Finance in Central and Southeastern Europe

The following chapter presents the cross-country comparison of central banks’ decision-making premises. A simple index of forward-lookingness (FL) is created and applied for the Czech Republic, Poland and Hungary. This index verifies whether the central banks consider their own inflation forecast and inflation expectations while making decisions on the interest rates. The way how the modern central banks understand transmission mechanism justifies a search for an assessment of their forward-lookingness. Once it is possible to compare the FL of the central bankers, the conclusion on the relationships of their results and FL or the FL of the central banker and expectations of economic agents can be drawn. The additional goal of this chapter is to assess the central bank’s decision compatibility with its own inflation forecasts. Inflation forecasts, consistently used by the central banks, may support the stabilization of inflation expectations exhibited by economic agents. The results for three countries covered by the examination show the highest FL of the Czech National Bank which outperforms the National Bank of Hungary and the National Bank of Poland in both: FL and decision consistence with the macroeconomic forecast.

The main goal of this chapter is to show what changes occur in case of accelerated issuance and use of private digital money. Respectively, in this work the authors analysed an environment that would arise in the case of parallel use of private and public electronic money. The analysis was carried out for the case of Montenegro.

For the analysis of the perception of the monetary authority, authors conducted a qualitative research that was based on deep interview, while for the testing of the attitudes of clients the authors have used the quantitative research that was based on a survey.

The research results showed that accelerated issuance of private digital money and its parallel use with the State electronic money can lead to negative impacts. Research has shown that the new conditions could lead to financial instability, difficulties in conducting monetary and fiscal policies, as well as to problems in the operations of the Central Bank and deposit institutions.

The results of this chapter may be a contribution to the discussions on private digital currency, understanding of the attitude of the monetary authorities and private clients in terms of digital money, especially in small and developing countries. Also, they can serve as a literary basis for a comparative analysis of this kind in developing countries, such as Montenegro. Results can also be useful to employees in the banking sector and regulatory bodies to better understand the environment in which private and state money are parallel operating.

According to the authors’ knowledge, previous researches on the topic of private digital money are not faced with attitudes of clients and monetary authorities, so with this chapter, the authors have sought to rectify the literary gap.

The chapter explores determinants of currency substitution on a sample of countries of Southeast Europe that follow a variety of exchange rate regimes within different monetary frameworks. In the sampled countries, the level of currency substitution remained rather high despite years-long efforts to address the issue. Although the substituting currency (euro) does not undermine the substituted ones in their role of means of payment, it is the pervasive use of foreign currency as the store of value, or choice of currency for financial assets and liabilities, that becomes a persistent feature of all economies in question. Foreign currency loans continue to dominate local loan markets, and broader money aggregates to a large extent consist of foreign currency deposits (financial euroization). The presence of financial euroization makes interest rate channel of monetary transmission inefficient. Moreover, the pervasive level of financial euroization leaves an economy dangerously exposed to external shocks. This is why understanding roots and mechanisms of financial euroization becomes an increasingly important policy issue. We employed multiple panel regression models feed by the official annual data that cover the last decade. In this study, the choice of explanatory variables is firstly based on the so-called portfolio view which considers economic agents’ choice between the classes of domestic and foreign assets driven by risk–return relationship. We have tested the significance of a set of variables pointed out by two international parity conditions, i.e., uncovered interest rate parity and purchasing power parity. The common variable for those international parity relations is exchange rate expectations, or future path of exchange rate. We also included different proxies for external fragility. Those proxies may shape public view of growth and stability prospects, and further on explain puzzling disparities of the international parity relationships, calculated based on current level of exchange rate. Designed that way, econometric models are able to trace wrong policy choices or unsustainable economic policy mix.

Our chapter investigates the economic exposure to currency risk of stock markets from nine countries in South-Eastern Europe using bilateral exchange rates of the domestic currencies against their main trading partners’ currencies between 1999 and 2015. The relevance and magnitude of exposures are investigated through changes in exchange rates in linear and non-linear specifications. Our results indicate that these economies show contemporaneous exposure to currency risk, but they are different in size and sign from one country to another and from one currency to another, a result that can be explained by the dissimilar economic structures in the region. There is smaller evidence for asymmetric exposures in linear specifications, which might indicate a general inability of companies in the region to use real or financial options in order to benefit from the positive effects of changes in exchange rates or to hedge the undesired expected exposures. The evidence for non-linear exposures is strong for these economies and generally shows that companies’ value is negatively influenced by higher volatility in exchange rates and more frequent appreciations of foreign currencies. Overall, our findings suggest that countries from South-Eastern Europe face competitiveness challenges regarding their main trading partners, but also that companies from the region are less capable to use real and financial options to mitigate their exposures to currency risk and this is reflected in their overall market performance.

Until the appearance of financial crisis, share of non-performing loans in bank portfolio for most of the countries were satisfactory. Since then, average asset quality has sharply decreased which caused a lot of turmoil in financial stability of countries. This chapter investigates causation of non-performing loans, from macroeconomic variables such as real GDP growth rate, inflation, and unemployment. Accordingly, we try to identify differences in this causality between selected Balkan countries. For that purpose, quarterly data about non-performing loans, GDP rate, inflation, and unemployment for Croatia, Serbia, and Bosnia and Herzegovina for the period 2006–2015 were collected. The aim of this research is establishment of causality model between non-performing loans and macroeconomic factors, as well as analysis of differences in intensity of influence between countries covered by this research. Then by applying Vector Error Correction Model examines whether there is a causality between non-performing loans and macroeconomic variables of selected Balkans’ countries in the short and long run. The same methodology was applied to all data from analyzed countries in order to provide comparison between obtained models. Cointegration analysis of non-performing loans and macroeconomic variables has been conducted through Johansen test of cointegration. Results indicate existence of at least one cointegration vector, which proves existence of causality between non-performing loans and macroeconomic factors. Results of this methodology application indicate long-term connection of these variables and causality of non-performing loans from macroeconomic factors in analyzed countries. However, results indicate differences in intensity of influence of macroeconomic factors on non-performing loans. Also, this chapter aims to, by considering these three countries as representatives of Western Balkan, bring conclusions about causation between non-performing loans and macroeconomic variables at Western Balkan level. For that purposes, panel cointegration analysis was employed. Results have shown that improvement in macroeconomic conditions cause changes in non-performing loans.

