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| Andreas Ittner, executive director at the OeNB |
Western banks, amid the eurozone crisis and regulatory change, are under pressure to cut ties with central and eastern European (CEE) banks and recapitalize back home. Barely a week goes by without a new headline pointing to the risks surrounding a potential pullback by western European banks from the region.
At the same time, bankers in the region – from chief executives to analysts – have queued up to assert that either: there has been no deleveraging to date; that if there has been deleveraging, it has been healthy and even desirable; and that any future deleveraging is either unlikely or no cause for concern. Amongst the multitude of opinion it’s difficult to filter rumour from fact.
Fortunately, some clarity can be found. In a recent interview with Euromoney, Andreas Ittner, executive director at the OeNB, reveals where Austrian banks and its regulator stand amid all the confusion.
What are the key challenges facing regulators of banks with subsidiaries in CEE?
First of all, let me state two things: one, CEE is not CEE. The umbrella-term CEE covers countries as diverse – economically and politically – as the Czech Republic and Poland on the one hand and Kazakhstan and Ukraine on the other. Second, I want to point out that the challenges of regulators of banks with subsidiaries in CEE do not, broadly speaking, differ from challenges of other regulators of international banks active in emerging markets. Looking at the challenges from this angle, they are indeed time-consistent: the OeNB, just like any other home supervisor, has to make sure that banks are able to bear those risks, for example through adequate capital positions or stable funding sources, both on group level and on subsidiary level.
What is the state of regulation in Austria for banks with CEE subsidiaries?
In principle, we adhere to the European legal framework. On top of that, the OeNB and FMA (Financial Market Authority) introduced the sustainability package, which was drafted to secure financial market stability in Austria and CESEE (central, eastern and southeastern Europe), as well as to
improve the sustainability of Austrian banks’ long-term commitment to CESEE during crises times and beyond. The sustainability package consists of three pillars: first, proactively avoiding costly boom-bust-cycles in lending (liquidity); secondly, establishing risk-adequate (capital) buffers; and thirdly, recovery and resolution plans in case of potential crisis situations.
How has the OeNB’s approach compared with that of other western European regulators?
The OeNB’s approach seeks middle ground between very active regulators from countries such as Sweden, Switzerland and the UK and other countries that aim to work on the implementation of the Basel III rules first.
Does the OeNB recognise claims there is a risk of widespread deleveraging in CEE?
Talk of “the risk of deleveraging” confuses two issues. One of the lessons of the crisis is that there has been too much leverage in the banking system; so, in the longer term this will have to come down. The challenge is for this to happen in as orderly a way as possible, without a widespread credit crunch and without excessive “home bias” at the expense of vulnerable emerging economies. This is where the Vienna Initiative has been an exemplary force towards stability. In Austria, the major banks and the authorities have always agreed that the CESEE region is a core market, an “extended home market” if you like. Overall, the Austrian banks’ exposure to it has actually increased moderately of late.
Do home regulators have a role to play in preventing deleveraging in neighbouring economies?
Regulators – home and host – should indeed take each other’s interests into account. However, beyond economic arguments and possibly moral suasion there are limits to the role of a regulator in influencing bank behaviour – at home and abroad. After all, no regulator interferes with banks’ managerial decisions in a market economy unless there are serious doubts about either the health of an institution or the proper conduct of business. Direct influence is therefore limited. However, regulators should keep in mind unintended consequences with regard to deleveraging. The European regulatory community has recently proven – as part of the European Banking Authority’s (EBA) recapitalization exercise – that they were indeed aware of the threat of disorderly deleveraging and designed the process accordingly. Successfully, I might add, as the preliminary results published by the EBA have shown.
Does the OeNB recognise concerns that attempts by home regulators to manage banks’ exposure in external markets can be distortive?
I would like to point to my answer to your previous question: there are obvious limits to home and host regulators' means of influencing banks’ managerial decisions. The best insurance against abrupt deleveraging is a predictable, non-volatile, and stable economic and political environment for investors. I therefore have to reject the suggestion that home regulators could manage banks’ cross-border exposures and hence any concern regarding distortions is indeed misguided.
If, however, this is a question related to the Austrian sustainability package, in relation to which some commentators have raised concerns, I would argue that the calibration has been performed in a way that the local stable funding ratio [of 110% for new loans to local refinancing] is only a binding constraint during periods of excessive credit growth; secondly, thorough impact assessments and discussions with banks, host supervisors and international bodies have been conducted prior to releasing the package; and thirdly, the objective of the sustainability package is financial stability as the ultimate guarantor of stable funding throughout the cycle. The only possible distortion I see is curbing excessive growth, for which the OeNB should be congratulated and not criticized.
How has interaction between the OeNB and host regulators in CEE developed during the past two to three years?
Although the economic development of the past two to three years brought significant challenges for supervisory cooperation, I believe we were able to further strengthen the mutual understanding for our – not always perfectly aligned – aims and to further improve our bilateral and multilateral cooperation. The most prominent examples of enhancing supervisory cooperation would be the establishment of a joint risk assessment, a joint decision on capital adequacy and the establishment of cross-border stability groups, which we have done. New European institutions like EBA and ESRB (European Systemic Risk Board) now form the necessary institutional set up for enhanced supervisory cooperation.
How supportive is the OeNB of the objectives of Vienna 2.0?
The OeNB, as one of the driving forces behind the initial Vienna Initiative, fully supports the objectives of the Vienna Initiative 2.0, particularly as the three main objectives – ensuring cross-border financial stability, avoiding disorderly deleveraging, and achieving policy actions in the best interest of home and host countries alike – have been a strategic focus of the OeNB for years.
How supportive is the OeNB of a move to EU-wide integration of banking regulation?
At the current juncture, a stronger European integration, which also applies to banking regulation, is needed. It is necessary to move towards the single rule book in banking as diverging national rules and regulations make cross-border cooperation and coordination – as highlighted by the financial crisis – a highly complex task. Moreover, it should not be forgotten that the EU single market requires harmonized rules. Nevertheless, while the need for a single rule book is evident, the principle of proportionality as well as national specificities should be given due consideration in its development. Let me add that we fully support the envisaged single supervision of financial institutions within the new banking union framework.
How well prepared are Austria’s banks for the implementation of Basel III on January 1?
The implementation of Basel III in the European Union is not yet finished, which leaves us with some remaining uncertainty. However, based on what we know, the implementation of Basel III as of 2013 does not pose any significant challenges to the Austrian banking sector. With regard to the final implementation of Basel III as of 2022, the capital need ranges from €8.5 billion to €13 billion, already including the repayment of state-aid measures. We consider this to be manageable. In addition, the largest three Austrian banking groups are supposed to fulfil the final Basel III rules [with the exception of not phasing out state-aid programme capital] by January 1, 2013 and are, from what we see, on a good track already.
