When do foreign banks ‘cut and run’? Evidence from west European bailouts and east European markets

Abstract

Very high levels of foreign bank ownership in central and eastern Europe (CEE) gave rise to fears that the region would be vulnerable to ‘cutting and running’ during a financial crisis, whereby western parent banks would repatriate capital and liquidity to their home markets and abandon their CEE clients. Such fears were compounded by the economic nationalism of late 2008 and early 2009 in western Europe, as well as by west European bank bailout programmes that privileged home markets over foreign ones. Although CEE experienced a severe credit crunch in late 2008, compared to other financial and economic crises, western bank behaviour in CEE has not amounted to ‘cutting and running’. While many experts credit the ‘Vienna Initiative’ for maintaining foreign bank exposures in the region, this paper argues instead that it was the deep form of financial integration to which CEE was subject that kept banks committed. Specifically, western banks’ ‘second home market’ business model, in which capital moved east via foreign-owned bank subsidiaries as opposed to primarily via branches or cross-border lending, led to only moderate retrenchment from CEE.

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