Financial Services And Country Risk

Importantly, to attract new customers, foreign banks will make their reputation in the region by addressing several areas (retail banking, asset management ...) and extending their geographical coverage, in contrast to local, often focused on a number few countries. This strategy requires a deployment capitalizing on existing settlements, focusing on synergies (sharing of customer data ...), and market knowledge already acquired with the risks, a decisive element in the investment decision.


Indeed, Central Europe in particular differs from other popular markets like China and India by showing a mainly political and economic situation almost stabilized. Of course some main regulatory obstacles remain, like the restrictions governing credit growth, to inhibit growth in net banking income. Also binding regulations set by some central banks in the region often impose bureaucratic processes. Also, banks will have to deal with financial transparency may be limited, to understand the economic health of their third example.

However, the states of Central Europe, mostly integrated into the EU, should be quickly put in line with European standards and guidelines and promote the establishment of foreign banks. Their alignment of means of payment or accounting standards is remarkable.

Still, the disparities within the region persist. Some states of Eastern Europe have large current account deficits and political instability, like the Balkans. Therefore, it is questionable whether these countries will be able to follow the path of the "leading countries" such as Slovenia, Hungary or the Czech Republic and converge to a stable market economy and conducive to the rapid emergence of financial services. From this perspective, Europe is undoubtedly a great ally.

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Financial Services

Consequently, the CEECs converge progressively towards consumption standards similar to those observed in Western Europe and reveal a proven potential for banking services. Although over 80% in Croatia or the Czech Republic, the rate remains low in most countries of the area, such as Romania, Bulgaria or Ukraine. As proof, the share of deposits to GDP stagnated in the latter State to 23% in 2005 against 90% for the euro area. Initiated fewer than twenty years, the transition from a de facto demonetized from Soviet pattern and a market economy is new and explains the low level of banking services. Therefore the CEEC are in a learning phase of the "bank" and the concepts and mechanisms inherent in the savings and credit, in a context marked by the absence of national champions or at local banks reference.

Thus, despite the rise of some local industry the development opportunities are real and evidenced by the growing demand for consumer credit or to the habitat. In addition to the benefits of the wave of privatizations, banking and investment also benefits from the financing needs of state and local governments under-equipped and is involved in the emergence of large industrial groups in the region.


To exploit these opportunities and differentiate themselves from their local competitors, foreign banks can rely on better product knowledge, particularly in private banking, where financial engineering is growing rapidly. The increased standard of living behind the rapid growth of the CEECs argues for a broader offering to meet increased need for diversified products, at least in the country’s most bank accounts or may become a near horizon. Meanwhile, banks will have to segment their offer and better distinguish the customers 'standards' of "tributaries" in particular financing. In this context, a solid local employee is no longer a luxury. They will have to learn to build a trusting relationship with customers, whose perception of banks is still mixed. The practice of clear and transparent pricing and secure banking will improve this perception.

The Economic Capital Requirements

The economic method goes further in the correlation of risks. Thus, the approach in terms of economic capital it often leads to a discussion of possible spin-off or termination of activities too inefficient because too greedy in equity (although sometimes very profitable). This view of risk thus favors an approach that is more conservative but also more efficient in the management of financial institutions.


Based on calculation methods close, the two types of capital are in fact in the service of distinct interest. Regulatory capital are primarily intended to maintain the solvency of all financial markets in order to avoid systemic risk, with, ultimately, the aim of guaranteeing the rights of depositors. And, in addition to these economic goals, regulation responds to political ends, as shown in the measure of risk for companies. Indeed, the method of calculating the risk Basel II is a purpose not to penalize SMEs in their research funding from major groups.

Conversely, the economic capital requirements respond first and foremost the concern to maximize business performance, and taking into account the risk is on the basis of this single purpose. Market stability, which is an end in itself in the regulatory framework is a result driven by the desire to improve the profitability of each financial institution.

Thus, the changes marked by the Basel II promote convergence of regulatory capital to their economic equivalents. But if the approach in terms of economic capital can meet some regulatory requirements, it remains primarily a lever that should enable financial institutions to improve and better manage financial performance.

The economic approach thus requires overcoming the only framework set by the Basel Committee, which is reflected in the efforts and significant investments in collecting the necessary data and developing models related. A close collaboration between the Risk Management, Finance and the various trades is also required with a strong involvement of the "top management" to ensure proper deployment of the approach in the establishment. So many projects and milestones that represent the next challenges banks for years to come...

The Economic Capital Management

Beyond these differences on the nature of the risk taken into account, the two types of methods are opposed to their method of calculation. Indeed, the peculiarity of the economic capital is that it incorporates the correlations between micro-economic risk of the counterparty in question and the macroeconomic risks that could affect it. The economic sector of the counterparty or its geographic location and are included in the measure of risk, so you can enjoy the most exhaustive possible potential failures.

More broadly, the sensitivity of the consideration to changing the general economic situation is also a factor in determining the economic capital, through the calculation of the coefficient R2. Thus, while regulatory capital stops at the theoretical definition of the risk of the counterparty, the internal model for determining the economic capital takes into account economic conditions and interdependencies of various factors, allowing a more detailed assessment of risk and therefore economic capital to put in front of the activity.

Specific objectives in the economic capital are an essential instrument of strategic management

Economic capital should actually meet three objectives nested, with the backdrop of the profit motive of financial institution:

* Assessment of risk-adjusted returns: in particular through the calculation of RAROC (Risk Adjusted Return on Capital). The RAROC measures the rate of return of an activity by adjusting the level of capital employed by the risk. Economic capital thus defined to measure the financial performance of the activity in the expected benefits related to capital needed to cover it.
* Portfolio Management: Once the risk-adjusted returns calculated, it becomes possible to compare the actual performance of various businesses of the bank.
* Strategic management activities: economic capital thus enables the bank to arbitrate between the different professions in order to optimize the use of capital.

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