In the late ’90s and early oughts, western banks like Erste began buying up local outfits in post-communist Europe, eventually winding up with most of the banking assets in the Czech Republic, Slovakia, and their neighbors. In 2008, as the U.S. credit crunch morphed into a global financial crisis that hit Central and Eastern Europe particularly hard, worry spread that these parent banks would run for the hills. They had helped transmit the crisis to post-communist Europe through various channels – would they now, many observers asked, pull capital out of eastern subsidiaries to protect themselves?

Initially, the answer was no. But as the crisis morphed again – this time into a European sovereign debt crisis – Eastern subsidiaries suffered sharp “deleveraging” and financing flight, especially late last year, undermining the post-2008 recovery in these countries. That’s one reason the European Investment Bank, World Bank, and other global lenders just pledged $38 billion in aid to Eastern Europe through 2014 – a figure that surprised many analysts because the region seems relatively stable compared with a few years ago.

Perhaps it was only a matter of time, then, before someone asked whether foreign banks have done more harm than good in the region. The European Bank for Reconstruction and Development’s (EBRD) answer, in its Transition Report 2012, is of course nuanced – they’re economists, after all.

Before the crisis, the EBRD says, foreign bank ownership was positive, contributing to long-term growth and easier access to credit. For instance, when I moved to the Czech Republic, in 2004, new mortgages were soaring.

As a result, the net benefits of an integrated banking system in Europe became assumed. While acknowledging that there were risks involved, most economists saw foreign ownership as a positive step in post-communist Europe’s financial development, as well as an engine of growth.

But the crisis poked holes in this assumption by revealing the credit boom to be unsustainable, if not reckless. In particular, western sovereigns contributed to a foreign currency lending bubble that left many Central European households wondering how to pay their mortgages as national currencies like the Hungarian forint tumbled in 2008 and 2009. Hungary was among the worst hit, with its economy contracting 6.8 percent in 2009 and back in recession today. (For more on the Hungarian bubble, check out this article.)

A key lesson of the crisis, then, isn’t the risks of foreign bank ownership, the EBRD concludes – they were already known. It’s how much potential harm these risks pose.

But have foreign banks done more harm than good? The EBRD doesn’t have a clear answer, but I think not. If the global financial crisis has taught us anything, it’s that European integration cuts both ways for Central and Eastern Europe. The same process that saw living standards soar on rising trade, foreign investment, and credit brought the region to the brink. Foreign bank ownership played a role in that roller coaster ride. But the climb has been steeper than the descent. Even in Hungary, real GDP, while still shy of the 2008 peak, is considerably higher than in the early ’90s – a period in Central and Eastern Europe I doubt any serious person would want to revisit.

Picture from Flickr

S. Adam Cardais

S. Adam Cardais is a TOL contributing editor. Email:

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