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In line with similar recent reports, a new survey by Fitch Ratings reports that deleveraging by parents of banks in Central and Eastern Europe - one of the most feared conduits of the Eurozone crisis to the region - remains significant but moderate. Rather, the agency says, foreign domination of CEE banking sectors is positive for regional economic stability, and suggests that reduced in general lending stems from low demand and limited attractive opportunities. The exception, of course, is Hungary.

Overall, the survey indicates that group funding of the 43 banks surveyed decreased by 20% to €62bn between the end of 2008 and the end of the first half of 2012. Fitch reports that it spoke with the largest foreign-owned banks in Poland, the Czech Republic, Slovakia, Hungary, Romania, Bulgaria and Croatia. The surveyed banks had combined assets of €454bn at the end of 2011, equal to 58% of total banking assets in the seven countries. "Although the proportion of repaid parent funding is significant in absolute terms, it represented a moderate 4% of the banks' total liabilities," Fitch states.

However, it also notes that the widely viewed risk of liquidity pressures driving deleveraging - as credit markets slow and Eurozone banks scramble to raise capital ratios to meet new EU limits which came into force in the summer - should have now run its course, particularly given central bank liquidity actions recently.

Instead, they say, it appears parent groups are set to continue to pull funding from CEE units based on more fundamental concerns: "changes in risk appetite, a weaker medium- term economic outlook, and limited attractive lending opportunities in CEE were the main drivers of these [funding withdrawals] and also of subdued credit growth in the region."

Still, most foreign banks with a large CEE presence remain committed to the region, and have recapitalised subsidiaries where needed, Fitch notes. However, greater competition for domestic deposits as parent institutions have refined their funding strategies, as well as higher pricing of intragroup facilities, have contributed to margin pressure at CEE banks.

That the likes of the Czech Republic, Slovakia and Poland remain within the average range of reduced funding is little surprise. Banks in the former two are among the most conservative and stable in the region, and enjoy some of the highest deposit to loan ratios in the region. As the survey points out, as the Czech Republic entered the crisis in late 2008, the share of parent funding in total liabilities amounted to no more than 7.5%.

Polish banks entered the period with parental funding still low at around 15%, and saw no more than a 5% drop to summer 2012. On top of having one of the brightest macro-economic pictures in the region to support investment in local banks, that potential also saw a series of M&A deals over the last couple of years. That action saw weakened foreign parents able to cash out, while new owners arrived with plans to expand.

Regulation has clearly had no small impact either. Poland's KNF has strictly policed the M&A deals, insisting investment levels remain healthy before offering final approval. Merger deals struck by Raiffeisen Bank International in 2011 and Santander in March 2012 had to wait until December 4 to finally be approved. KNF has also kept a close eye on dividends as a means to restrict outflows.

The Czechs - which have seen the stability of their banks backfire somewhat as the confidence of parent groups in local funding levels saw cross-border funding drop by around 20% according to the survey - also remain wary. On December 4, Finance Minister Miroslav Kalousek told the EcoFin meeting in Brussels that Prague will only approve the EU banking union if the Czech National Bank is allowed to retain authority over bank branches.

The revision of full subsidiaries into mere branches by parents is seen as a route to evading national regulation. Not surprisingly, Austria - which is home to two of the largest CEE networks: Raiffeisen and Erste Bank responded to the idea critically, reports CTK. On the other hand, Hungary and Bulgaria - the two countries to have seen the largest pullbacks in parental funding - are said to be in full support.

Bulgaria lost 47% of cross-border funding in the survey period - equal to 13% of bank liabilities, while Hungary's banks saw 38% pulled, which is the equivalent of 12% of liabilities. However, Fitch notes a large discrepancy between the two outliers. In Bulgaria, the funding drop "mainly reflected strong 30% deposit growth over the period, which enabled the sector to report moderately positive loan growth notwithstanding the contraction of parent facilities," the ratings agency notes.

However, Hungary is largely seen as architect of its own downfall. Since the Fidesz government came to power in 2010 it has been fighting a vicious battle with the banks, starting off with the EU's largest crisis tax on the sector and continuing ever since with measures that drove the country's banks to their first amalgamated loss for 13 years in 2011. Analysts have been warning for a long while that Budapest is making the choice of where to cut back too easy for parent groups, and that's only likely to crystalize further if the economy continues to go backwards.

"Hungary was the only country in the region in which customer deposits shrank in euro terms between end-2008 and [the first half od 2012]," Fitch notes. "Overall, the sector's loan portfolio contracted by 15% in HUF terms (22% in euro terms)," it adds. "[W]e believe the reduction in group funding reflected both greater parent bank concerns about the sector's prospects and subsidiaries' lower external funding requirements after an option was granted in [the second half of 2011] to customers to prepay foreign-currency mortgage loans ... outflows from Hungary also reflected weak prospects for the local economy as well as unorthodox policies implemented by the Hungarian government in respect of the banking system."

The worry for the future is that Budapest appears to have now thrown caution to the wind, and has only accelerated the pressure on the sector in late 2012. The banking tax has been declared a permanent levy rather than a crisis measure, and a 2% financial transaction tax has been slapped on top. Perhaps most damaging though is the erratic nature of policymaking - which saw almost weekly changes in November - and the apparent short-sightedness of the government. Introducing yet another extended levy on the banks last month, Prime Minister Viktor Orban rejected suggestions that it could hour the economy, retorting that it would make no difference as "the banks aren't lending anyway."