European Banks to Reduce Lending Abroad Says Igor Purlantov

As struggling banks around the globe continue tightening their belts, European banks are leading the way in cutting back on lending across Central and Eastern Europe. Looking back to the 200-2007 period, banks across Europe grew more than 15% in terms of cross-border lending says Igor Purlantov. A lot of this growth came in Central and Eastern Europe as European banks were willing to see up to a third of their assets parked outside their home market. This trend has now changed as European banks are under increased pressure to trim down their balance sheets and shore up capital at home.

According to Igor Purlantov, the European Union could see as much as 2 Trillion Euros of deleveraging over the next two years. Much of this deleveraging will come from the retrenchment of capital out of emerging European countries such as Croatia, Bulgaria, Romania, and Hungary and back into the home countries of large German, Italian, and Spanish banks.

Along with deleveraging forces, politics and regulations are playing a large role behind this retrenchment of capital says Igor Purlantov. Since the recent sovereign debt crisis, there is little doubt that governments are putting pressure on banks to focus on their home markets and shore up their balance sheets so that tax payers are not forced to bail them out. Patriotism has also come into play as experiences by Italian and Spanish banks that have increased their holdings of local government bonds by 31% and 26% respectively. Banks are now realizing that in order to survive, the home country they are headquartered in needs to remain solvent.

The recent financial crisis has showed that banks that are global in their life can quickly become national in their death. Driving this retrenchment of capital home is the push by regulators to ensure that banks have enough assets to keep operating in a crisis and also pay back creditors should the bank fail. As a result, many European regulators have put restrictions on the limit of exposure outside of a banks’ home country says Igor Purlantov. An example is the Austrian Central Bank stating that Austrian bank subsidiaries in Central and Eastern Europe should not exceed to deposit ratios of 100%.

As this slowdown in lending by European banks continues, the effect will be most noticeable in Central and Eastern Europe according to Igor Purlantov. Given the state of underdeveloped bond markets and low deposit basis, this slowdown in lending could mean slow credit growth throughout emerging Europe. Among the sectors to be most affected by this retreat in capital are shipping and aviation lending and infrastructure finance.

Although European banks are not going to shut down their Central and Eastern European businesses, given the great prospect for future growth, this retrenchment of capital will ensure that foreign subsidiaries have loan to deposit ratios well below 100%. According to Igor Purlantov, this retrenchment of capital by European banks will only further open the door for Japanese and Chinese banks that are flush with cash deposits and looking to lend and grow their foreign client base in Central and Eastern Europe.