Special Activities ⑦

・Report by Associate Professor Dr. Eva HANADA：

The Impact of COVID-19 Pandemic on Banking Markets of the new EU Member States

By Eva Hanada

Presentation at Panel H of the European Union Studies Association Asia Pacific (EUSAAP) conference 2023, in Bangkok, Thailand, 30 June 2023,

Since 2020, the global COVID-19 pandemic has had unprecedented socio-economic impacts. The presentation looked specifically at the impact of COVID-19 pandemic on the banking sectors of 11 EU Member states from Central and Eastern Europe, the research dimension that remains relatively underexplored, but is nevertheless important, as foreign-owned banks dominate these banking sectors, therefore any larger potential losses of the foreign-owned subsidiaries would also pose a risk to the financial stability of the home country. Since the global financial crisis of 2008, the resilience of financial systems has largely improved in the EU owing to the reformed regulatory framework (EU banking regulations aligned with Basel III) and substantial improvements in the European banking supervision, notably the creation of the European Banking Union. Prior to 2020, banks in these 11 EU Members showed sound balance sheets (high ratios of CET1 capital, high Return on Equity etc.). The pandemic caused a very large short-term decline in GDP of these 11 states in 2020, but thanks to a wide range of measures deployed by these states as well as the support by the European Banking Association (EBA), European Central Bank (ECB) and the European Systemic Risk Board (ESRB), the negative impact has been largely mitigated. The presentation shows that even though the effects of the pandemic could be detected in some bank indicators for these 11 states, the banking sectors proved their resilience in 2020-2021. Nonetheless, the presentation also demonstrated that it might be too early to assess correctly to what extent the hidden risks in terms of Non-Performing Loans (NPL) will materialize or not in these states. Furthermore, these states are often described as a single region, but the presentation distinguished several differences among them. Last but not least, the presentation also illustrated that the pandemic has led to a deep transformation in banking and 11 states from Central and Eastern Europe have been no exception. The trends like digitalization in banking as well as move towards sustainable finance with emphasis on the ESG (environmental, social and governance) factors will not be reversed even when the pandemic is under control and will continue to transform the banking industry across the EU. The presentation also implied that these new trends present opportunities for raising bank profitability. Further research is needed to take into account the latest set of challenges and the risks they pose to the banking systems of these 11 states. The continuing war conflict in Ukraine in particular could exert an adverse effect on banking in the states with high exposures and economic links with Russia and Ukraine.