Foreign banks slow down emerging Europe funding withdrawal-study
* Funding withdrawal slows in Q2
* Risk seen that it could accelerate in near term
* Possible threats from Fed tapering and ECB's stress-tests
By Marcin Goettig
WARSAW, Oct 31 (Reuters) - Western European banks slowed down their funding withdrawal from central and eastern Europe in the second quarter of 2013, a report showed on Thursday, but there were still risks from the expected stimulus tapering by the U.S. Federal Reserve.
Institutions that report to the Bank for International Settlements (BIS) reduced their external positions in emerging Europe excluding Russia and Turkey by 0.3 percent of gross domestic product in the second quarter, slowing down from 0.7 percent in the previous quarter, according to the report.
The report was compiled by the steering committee of the Vienna Initiative, the coordinated effort by banks, international financial institutions and policymakers to avert a disorderly withdrawal of capital from the region.
Emerging Europe enjoyed large foreign capital inflows in the boom years before the start of the global financial crisis in 2008. Now some is being pulled back.
The report said prospects of the U.S. Federal Reserve tapering its stimulus had had little impact on bank funding in the region so far, but that could change.
"There remains a risk that funding reductions could re-accelerate in the near term," said Christoph Klingen, deputy chief of the European Department at the International Monetary Fund (IMF).
Many east European countries have banks wholly or largely owned by western parents, which are reducing exposure to the region as they try to fix balance sheets damaged by the euro debt crisis.
NOT TOO FAST, NOT TOO FAR
The coming European Central Bank asset quality review could speed up this process.
"Obviously there are uncertainties surrounding the European banks' asset quality review and also the tapering of unconventional monetary policy," Klingen said.
Some foreign funding withdrawal has also been a result of domestic regulation that curbed foreign currency loans, as happened in, for example, Poland and Hungary.
Such loans, highly popular before the financial crisis, are now viewed by regulators across the region as creating risks for macroeconomic stability.
"To some extent the deleveraging has been unavoidable and good ... you just have to make sure that it does not go too fast and too far," Klingen said.
The report said a further reduction in bank funding for the region was likely, as banks continued to shift from heavy reliance on funding from their western parents to local sources.
"(The) challenge remains to fund a meaningful credit recovery in the region with banks now committed to a funding strategy based much more on local sources and given shallow local capital markets," the report added. (Editing by Andrew Roche)
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