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The global crisis as a test for the banking system in Bulgaria
submited on 10.07.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 10.07.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
The global financial crisis that started from the housing market in the US put up new challenges before the world banking system. Many of the largest credit institutions in the world reported substantial losses from their exposition toward risky assets. The capitalization of some the largest banks in Europe and America contracted almost in half, financing became more expensive, while the confidence of investors, both professional and individual, hit the bottom.
In the context of the world financial turmoil the Bulgarian banking sector continues to grow at steady and high rates. Banks’ assets in May increased at 38% annually. Bank intermediation continues deepening, as bank industry assets exceed GDP (the so called penetration rate). Despite some analysts’ forecasts for sharp slowdown in credit activity in Bulgaria, this did not happen. Corporate credit growth remained high in 2008, decelerating only insignificantly in recent months. In the same time household credit kept on growing at fast rates, as the consumer credit dynamics even accelerated, while mortgage financing slightly slowed down.
Considering financial turmoil on global scale, the considerable issue before the Bulgarian economy is to what extent local banks succeed in facing new challenges.
Effects from the global crisis to Bulgarian banks are in general two groups – direct and indirect. Direct effects are determined by the investment policy of Bulgarian banks’ headquarters abroad. Their expositions toward high-risk mortgage-related securities are relatively small, resulting in so far not substantial losses. In other words, the probability of foreign capital withdrawals from Bulgarian banks with the aim to cover losses on foreign markets is relatively small. Furthermore, bank property here is relatively well-diversified, as the foreign owners are not concentrated in particular region. The situation with Baltic republics is however different – most local banks there are owned by Scandinavian financial institutions.
In this line of thoughts, still more important is the subjective assessment of foreign investors for risks before the Bulgarian banking system in the current global conditions. Namely the diminishing confidence of mother companies in batlic banks and the further financing restrictions were among the reasons for the rapid decline in credit activity there. In Latvia for example credit growth decelerated significantly – from 68% on average in 2007 to barely 29% annually in March 2008. The troubled access to financing caused economic growth deceleration and decline in real estate prices in the region.
On the other hand, Bulgarian banks’ headquarters thus far do not restrict financing, because here they have potential to realize substantial profit – opportunities gradually diminishing on mature markets. This way Bulgarian banks continue to actively borrow financial resource from abroad, as in May net foreign liabilities exceeded BGN 7.7 billion being only BGN 600 million before the emergence of the first notable effects of the crisis in August 2007.
Although direct effects from the crisis are rather limited, the indirect impact of the global credit crunch is increasing. Bulgarian banks now use more actively foreign resource despite the rising price of interbank credit in the Euro area.
Considering the trend for credit interest rates to pick up, the credit expansion in Bulgaria will keep on gradually decelerating in the coming months. However, the probability of a sharp decline in credit activity in Bulgaria (and potential second-round negative effects for the economy) remains small.
In the context of the world financial turmoil the Bulgarian banking sector continues to grow at steady and high rates. Banks’ assets in May increased at 38% annually. Bank intermediation continues deepening, as bank industry assets exceed GDP (the so called penetration rate). Despite some analysts’ forecasts for sharp slowdown in credit activity in Bulgaria, this did not happen. Corporate credit growth remained high in 2008, decelerating only insignificantly in recent months. In the same time household credit kept on growing at fast rates, as the consumer credit dynamics even accelerated, while mortgage financing slightly slowed down.
Considering financial turmoil on global scale, the considerable issue before the Bulgarian economy is to what extent local banks succeed in facing new challenges.
Effects from the global crisis to Bulgarian banks are in general two groups – direct and indirect. Direct effects are determined by the investment policy of Bulgarian banks’ headquarters abroad. Their expositions toward high-risk mortgage-related securities are relatively small, resulting in so far not substantial losses. In other words, the probability of foreign capital withdrawals from Bulgarian banks with the aim to cover losses on foreign markets is relatively small. Furthermore, bank property here is relatively well-diversified, as the foreign owners are not concentrated in particular region. The situation with Baltic republics is however different – most local banks there are owned by Scandinavian financial institutions.
In this line of thoughts, still more important is the subjective assessment of foreign investors for risks before the Bulgarian banking system in the current global conditions. Namely the diminishing confidence of mother companies in batlic banks and the further financing restrictions were among the reasons for the rapid decline in credit activity there. In Latvia for example credit growth decelerated significantly – from 68% on average in 2007 to barely 29% annually in March 2008. The troubled access to financing caused economic growth deceleration and decline in real estate prices in the region.
On the other hand, Bulgarian banks’ headquarters thus far do not restrict financing, because here they have potential to realize substantial profit – opportunities gradually diminishing on mature markets. This way Bulgarian banks continue to actively borrow financial resource from abroad, as in May net foreign liabilities exceeded BGN 7.7 billion being only BGN 600 million before the emergence of the first notable effects of the crisis in August 2007.
Although direct effects from the crisis are rather limited, the indirect impact of the global credit crunch is increasing. Bulgarian banks now use more actively foreign resource despite the rising price of interbank credit in the Euro area.
Considering the trend for credit interest rates to pick up, the credit expansion in Bulgaria will keep on gradually decelerating in the coming months. However, the probability of a sharp decline in credit activity in Bulgaria (and potential second-round negative effects for the economy) remains small.
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