Sector Stability in Emerging Europe:

The Joint IFI Action Plan

Presentation at the World Bank-IFC Donor Conference, Paris

May 25-26, 2009

Piroska M. NagyEuropean Bank for Reconstruction and

Development

The reasons for Joint Action

Emerging markets are being hit by the global crisis and emerging Europe is among the most vulnerable

General need for joint action:

Alone not enough resources (and even with this all institutions are running into capital constraints)

Maximize complementarities and comparative advantage

All IFIs: EBRD, World Bank Group, EIB, IMF. A whole new world of collaboration

Division of labour also depends on support via public or private sector: need for both

The reasons for Joint Action

Specific need in Europe:

Leverage incentives in the continent linked to the European integration project

Use both the private and official sectors: collaboration with national authorities as well as European institutions.

4

Leveraging the European project : Most integrated region in the world through trade, finance, firms, remittances, migration

Trade linkages Financial linkages

0

5

10

15

20

25

30

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

5

10

15

20

25

30

AfricaMiddle EastWestern HemisphereAsiaEuropeEU

Intraregional Trade, 1997–2007(Percent of GDP)

0

200

400

600

800

1000

1200

1400

1600

1800

Europe Asia America

0

200

400

600

800

1000

1200

1400

1600

1800

Emerging EuropeEmerging AsiaEmerging America

Europe, America, and Asia: Cross Border Claims on Emerging Economies, 2008:Q3(Billions of U.S. dollars)

Source: IMF

Clear Case for Collective Action

Europe is well integrated:

– A handful of EU-based banks own much of the banking sectors in CESE and Baltics

– Similarly in the corporate sector, with links to banks

Policy response to the financial crisis thus cannot be only along national lines either in home or host countries of the large bank groups– Interdependence yet potential free rider problem without

burden sharing arrangements

– Adverse spill-overs (DI, crowding out of sovereign borrowing)

– Non-cooperative solutions thus would be destructive

Joint IFI Action Plan – The framework

Objectives:

Joint IFI work to address funding needs in a coordinated way. € 24.5 billion for 2009-2010

Catalyze resources through confidence building and home government support

Facilitate co-ordination framework that brings together key stakeholders to overcome collective action problem: Home and host country authorities; investing IFIs (EBRD, EIB, IFC/MIGA); IMF; EC; ECB

Joint IFI Action Plan - Progress to date on its 3 platforms

Platform #1: Joint IFI discussions with key 16 parent banks on business plans and funding needs are completed

Commitments to region confirmed; in exchange asking for good macro-economic environment

Funding needs significant mainly for debt finance, but also very strong demand for risk mitigation

Trade-off between prudential EC competition rules and lending

Platform #2: Discussions on task and burden sharing arrangements (home and host issues)

Joint IFI Action Plan - Progress to date on its 3 platforms

Platform #3:

Host-country co-ordination of stakeholders. New dimension: voluntary buy-ins by key parent banks in the context of IMF programs:

Private-public sector interface, supported by incentives (IMF and EU support, Joint IFI Action Plan, specific local regulatory incentives)

All stake holders contribute: device for collective action

Parent group commitment to maintaining exposure and recapitalize that is linked to IMF program performance

Successfully completed for Romania, Serbia, and Hungary. Key parent banks, IMF, Joint IFIs, EC, ECB, host and home country authorities.

EBRD crisis response

Increase in business volume by 30% to EUR 7 billion; getting capital constrained

Focus on financial sector first because it is in the epicentre of the crisis and because of its systemic importance

Re-focus on CEE that was supposed to be “graduated” but also help ETCs and CIS

New methods: Joint IFI Action Plan, EUR 6 billion, well on track

New instruments: Bank Group lending to Subsidiaries: Unicredit EUR 432 million to 8 countries 11 subsidiaries and leasing companies. Others to follow

Even further collaboration is needed to tackle new challenges

Second and third wave of crisis impact on the financial sector.

o Recapitalisation needs; stress testing of groups

o Corporate debt

o Risk mitigation needs for the region

o Testing bank relations? the Nordic model

Address key vulnerabilities: forex exposures : corner solutions with European support ?

The objective is to safeguard he European project

Thank you!

Piroska M. Nagy

NagyP@ebrd.com

www.ebrd.com; www.ebrdblog.com

ANNEX

Big albeit differentiated crisis impact

Drops in cross-border claims: bad, but Emerging Europe is least hit thus far

-6.1%

-10.1%

-17.9%

-10.1%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Developing Europe All developing countries Developing Asia & PacificDeveloping Latin America &

Caribbean

Sep07 Dec07 Mar08 Jun08 Sep08 Dec08

Source: BIS locational dataset 6A, external assets of BIS-reporting banks; Developing Europe excludes Caucasus, Central Asia, Mongolia and Slovenia

Cross-border claims of BIS-reporting banks, relative terms 2008Q4, in percent change to previous quarter, exchange rate adjusted

Emerging Europe hit list: a strange mixture of few countries

Source: BIS locational dataset 6A, external assets of BIS-reporting banks vis-à-vis Developing Europe (excludes Caucasus, Central Asia, Mongolia, Slovenia)

Cross-border claims of BIS-reporting banks, relative terms 2008Q4, in percent change to previous quarter, exchange rate adjusted

-15.5%

-9.4%-8.2%

-7.5% -7.2%

-4.1%

-0.1%

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

Russia Ukraine Poland Turkey Czech Rep. Moldova Latvia

Developing Europe Average

Crisis countries + “innocent by-standers”

Source: BIS locational dataset 6A, external assets of BIS-reporting banks vis-à-vis Developing Europe (excludes Caucasus, Central Asia, Mongolia, Slovenia)

Cross-border claims of BIS-reporting banks, absolute terms 2008Q4, change to previous quarter in USD bn, exchange rate adjusted

-12 -11

-4 -4

-33

-0.030 -0.026

-35

-30

-25

-20

-15

-10

-5

0

Russia Turkey Poland CzechRep. Ukraine Latvia Moldova

US

D b

n