Foreign Banks and the Vienna Initiative

Abstract

We use data on 1,294 banks in Emerging Europe to analyze how bank ownership and the so-called Vienna Initiative impacted credit growth during the 2008-09 crisis. As part of the Vienna Initiative western European banks signed country-specific commitment letters in which they pledged to maintain exposures and to support their subsidiaries in Emerging Europe. We show that in general both domestic and foreign banks sharply curtailed credit during the crisis, but that foreign banks that participated in the Vienna Initiative were relatively stable lenders. We find no evidence of negative spillovers from countries where banks signed commitment letters to countries where they did not.

Foreign Banks: Access to Finance and Financial Stability

“…de Haas and van Lelyveld (2012), for example, compare foreign banks with large domestic banks and find that the former group on average contract more. de Haas et al (2011) andMihaljek (2010) find similar results for a sample of Eastern European countries. Stijn Claessens and I performed a similar exercise using our database, which covers almost the universe of banks, focusing especially on heterogeneity within the group of foreign banks (Claessens and Van Horen, 2013).…”

Overcoming ‘Economic Backwardness’ in the European Union

“…Western banks' long time horizons led them to pursue a voluntary bank rollover agreement in 2009 in response to the crisis: the European bank co-ordination initiative, otherwise known as the 'Vienna Initiative'. The technical literature, as well as the media, has concluded that it was the Vienna Initiative, which was sponsored by the European Bank for Reconstruction and Development (EBRD) among others, that saved ECE from economic catastrophe in 2009 (see especially De Haas et al, 2012). While I would argue against a causal role for the Vienna Initiative in forcing banks to stay committed to their eastern markets, the Initiative nevertheless demonstrated the crisis-mitigating role of Europe's institutional context.…”

Financial Globalisation and the Crisis

“…The most notable example is the Vienna Initiative by which Western European parent banks agreed to maintain commitments vis-a-vis affiliates in Central and Eastern Europe during the initial stages of the global financial crisis (see De Haas et al 2012). This coordinated approach solved the " race to the exit" problem by which individual parent banks might fail to internalise the systemic impact of pulling funding from affiliates in host countries, especially those host countries in which foreign-owned banks were the bedrock of the local financial system.…”