Financial Stability Assessment of EU Candidate and Potential Candidate Countries Developments Since 2014

Posted: 13 Jun 2017

See all articles by Martin Gächter

Martin Gächter

European Central Bank (ECB)

Piotr Macki

National Bank of Poland

Isabella Moder

European Central Bank (ECB)

Eva Katalin Polgar

European Central Bank (ECB)

Li Savelin

European Central Bank (ECB)

Piotr Żuk

Independent

Date Written: May 15, 2017

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper focuses on the period since 2014 and on the banking sectors that dominate financial systems in this group of countries. It identifies two main near-term challenges applying to most of them. The first relates to credit risk, which remains substantial despite some progress in reducing the burden of non-performing loans on banks’ balance sheets in the period under review. However, progress so far is limited, partly owing to structural impediments. The second relates to the still high share of foreign exchange denominated loans and deposits, which poses an indirect credit risk in the case of lending to unhedged borrowers and impairs the monetary transmission channel. In addition, profitability is worth monitoring going forward, as it remains subdued in many countries given high provisioning needs and a lacklustre credit growth and low interest rate environment. These concerns are generally met with a solid shock-absorbing capacity, as exemplified by robust capital and liquidity buffers.

Keywords: Banking sector, financial stability, foreign exchange lending, credit growth, EU accession, Western Balkans, cross-border flows, deleveraging

JEL Classification: F31, F34, F36, G15, G21, G28

Suggested Citation

Gächter, Martin and Macki, Piotr and Moder, Isabella and Polgar, Eva Katalin and Savelin, Li and Żuk, Piotr, Financial Stability Assessment of EU Candidate and Potential Candidate Countries Developments Since 2014 (May 15, 2017). ECB Occasional Paper No. 190, Available at SSRN: https://ssrn.com/abstract=2985451

Martin Gächter (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Piotr Macki

National Bank of Poland ( email )

00-919 Warsaw
Poland

Isabella Moder

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Eva Katalin Polgar

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Li Savelin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Piotr Żuk

Independent ( email )

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