fears of Greek contagion surround Serbia, Romania and Bulgaria, because Greek-owned bank subsidiaries have a big share of their banking sectors.

The European Bank for Reconstruction and Development (EBRD) has invested in these subsidiaries to help “wean” them from their parents, says Eric Berglof, the EBRD’s chief economist. New bank capital rules, designed to make banks safer, are causing anomalies locally. Many of these countries’ banks are owned by European Union (EU) groups which are regulated at home on a consolidated basis. Even if the local subsidiary is well-capitalised, its loan portfolio can be constrained by the weaker capitalisation of the overall group. “I can’t lend as much as I’d like,” says the general manager of a well-capitalised subsidiary of a struggling EU parent. These capital rules can also constrain EU subsidiaries from being active in the local government bond market. Most countries rely on their domestic banks to keep some liquidity in local government bonds. But in Albania, the subsidiaries of EU-regulated banking groups find that extremely expensive, because of the capital charge for non-EU government bonds imposed at home. BKT, a local bank owned by a Turkish non-bank company, ends up as one of the few banks able to participate. Given the perceived benefits of developing local capital markets—the EBRD’s recent annual meeting in London tried to keep the issue alive—the EU’s rules on bank regulation via distant parent seem in urgent need of revision.