The future of banking is in question all around the world, but nowhere more so than in Central and Eastern Europe. The choice is between sticking with Western European banks that may be hobbled for years by the euro zone's fiscal problems, or renationalizing the banking system.
To a degree unrivalled in any other region, credit provision in Central and Eastern Europe is dominated by banks ultimately headquartered elsewhere, and almost always in Western Europe.
That is to some extent an accident of history.
When those countries began to rejoin the global market economy following the collapse of communism in the late 1980s and early 1990s, greater financial integration was seen as a solution to many of the world's economic problems, and every removal of a hindrance to the free flow of credit and capital was to be encouraged. Or at least, that was the Washington—and Brussels—consensus.
But there was a more practical side to the decision to involve foreign banks so heavily in the provision of credit. Over four decades of communist rule, banks had operated very differently from their Western counterparts.
So when it came to privatizing the small number of relatively large banks that dominated the region in the early 1990s, one of the problems governments faced was that there were very few people within those banks with any experience of commercial banking. What governments were looking for was a rapid transfer of know-how and technology, and foreign banks had both.
For Western European banks, the CEE countries offered a relatively safe way of expanding beyond their home markets, and the prospect of rapid asset growth and higher lending margins.
So it was that these banks bought many of the region's newly privatized lenders during the 1990s. They were encouraged to do so by governments in their home countries. As part of the routine hypocrisy that was common at the time and not rare now, those same Western European governments discouraged significant foreign involvement in their own banking systems.
And so banking in Europe split along the line of the old Iron Curtain. West of that line, the old national champions prevailed. Deutsche Bank stayed out of France, BNP Paribas out of Germany. Of the major economies, only the U.K. appeared willing to take a risk and allow a significant part of its banking system to fall under foreign control. Read more. (Subscription required.)
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