Influence of Regulatory Framework and Exchange Rate Regimes on Financial Stability in Western Balkan Countries

This chapter aims to address influence of regulatory framework and exchange rate regimes on financial stability in the Western Balkan countries by respecting that nowadays international capital flows are very important in determining the exchange rate regimes and financial stability especially in emerging economies. The rapid increase in global regulation and the large-scale net capital flows to WB countries have raised serious concerns about sustainability of existing exchange rate regimes and adverse effects on the financial stability in these countries. Authors try to find the best definition of regulatory framework and financial (in) stability in order to consider key aspects of macro-prudential policymaking in WB region. For all WB economies recommendation in the chapter is consecutively adoption and implementation of Basel II/III standards with the argument to give macro prudential policy mandate to explicit authority to conduct efficient and timely decision making. This chapter studies the impact of exchange rate regime choice on financial stability in WB countries. Since all the countries faced capital reversals and trade shocks they had to deal with rising external shocks. Adjustment mechanisms to these shocks differed according to chosen exchange rate regime. The emergence of the crisis has caused a significant drop in FDI in these countries. It seems that all countries in the region experienced significant reduction in FDI regardless on exchange rate regime.