Financial Stability Challenges in Candidate Countries: Managing the Transition to Deeper and More Market-Oriented Financial Systems

66 Pages Posted: 13 Oct 2008

See all articles by Thierry Bracke

Thierry Bracke

European Central Bank (ECB)

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH

André Geis

European Central Bank (ECB)

Maurizio Michael Habib

European Central Bank (ECB)

Csaba Móré

European Central Bank

Eva Katalin Polgar

European Central Bank (ECB)

Emidio Cocozza

Bank of Italy

Hubert Schokker

affiliation not provided to SSRN

Tina Zumer

European Central Bank (ECB)

Date Written: September 8, 2008

Abstract

This paper reviews financial stability challenges in the EU candidate countries Croatia, Turkey and the former Yugoslav Republic of Macedonia. It examines the financial sectors in these three economies, which, while at very different stages of development and embedded in quite diverse economic settings, are all in a process of rapid financial deepening. This manifests itself most clearly in the rapid pace of growth in credit to the private sector. This process of financial deepening is largely a natural and welcome catching-up phenomenon, but it has also increased the credit risks borne by the banking sectors in the three economies. These credit risks are compounded by the widespread use of foreign currency-denominated or -indexed loans, leaving unhedged bank customers exposed to potential swings in exchange rates or foreign interest rates. Moreover, these financial risks form part of a broader nexus of vulnerabilities in the economies concerned, in particular the external vulnerabilities arising from increasing private sector external indebtedness. That said, the paper also finds that the authorities in the three countries have taken several policy actions to reduce these financial and external vulnerabilities and to strengthen the resilience of the financial sectors.

Keywords: Europe, banking sector, vulnerability indicators, capital inflows, emerging markets

JEL Classification: F32, F41, G21, G28

Suggested Citation

Bracke, Thierry and Winkler, Adalbert and Geis, André and Habib, Maurizio Michael and Móré, Csaba and Polgar, Eva Katalin and Cocozza, Emidio and Schokker, Hubert and Zumer, Tina, Financial Stability Challenges in Candidate Countries: Managing the Transition to Deeper and More Market-Oriented Financial Systems (September 8, 2008). ECB Occasional Paper No. 95, Available at SSRN: https://ssrn.com/abstract=1144466

Thierry Bracke (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

André Geis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maurizio Michael Habib

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Csaba Móré

European Central Bank ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
United States

Eva Katalin Polgar

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Emidio Cocozza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Hubert Schokker

affiliation not provided to SSRN ( email )

Tina Zumer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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