piraeus bank group

South - Eastern Europe Economic Review - November 2014

SEE Banking Sector: Fundamentally sound but haunted by the excesses of the past and the new EU regulatory landscape

The current issue of our SEE Economic Review focuses its attention on the current state of the banking sectors in the major economies of the region, namely Albania, Bulgaria, Romania, Serbia and Cyprus. The main takeaway from our analysis is that the banking sectors in the region are adequately capitalized with sufficient liquidity and decent levels of capital buffers and provisions. Furthermore, local Central Banks and regulators have demonstrated substantial skill and determination in solidifying their local banking institutions throughout the crisis. As a result, the average capital adequacy of the banking systems in SEE countries stood at 18% at end-2013, while Tier I capital reached 16% at the same point.

Yet, despite our positive and constructive stance regarding the SEE’s growth potential throughout the crisis, we have also identified a set of challenges that the banking sectors in the region should tackle.


  • Banks in the region should address the issue of a large and still growing stock of Non-Performing Loans. The fact that NPLs have grown so much, especially when we take into account the fact that these economies have not felt the full brunt of the global economic crisis and they have – by and large – been registering positive economic growth in the last few years, is an indication of two economic weaknesses. First, it is a sign of a hangover from the breakneck credit expansion of past years, which unavoidably led to a relaxation of the credit standards. Second, the fact that growth, while positive, remains below the levels necessary for a generalized lift to employment and peoples’ disposable income.
  • Lenders in the region are also exposed to substantial FX risk, given that they have granted loans to both households and corporations in foreign currency (mainly in EUR but also in CHF). As these borrowers, especially households, do not exhibit any natural FX hedge, abrupt changes in the FX rates can alter the risk profile of these exposures drastically.
  • Finally, banking sectors in the region will have to deal with the potential pressures that the major European banking groups might face in order to curtail or abandon altogether their operations in the SEE region due to supervisory burden and extra capital needs imposed on them by the new pan-European regulator, the SSM, in the context of the implementation of the EU Banking Union.

Ilias Lekkos
Chief Economist