With a stronghold in the institutional theory of corporate social responsibility (CSR), a hypothesis is made on banks’ CSR performance being positively driven with the contextual factors, i.e., countries’ macroeconomic and institutional development and their banking sectors’ development (briefly country development level). Development banks, rather than commercial banks, are at the center of the empirical evidence, mainly because they are perceived to be socially responsible institutions by their definition, as well as the best in class example for commercial banks’ CSR practices in certain country. CSR performance is measured throughout CSR reporting quantity and reporting form following Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines. By combining the aforementioned data and the World Bank’s data for 22 European countries in 2013 out of which 15 are Balkan and Eastern European countries and the rest Western European countries, we find out that GDP per capita, research, and development expenditure over GDP, gross savings over GDP, and employment of total labor force are positively related to development banks’ CSR performance, while banking sector variables (net interest margin and regulatory capital to risk-weighted assets) are negatively related to development banks’ CSR. Countries’ institutional development variables are also connected to development banks’ CSR performance, but with rather slight differences between better and lower performing development banks with regard to CSR. Thus, more developed economic systems as well as less profitable banking systems, which have lower level of regulatory burden have higher performance of development banks’ CSR when K-means clustering approach was adopted. An important caveat of the research is that there is a trade-off between cost of banking intermediation and development banks’ CSR performance, while macroeconomic performance and CSR performance are in complementary relationship. Altogether, a conclusion is made that banks’ CSR performance is rather modestly explained by the country development level in the previous empirical works and thus a more general approach when researching and creating public policies about the CSR phenomenon is required.

Account receivables are a sum of money owed to a company by its debtors. Receivables are recorded by a company’s accountants and reported on the balance sheet, and they include all debts owed to the company, even if the debts are not currently due. They are a part of current assets. Company’s receivables may occur from a variety of titles. Each of these forms affects the financial situation in a different way. The majority of receivables has the nature of trade credit. Offering trade credit is a strategic tool in the hands of the company but many payments in commercial transactions not only between businesses but also between businesses and public authorities are much later than were agreed. Therefore, we can conclude that the offering trade credit is largely linked to credit risks. Term credit risk has assessed the risk associated with the fact that the customer fails to pay its obligations properly and on time or at all. Every year thousands of businesses go bankrupt just because of late payments not only in Europe but also in the world. In this chapter, we will focus on the relationship between the absolute amount of trade receivables and the ratio of equity to liabilities represented as indicators used for identifying impending bankruptcy and the relationship between the days sales outstanding and the mentioned ratio.

Banks are exposed to a wide range of different risks and credit risk is considered one of the most important and most influential ones in terms of affecting bank performance. In order to investigate credit risk—profitability relationship, in addition to other bank-specific variables, the model also encompasses industry-specific and macroeconomic variables that might have an influence on bank profitability. A dynamic panel data analysis is applied to the data set of commercial banks that operated in Croatia in the period from 2003 to 2013. The aim of this chapter is to contribute to the understanding of the profitability determinants in the context of developing countries such as Croatia and to give additional insight into the main factors that may influence bank success, which is of unquestionable importance for both policy makers and bank management.

A phenomenon in the insurance industry is that both mutual and stock firms dominate the market. Mutual and stock companies differ fundamentally. In a mutual organization, consumers are also owners. They provide capital and bear the risk. And because of that the mutual form is free of the conflict of interest between the owner and the consumer. In stock organizations, the owners and the consumers are distinct. The owners supply capital and receive the residual value; the risk is shared between the owners and consumers.

For many years in the literature, we try to find out the causes of coexistence of mutual and commercial insurers. The issue has been pointed out in the theory of enterprises (mainly the theory of agency) or the theory of finance (in connection with the effectiveness or availability of capital).

At the same time, in the last several years, we could observe a change in the concept of financial institutions’ operations. They no longer play a subordinate role to the real economy, and they have become a generator of profits for investors. A clear result of such action was the financial crisis 2007–2008. However, it seems that this trend is not stopped in the insurance sector. Such action involves a loss of confidence in financial institutions by customers.

In the chapter, the authors analyse whether and how the paradigm shift operation of insurance affects the mutual insurance companies. The authors verify the hypothesis that the formula of reciprocity allows mutual insurers not only easier to survive crises of confidence in financial institutions, but even improve their market position.

To achieve the objective of the chapter, the authors analyse literature and the situation of mutual insurers in the European insurance market (with special emphasis on the countries of Central and Southern Europe).

The aim of this chapter is to study the forces driving companies’ exit from the Athens Stock Exchange (ASE). It also highlights the motives and the information on which this exit was considered as the most appropriate choice as well as the actions taken before, during and after the delisting process from the ASE. Moreover, the differences between voluntarily and not voluntarily delistings are highlighted and useful and valid conclusions from investors who are placed in diversified portfolios are indicated. The chapter attempts finally to give a brief overview of the current regulatory framework in Greece.