What happens in Eastern Europe’s banking market after Corona

Dhe economic output is shrinking and unemployment is rising, while a second wave of corona infections sweeps across Eastern and Southeastern Europe. But the banks operating there are recording fewer bad loans than in the previous year, but loans are growing. The most important reason is obvious: generous government aid programs and generous central banks often keep businesses and households afloat. But what if the programs expire?

Economists at Raiffeisen Bank International (RBI) took a closer look at the situation. They assume that the aftermath of the Covid crisis will continue to occupy the Eastern European banking sector until the end of 2022. They expect a “significant and gradual deterioration in the quality of assets in 2021 and possibly beyond”. The current second wave of Covid brings the banks additional risks from private customers and small and medium-sized companies. Accordingly, they expect a surge in loan default rates.

Failures of up to 10 percent

In East Central Europe they calculate with failures of 4 to 8 percent, in the southeast of up to 10 percent. Measured against the default rates currently quoted by the Austrian institutes Erste Group and RBI, which are strongly active in the region, that would be a three to four-fold increase, compared with the average default rates of all banks of 5 to 6 percent last year, but rather little . That doesn’t mean sleepless nights for those involved. Because even in the worst case, “the increases in Southeastern Europe in particular would be far less dramatic than ten years ago,” says the Raiffeisen Report. In the financial crisis of that time, the region’s banks were hit hard, also because they had too little equity. Not only Southeastern Europe was affected at the time, where a third of the banks have since disappeared from the market.

International financial institutions and banks came together in 2009 in the “Vienna Initiative” to ensure the stability of the financial sector in Central, Eastern and Southeastern Europe. The coordination circle still exists, but, according to insiders, it largely keeps its feet still. Unlike in the crisis ten years ago, the financial institutions have accumulated enough capital.

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