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**27. Countries that are heavily dependent on banks from the European periphery― Greece, Ireland, Italy, Portugal, and Spain (GIIPS)—are also exposed.** The subsidiaries of GIIPS banks, which are active in a number of CEE countries and have large capital gaps under the EBA stress tests, are also particularly vulnerable to parent bank retrenchment. Although GIIPS claims are generally under 1 percent of GDP for most countries, the country median exposures for CEE (to Greek and Italian banks) and for Latin America (to Spanish banks) are relatively significant, at a median 7.7 percent and 5.6 percent of GDP, respectively. The rapid growth of CEE claims of GIIPS banks since 2006 is particularly striking (figure 17c).

**28. Dependence on cross-border flows from European banks is an important channel of contagion.** Cross-border bank flows (foreign claims excluding the claims of local offices of foreign banks in a given host country) are relatively large and have been growing in some regions since 2005, particularly in CEE (figure 17d). The claims have declined since 2008, especially in the last quarter of 2011, across most regions:  amounting to US$48 billion in Asia, US$40 billion in CEE, US$20 billion in MENA and SSA, and US$6 billion in Latin America. Meanwhile, rollover risk has increased along with a reduction in the maturities of claims. Flows to advanced European countries have also decreased, driven by a retrenchment from the European periphery. At least 50 percent of median cross-border claims across regions have less than a two-year maturity.

**29. Local affiliates of foreign banks play a large role in many emerging markets; recently their claims declined, particularly affecting the regions that rely on a wholesale cross-border funding model** . Claims of foreign affiliates have grown rapidly since 2005, particularly in emerging Europe (figure 17e) where foreign bank ownership is prevalent (figure 18), with median claims of affiliates around 30 percent of host country GDP, compared with a low 10 percent in Asia and Latin America. After 2009, the role of foreign affiliates gradually declined in the Middle East and in Africa. However, foreign affiliates are almost back to 2009 levels in Africa. The level of local claims dropped in most regions in 2011:Q4, making foreign affiliates of global European banks that are dependent on parent funding particularly vulnerable. In Latin America, the regional average of country median L/D ratios of European bank subsidiaries is 92 percent, compared with 123 percent in CEE, indicating that Latin American banks are less dependent on parent funding. In early 2012, European officials, private banks, and international financial institutions (IFIs) agreed on a set of principles in Vienna to reduce the CEE region‘s vulnerability to European parent bank retrenchment as capital and funding pressures increase.<sup>16</sup>

> 16 The meeting, dubbed Vienna Initiative 2.0, followed the first phase of the initiative launched in 2009 at the height of the global crisis to help maintain financial sector stability in emerging Europe, including by encouraging crossborder banking groups to maintain their exposure to the region and adequate solvency levels for their subsidiaries. (See World Bank, 2012.)