| PRAGUE, April 25
PRAGUE, April 25 Policymakers in emerging Europe
should help banks resolve bad loans and find more local sources
of funding to avoid the cycle of boom and bust fanned by an
ownership model dominated by foreign lenders, the IMF said on
In a report on the banking sector in the European Union's
eastern wing, the International Monetary Fund said
non-performing loans would continue to rise in some states,
impeding credit flows and denting profits in western banks
It said that, while conditions differed from country to
country, authorities could remove legal and other obstacles to
help lenders clear soured loans that in some had reached more
than 20 percent of portfolios.
That has crushed loan growth and undermined recovery.
"Tackling the high non-performing loans that make banks in
CESEE (Central, Eastern and South Eastern Europe) reluctant to
extend new loans could provide an important offsetting effect on
credit growth," it said.
"In addition, developing local capital markets could help
create a source of stable, long-term domestic funding for
banks," it added, saying that too much dependence on capital
from foreign owners had triggered the boom-bust cycle.
Foreign banks - notably from Austria, Italy and France -
dominate a region that stretches from the Baltic to the Black
Sea after many countries sold their banks into private hands
following the fall of the Iron Curtain.
The IMF said that, from 2003 to 2008, funds provided to the
region grew fivefold to $1 trillion, sparking a lending boom
that created real estate and other asset bubbles.
Those popped following the collapse of Lehman Brothers in
September 2008 and the subsequent turmoil on global markets,
leading to an outflow of around one third of those funds.
A coordinated effort by banks and policymakers known as the
Vienna Initiative allayed fears of a cross-border banking
crises. But the IMF said the foreign funding had not helped
"In good times it facilitated unsustainable credit booms,
which were difficult to control for policymakers. In times of
tight global liquidity, it exacerbated the retraction of credit
supply, again with little scope for domestic policymakers to
counteract," it said. "There is no evidence that greater access
to foreign funding improved the economic growth performance in
CESEE over the cycle."
The IMF also said new global rules on banks' capital buffers
could cause some Western European lenders to cut exposure to
their emerging subsidiaries "in excess of what would be
considered 'healthy' deleveraging".
But it said results showed that, for the five largest
banking groups in the region, their businesses in eastern Europe
were substantially more profitable than those in the West.
(Editing by John Stonestreet)