Impacts of euro adoption on banks in the New Member States

Soós János

Keywords: banking sector, EMU, New Member States

Banking systems of the NMS are strongly linked to those of the EU15 Member States. Accession of NMS to EMU will likely to act, in the medium to long term, as a catalyst to strengthen already existing developments and trends in the banking systems of these countries. Accession to EMU will likely to strengthen the pressure for the reduction of existing excess capacity in the banking sector of the NMS. Further on, it is expected to put profitability under pressure and lead to increased geographical diversification and internationalisation, as well as to increased conglomeration and mergers and acquisitions. Overall, competition in banking within the euro area is likely to increase considerably after the NMS join EMU. When assessing any potential outcomes or challenges arising from the EMU presence of NMS banks, banks shall automatically take part in an adjustment process where, ideally, they redefine their roles and restructure, if necessary, their strategies for participation in an enlarged euro area market. In the preparation stage, banks in the NMS shall increase their awareness of challenges EMU can bring and here experiences of the present EMU Member States can be a major asset. In theory, changeover to the euro in NMS might represent a risk in the banking systems (revenue and cost implications of the transition to the euro). in the medium term, the negative effects of the structural adjustment process in the EU banking systems could be concentrated in strategically unfavourably placed banks that may not cope with the risks and difficulties associated with the adaptation to that process. Nevertheless, in the longer term, the adjustment process should result in a stronger and fitter banking sector and generate customer gains due to increased competition. In addition, the transition to a stable monetary environment should bring positive effects to the banking systems in the NMS. This shall be mostly felt by those banking industries that previously operated in a relatively high inflationary environment.