Financial stability challenges in candidate countries managing the transition to deeper and more market-oriented financial systems

Adalbert Winkler, Hubert Schokker, Emidio Cocozza (), Valerie Herzberg, Csaba Móré, Anthony de Lannoy, Sandor Gardo, Tomasz Chmielewski, Éva Katalin Polgár, Maurizio Michael Habib, Thierry Bracke, Tina Zumer, André Geis and Peter Backé

No 95, Occasional Paper Series from European Central Bank

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. JEL Classification: F32, F41, G21, G28

Keywords: banking sector; capital inflows; emerging markets; Europe; vulnerability indicators (search for similar items in EconPapers)
Date: 2008-09
Note: 1131214
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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