Deleveraging Continues More Slowly in Emerging Europe

VIENNA--There is a significant slowdown in deleveraging in emerging Europe, thanks largely to the European Central Bank and an improvement of bank regulation even cross borders, an European Bank for Reconstruction and Development official said Tuesday.

Western European banks have been selling assets in non-core markets to meet regulatory requirements designed to reduce debt and increase capital reserves. Regions such as the central and Eastern Europe have been particularly hit as a large percentage of the banking sector is made up of foreign banks.

"Very clearly, the ECB has been a main driver in slowing down and, hopefully, reversing the fragmentation of the banking sector, with the improvement in the funding system of banks and a very significant move toward a better institutional framework, which has made a material contribution to the whole situation," Piroska Nagy, EBRD director for country strategy and policy, told DJ FX Trader in an interview on the sidelines of a financial conference in Vienna.

The fact that deleveraging continues is still a source of concern, she added. But a mechanism dubbed the Vienna 2.0 Initiative, established last year to curb negative factors and slow down deleveraging, has helped "not to stop deleveraging but avoid any sudden uncoordinated move that leads to systemic risk," Ms. Nagy said.

Parent-bank conditions still play a role in bank funding in emerging Europe as do low demand conditions, a study by the Bank for International Settlements in December showed, she noted. But bank sector fragmentation, which term is used to mean the disintegration of an integrated market, is less that it used to be as a result of the euro zone's debt crisis.

However, "we are not out of the woods yet in this regards," she said.

Emerging Europe still has better growth prospects than the euro zone so parent banks are committed to these markets, Ms. Nagy noted.

Raiffeisen Bank International AG (RBI.VI), one of the Austrian banks active in emerging Europe, expects growth rates in Central and Eastern Europe, which has been hit hard by the euro zone's problems, to remain higher than Western Europe and forecasts growth of 2.1% in 2013 for the CEE region.

Debate now is centered around the banking union in the sector, Ms. Nagy added.

The EBRD "will play a very constructive role in the ongoing policy debate about the single supervisory mechanism," Ms. Nagy said.

--Nicole Lundeen contributed to this article.

Write to Margit Feher at [e-mail]

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