The euroization of bank deposits in Eastern Europe

Abstract

SUMMARYIn Central, Eastern and Southeastern Europe a substantial share of bank deposits are denominated in foreign currency. Deposit euroization poses key challenges for monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency-induced credit risk. Policymakers disagree on whether countries in the region should tackle deposit euroization with 'dedollarization' policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of 'dedollarization' policies requires a clear understanding of which households hold foreign currency deposits and why they do so. On the basis of survey data covering 16,375 households in ten countries in 2011 and 2012, we provide a comprehensive household-level analysis of deposit euroization in Central, Eastern and Southeastern Europe. We examine how households' preferences for, and holding of, foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Central, Eastern and Southeastern Europe can be partly tackled by prudent monetary and economic decisions by today's policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a 'habit' in the region. Second, we find that deposit euroization is still strongly influenced by households' experiences of financial crises in the 1990s. Our findings question the effectiveness of supply side interventions (e.g. bank regulation) or demand side interventions (e.g. local currency capital market development) in de-euroizing household savings. First, we show that deposit euroization is largely demand driven. Second, we show that households already have access to a broad range of savings products in local currency.

The Mass Political Economy of Capital Controls

“…Households are particularly motivated to take out foreign currency–denominated loans when the local currency and local financial institutions are perceived as unstable (Fidrmuc, Hake, & Stix, 2013). Similarly, residents are most interested in saving in foreign currency when they lack confidence in their government and local currency (Brown & Stix, 2015; Weymouth, 2011). Capital controls have stronger effects on the mass public in volatile economies than in stable economies.…”

Deposit insurance, remittances, and dollarization: Survey‐based evidence from a top remittance‐receiving country

“…Using survey data from Albania, Narazani (2013) finds that financial literacy appears to be positively related with the preference of urban households to hold Euro both in cash and in the form of deposits. Employing micro-level survey data for ten Eastern European countries, Brown and Stix (2014) find that the assessment of future monetary conditions (e.g., the expectation of a depreciation within a year, etc.) have a stronger positive impact on preference of holding foreign exchange among more financially literate households than among financially illiterate ones.…”

An Economic Review of Financial Liberalization Real Interest Rates Savings and Investments Into European Union.

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