In Bulgaria the banking sector came under stress in the summer of 2014, with runs on two major locally owned banks. The authorities took prompt action, putting one of the banks into administration and securing emergency liquidity support for the banking system as a whole, with the approval (under state aid rules) of the European Commission. The authorities’ response has helped to ease the situation, but the episode has raised concerns about supervisory standards. The Bulgarian authorities have subsequently signalled their intention to opt into the Single Supervisory Mechanism under the European Union’s banking union project.

On the positive side, deleveraging in the region has tended to be accompanied by a reduction in the percentage of credit which is denominated in foreign currency. New lending has increasingly been denominated in local currency, reflecting a greater reliance on domestic funding, while in countries where credit has continued to contract in real terms, the contraction has been largely at the expense of foreign currency-denominated loans (see Chart M.11).

A number of other factors have also contributed to this trend, including reduced interest rate differentials between loans denominated in local and foreign currencies (owing to lower levels of inflation) and stricter standards for lending to unhedged borrowers (for instance in Poland). In certain cases subsidised lending programmes (such as the Funding for Growth programme in Hungary) have also played a role.

Non-performing loans (NPLs) continue to account for a large percentage of total loans, and that ratio has even increased further in a number of countries, limiting the post-crisis recovery. In Hungary, Croatia, Ukraine and most SEE countries the ratio of NPLs to total loans is close to or in excess of 15 per cent (see Chart M.12). In Kazakhstan the NPL ratio has remained close to 30 per cent since mid-2009. The highest rate is in Cyprus, where NPLs account for more than 40 per cent of total loans and a significant contraction is still being observed for GDP. In Slovenia estimates of banks’ NPLs were revised upwards in late 2013 in the context of an asset quality review conducted by independent assessors at the request of national and EU authorities, while the subsequent recapitalisation of banks led to a reduction in NPL levels. Similar upward revisions of NPL ratios may follow in other countries conducting asset quality reviews.