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Financial Prey for the Populists

As the global wave of cross-border banking recedes, foreign banks are becoming easy targets for populist expropriation, especially in Central and Eastern Europe. More fundamentally, an important agent of local financial development and channel for stable capital flows to emerging and developing economies is closing down.

LONDON – The money-laundering scandals at Danske Bank and Swedbank have already toppled both institutions’ CEOs and caused their share prices to plummet. The scandals, which are mainly related to the Nordic banks’ operations in Estonia, are also likely to speed up the ongoing withdrawal of foreign banks from emerging Europe.

Facing renewed populist attacks in Central and Eastern Europe, and increasingly vigilant regulators and supervisors at home, foreign banks will no doubt reassess their already dwindling ties to the region. True, banks had to cut their exposure to emerging Europe after overextending themselves before the financial crisis. But while withdrawing further might reduce their risks, it would hurt the region’s future growth.

The exodus from emerging Europe is part of a global retreat from cross-border banking in the wake of the financial crisis. In the period leading up to 2008-2009, European banks served as conduits for US peers that were reluctant to become too exposed to emerging economies. With Europeans now pulling back, American banks have taken up some of the slack. In addition, corporate bond markets have expanded. Risks have spread from banks to the rest of the financial system, much of it unregulated.

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