The Vienna Initiative is a forum for the exchange of views and for coordination/
joint action on financial sector development by IFIs, central banks from host and home countries and commercial banks’ representatives. While Vienna Initiative 1.0 was focused on western banking groups maintaining exposure to their CESEE affiliates and providing capital and liquidity, as needed, Vienna Initiative 2.0 is mainly geared towards authorities, encouraging them to cooperate. Beyond an active contribution to the preservation of financial stability in participating countries, it provides an important forum for the exchange of experience and discussions around appropriate actions with a goal of financial sector development. (Importantly, there is still no alternative forum where major stakeholders (IFIs, central banks, commercial banks, representatives and risk investors) meet and discuss financial and real sector volatility and opportunities to strengthen the financial sector.) It also serves well as a prevention mechanism through practical monitoring of the deleveraging process and by setting up temporary structures where private and public-sector decision makers meet to exchange experience and discuss appropriate actions. The latter concerns the establishments of different working groups on strategic issues, where World Bank Group actively participates and contributes.
Looking back at years of continuous fruitful collaboration under the Vienna Initiative, the World Bank Group stays committed to working together on future financial sector reform challenges. The World Bank Group will continue to support the client countries in conducting diagnostic activities to ensure resilient financial sectors, and implementing reforms to strengthen financial systems by streamlining supervisory and regulatory frameworks in line with best international practices and developing tailored approaches to dealing with NPLs. The World Bank Group is committed to staying an active member and prominent contributor to the Vienna Initiative agenda. In additional to the ongoing work streams, there are newly evolving potential areas from that countries could benefit from, such as: i) diversification of financial systems; ii) development finance; iii) advances in technologies for providing financial services; iv) innovation and increased productivity; v) development of green finance; and vi) mitigation of risks created by sovereign-bank nexus
Policymakers and regulators in the CESEE region increasingly recognize the importance of furthering diversification of financial systems. Diversification of financial markets in the region is key when it comes to the provision of term financing aimed at fostering investments and ultimately economic growth. In that context, the availability of a wider range of financing instruments will be able to benefit the varying needs of households and enterprises. Beyond traditional lending channels, there is an increasing range of financing options for different needs of firms over their life cycle: (i) asset-based finance (asset-based lending, export – buyers and suppliers – credit and insurance, factoring, purchase order finance, warehouse receipts, leasing), (ii) alternative debt (corporate bonds, securitized debt, covered bonds, private placements, crowdfunding (debt)), (iii) hybrid instruments (subordinated loans/bonds, mezzanine finance), and (iv) equity instruments (private equity, venture capital, business angels, specialized platforms for public listing of SMEs, crowdfunding (equity)). Not only the awareness, but also availability of these type of finance is limited in CESEE.
Development finance could also play a more important role in supporting access to finance and economic growth by better leveraging available funding resources, especially in light of the availability of EU structural funds and IFI support in CESEE. Essentially, development banks serve as a vehicle for mobilizing and channeling medium- and long-term capital into the economy and addressing market failures in the financing of priority sectors. Through this, they can facilitate the growth and competitiveness of companies and ultimately the economy under the strategic direction of the government. Even though EU integration has
circumscribed the ability of governments to directly support national economic interests, governments have adapted development banks to indirectly implement national economic policy via market-based mechanisms.
Advances in technology are enabling financial services to reach greater numbers of low-income individuals and small firms at lower cost and risk. Recent FinTech developments point to a fundamental re-imagining of the processes and business models of the financial services industry. In this process of heightened disruption, a clear insight emerges – banks and fintech players are naturally interdependent.
Fintech players have built a bouquet of innovative products and services on the strong backbone of the banking and payments infrastructure in the country. Banks, on the other hand, have relied on innovative solutions developed by fintech players to better address the needs of their existing customer base. Finally, at the center of the policy debate is the question how this new area of finance should be regulated and supervised.
CESEE countries will benefit from a new and more balanced growth and financing model with a stronger focus on innovation and increased productivity. There are still significant gaps in the region’s framework conditions, demand, and supply sides of the innovation ecosystem. The Innovation Finance working group concludes that risk capital for the region’s companies’ growth stages is a particular constraint. IFIs can play a key role in a coordinated effort of all market participants to support the growth of innovative firms.
Mobilizing the required funding for financing sustainable and green economic growth, a great proportion of which is expected to come from the private sector, calls for re-shaping key parts of the financial system and identifying and setting new international standards for investment. To attract capital, growing environmental concerns and action on climate change need to be combined with sustainable economic returns. Governments around the world are taking steps to encourage the development of green finance with a view toward mobilizing the needed resources to support economic transformation and maintain competitiveness. While green finance is an emerging segment of financial markets, a range of financial instruments such as green loans, green bonds, green funds and green index products has been developing rapidly. Beyond perhaps energy efficiency and renewable energy financing, the supply in CESEE remains weak.
The sovereign-bank nexus reflects the interconnectedness between the health of the sovereign and the banking system, whereby stress in one sector may create and
amplify stress in the other. There are two direct channels (bank’s direct exposures to the sovereign and the “presumption” of government support to failing banks) and two indirect channels (fiscal and bank interactions with the real sector).
The Basel III capital and liquidity accords, the G20 “too big to fail” reforms, the Financial Stability Board’s Key Attributes for effective resolution frameworks for financial institutions- and the Basel Committee’s review of the regulatory treatment of sovereign exposures all offer relevant measures, but also pose implementation challenges in light of institutional capacity constraints and the level of economic and financial market development in CESEE. Finally, improving transparency and data quality of bank-sovereign linkages and contingent liabilities is critical for surveillance and prudential purposes.
References
European Bank for Reconstruction and Development, European Investment Bank Group, World Bank Group, 2011. Final Report on the Joint IFI Action Plan, http://
documents.worldbank.org/curated/en/145601468162852641/Final-report-on-the-joint-IFI-action-plan
European Bank for Reconstruction and Development, European Investment Bank Group, World Bank Group, 2014. Third Report on the Joint IFI Action Plan for Growth in Central and South Eastern Europe, https://www.eib.org/en/infocentre/
publications/all/economic-report-jiap-III.htm
Financial Sector Advisory Center, 2017. FinSAC Annual Report 2017, http://
documents.worldbank.org/curated/en/949291523955823674/Financial-sector-advisory-center-annual-report-2017
Zoellick, Robert (2009), Seizing opportunity from crisis: making multilateralism work, London, http://documents.worldbank.org/curated/en/991551522047833781/
Seizing-opportunity-from-crisis-making-multilateralism-work-by-Robert-B-Zoellick
Zoellick, Robert, 2009. The World Bank Group beyond the crisis, Annual Meetings of the Board of Governors of the World Bank Group, Istanbul, Turkey http://
documents.worldbank.org/curated/en/119141522053577316/The-World-Bank-Group-beyond-the-crisis-by-Robert-B-Zoellick-President-World-Bank-Group