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January 23, 2022

Europe’s banks retreat from the East

Dozens of euro-zone banks flocked to Eastern Europe in recent years, hoping to harness the region’s fast-growing economies and relatively untapped banking markets. Amid Europe’s banking crisis, the situation has suddenly been thrown into reverse. Banks are beating hasty retreats from the region, scrambling to conserve limited resources and facing pressure to concentrate on their domestic markets.

The withdrawal is fanning fears that the economies of Eastern Europe, which so far have held up reasonably well despite the crisis to the west, could fall victim to a downturn. According to an Wall Street Journal analysis, Western European banks account for close to three-quarters of all lending in central and eastern Europe. Most countries in the region have only one significant remaining independent bank. The exception is Bulgaria, which has none. Yet the roll call of the foreign banks that dominate the region reads like a list of institutions that have suffered most in the eurozone crisis, magnifying the potential disruption. Magdalena Stoklosa, an analyst at Morgan Stanley, the investment bank, warns of a new “credit crunch across the region” – with the exception of Poland and the Czech Republic – and a repeat of the 2008 squeeze, when the flow of credit from developed markets to emerging markets shrank 20 per cent. Italian bank UniCredit, the biggest player in the region, epitomises the gloom, and is a shadow of the aspiring group it was before the financial crisis.

In a recent stress test exercise by regulators at the European Banking Authority, UniCredit was judged to have a EUR 7.4 bln capital shortfall, which it is seeking to close via a rights issue and a refocusing in central and Eastern Europe on three core markets – Poland, Russia and the Czech Republic. That is bad news for the 16 other countries in the region where it also has operations. UniCredit’s retreat is echoed, in less extreme terms, by others. Germany’s Commerzbank – whose EBA capital shortfall is put at EUR 2.9 bln – says it will do no more lending outside Germany and Poland, despite having significant operations in the Czech Republic and Slovakia, Xinhua informs. Societe Generale, the French bank, is likewise seeking to close its EUR 3.3 bln capital gap. Analysts expect its capacity to lend to its central and eastern European operations to be constrained. This is a significant potential problem – it is a top-five foreign bank in the region, with a strong presence in Russia and Romania.

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