Academic journal article Journal of Economic and Social Studies

The Impact of the Global Financial Crisis on the Banking Sector of Western Balkans: Cross-Country Comparison Analysis

Academic journal article Journal of Economic and Social Studies

The Impact of the Global Financial Crisis on the Banking Sector of Western Balkans: Cross-Country Comparison Analysis

Article excerpt

Introduction

In the last 15 years, banking of Western Balkans has come a long way from stumbling, radical reforms to healing. Among other things, a high degree of vitality and ability was demonstrated to strengthen the deposit potential of banks and restore lost public confidence. Overall, the continued growth rates in the Western Balkans over last ten years were converged mostly due to similar policies of economic stabilisation and a period of relative political stability.No matter what are the ways of institutional and administrative changes for each country, they are visible almost identical areas in which they made the necessary structural reforms, as in the case of banking markets. This position of the banking sector in Western Balkansis the result of the process of structural reforms implemented in most banks of these countries in 1990s signaling the begining of transformation from socialist ownership to private ownership and market economy. Significant progress has been made in the area of the privatisation of banking sector which is almost completed in most of the selected countries in during 1990s.With its comprehensiveness reforms have changed the whole structure of the banks in terms of the ownership, organizational and business. They emphasized creation of favorable conditions for entry of private capital and eliminating barriers to entry foreign (western) banks. In addition, the low credibility of the Western Balkans, the absence of additional credit ratings was greater complexity for the situation by forcing banks to borrow abroad at much less favorable conditions.

The adoption of new laws created a framework dealing with the instruments and institutions of the banking market. Changes that were later made to existing laws by their character were editing market-oriented concept of development and functioning of the banking market in order to strengthen the financial system of Western Balkans with the appropriate parties and different offerings of banking products and services. More or less in all transition countries facing the reality of market economy and risks were something new and they all had to adapt to it quickly. Price paid for getting used to the new reality was not small, given the loss of public confidence.

The issue of major reforms in the field of banking imposed an imperative. The implementation of these measures led to significant changes and improvements in almost all transition economies.

The reforms introduced have not only put the countries of the Western Balkanson the path to growth but also made its economy strong to sustain positive trends in coming years. After the credit boom years between 2003 and 2007, which were characterised by strong credit growth the economy of Western Balkans saw a downward trend in economic growth in the period between 2008-2010 on the back of the unfolding global financial turmoil.A recent survey, conducted by Jiménez and Saurina (2006) was pointed out that there is positive, although quite lagged, relationship between rapid credit growth and future nonperforming loans of banks. In according their finding during lending booms riskier borrowers obtain funds, and collateral requirements are significantly decreased. The same turned out to be time for the Western Balkans.

The spillovers from the global crisis fully hit the economies of Western Balkan and led in 2009 to the deepest recession since early transition. The countries of the Western Balkans have faced significant challenges since the latest financial crises began in 2008. However, 2009 has proved to be a difficult year for all economies of the Western Balkan countries. The credit expansion of Western banks caused instability in many transition economies where these banks had operations. Especially if we know that many transition economies are dependent on remittances or on revenues from natural resources, all of which sharply decreased with the downturn. The paper begins by giving an overview of the banking sector in Western Balkans in pre - crisis by describing the development structure of the banking sector. …

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