A squall in Europe’s abating banking crisis

Is the eastern European banking crisis flaring up again? Last month, Bulgaria’s fourth-largest lender, Corporate Commercial Bank (CCB), was nationalised.

The move came after allegations of financial mismanagement, and reports that a large depositor had withdrawn funds, triggered a bank run. Over 20% of deposits were pulled out in a week, causing Bulgaria’s biggest bank failure in 17 years.

The rumours (which the government believes represent an orchestrated attack on the banking system) prompted a smaller run at another institution, First Investment Bank.

Meanwhile, shares in Austria’s Erste Bank fell by 16% after it said last week that it would have to set aside €2.4bn to cover losses on loans in Hungary and Romania.

Still, this “looks like more of a returning squall in a slowly abating storm than the outbreak of a new leg in the crisis”, as Jeremy Warner puts it in The Daily Telegraph. The problems at Erste seem to be largely a question of regulatory changes in Hungary and Romania.

In Romania, the central bank is pushing lenders to adopt more stringent rules on bad debt. In Hungary, the government is forcing banks to compensate customers for using unfavourable exchange rates when selling them foreign-currency mortgages.

In Bulgaria, meanwhile, there’s no sign of runs spreading – interbank lending rates have stayed stable. But regardless of what exactly happened to CCB, this is a reminder that we should expect the occasional failure in Europe’s still-fragile banking system, as Capital Economics notes.

The most vulnerable will be in countries where bad debts have risen most steeply in the past five years: Romania, Hungary and Bulgaria.

Merryn

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