A new EBRD-led initiative to boost local currency lending runs the risk of triggering a drop in foreign currency loans that could imperil economic growth by choking off credit supply to the regions, leading bankers have warned.
They said that the programme – the Local Currency and Capital Market Initiative - could lead to tighter financial regulation.
But they broadly welcomed the initiative, which is backed by a group of multilateral banks, and which will be officially launched in Zagreb tomorrow with the aim of phasing out short-term unsecured consumer lending in foreign currency.
The programme – informally dubbed the ‘Vienna Plus’ initiative – will be modelled on the European Banking Co-ordination Framework, set up in Vienna in January 2009. This brokered an agreement between the EU, IMF, World Bank, EIB and EBRD and banking regulators, among others, that parent banks would maintain their exposures in eastern Europe.
Herbert Stepic, chief executive of Austrian bank Raiffeisen International, which is one of the most active banks in the region, welcomed the initiative as a “mechanism to discuss these issues with regulators”.
But he said he was worried that policymakers might fail to “balance the need to regulate foreign currency exposures” while ensuring that the cost of capital was competitive. The policy might result in pro-cyclical regulations that would “hike the cost of euro-denominated credit” he added.
Charles Dallara, director of the Institute for International Finance warned the biggest threat to local credit provision in the region lay with “new and pro-cyclical regulation”.
Regulations proposed under the Basel III regime could rule that banks with minority shareholdings in central and eastern Europe cannot count this equity as part of their capital base, he said. “This is the big, big threat to local and euro credit supply to the CEE region as liquidity costs will be higher and banks will have to raise capital.”
In his opening speech yesterday, EBRD president Thomas Mirow said the bank would push for “commercial banks to differentiate lending standards according to the currency denomination of lending”. This would incentivize the take-up of local currency loans and reduce costly foreign currency mis-matches, he said.
Erik Berglof, EBRD chief economist, told Emerging Markets: “This local currency initiative, principally a policy dialogue framework, will connect lenders and borrowers to address the creation of long-term funding in local currency.”
Manfred Schepers, EBRD vice-president, said the initiative could also see the EBRD step up bond issuance in local markets. Serbia has called on the bank to issue a dinar-denominated bond to finance its operations in the country.
Radovan Jelasic, Serbia’s outgoing central bank governor, told Emerging Markets such issues would “create a yield curve, strengthen the quality of their [the EBRD’s] loan portfolio, and it can also help the government to set its yield curve”.
Schepers said it was the EBRD’s “objective” to create long-term domestic funding sources. But he warned that “if you do a bond issue in a country and no-one [bond issuers] follows this up and if it does not support our operations – then we need to think again.”