When senior European officials, IFIs, banking regulators, and the chief executives of Europe’s leading banking groups met in Vienna in January 2009, the outlook for the region’s banking sector looked bleak.
The prospect of mass deleveraging and banking sector collapse across Central and Eastern Europe (CEE) spurred all parties into action. The upshot was the Vienna Initiative, a co-ordination framework that was widely credited with preventing a large-scale and uncoordinated withdrawal of liquidity by Western European parent banks from the CEE region. The initiative pledged to provide €24.5 billion in the form of credit lines, funding for bank recapitalization and development policy loans to support the region’s financial sector. Between January 2009 and February 2011, a total of €33.2 billion was committed by the World Bank, EBRD and EIB under the plan.
Representatives of the European Bank Coordination Initiative, to give it its official name, met again in the Austrian capital this week, with the CEE region facing a more serious threat to its banking system than that posed in January 2009. This time, the stakes are arguably higher with the Western European parent banks that dominate the region’s banking sector at the epicentre of the escalating eurozone banking crisis, despite gigantic monetary stimulus.
Against this backdrop, the upshot of the meeting was dispiriting by virtue of the lack of policy prescriptions. On the upside, attendees acknowledged the need for a revamped Vienna initiative, a “Vienna 2.0”, given the scale of the risks facing the region’s banking sector.
To quote from the official press release, published this morning:
| “In the absence of coordination, excessive and disorderly deleveraging as well as a credit crunch may be the outcome. Although the circumstances are different from 2008/9, there is a similar need for collective action to avoid suboptimal outcomes: this is Vienna 2.0.” |
But IFIs failed to announce an immediate funding boost or any concrete measures to enhance coordination.
IFIs pledged financial support in principle, saying that they “stood ready to provide external assistance and financial support to banks in host countries within their mandate and balance sheet capabilities”, without outlining the scale of such support.
Meanwhile, attendees pledged to meet again to “elaborate the modalities of these principles in the near future”. As to what that means, exactly, your guess is as good as mine.
On the one hand, it is understandable that IFIs are reluctant to place an absolute number on the scale of support they are willing to provide to safeguard the region’s banking sector at this juncture given the litany of unknowns.
Nobody knows exactly how deep and how severely the eurozone crisis will hit, or what future developments will bring, and, should Western European parent banks run into serious trouble, it is doubtful that the EBRD and EIB have the firepower to prevent a major liquidity withdrawal from the region.
Furthermore, it is possible that once the “modalities of the principles have been elaborated upon”, a more concrete pledge of support will be announced.
But a vaguely worded press release will do little to ease market concerns about the very real prospect of significant bank deleveraging across central and eastern Europe should the Eurozone crisis escalate further.
Capital Economics, for one, was not impressed by the outcome in Vienna. The research house wrote in a research note published today:
| “Yesterday’s “Vienna Initiative” meeting adds to our fears that euro-zone policymakers are now less willing to step in to help Emerging Europe than in 2008/09. Of course, much depends on how events pan out in the eurozone, but we remain of the view that a number of countries in the East, notably Hungary, but also Bulgaria, Croatia and Romania are at high risk of a banking crisis.” |
It cited moves by the Austrian government in November to ensure that the ratio of new loans to local deposits at Austrian parent banks’ subsidiaries in Eastern Europe must not exceed 110% as evidence of a broadershift in sentiment on the part of Western banks away from supporting their CEE subsidiaries.
As to whether or not we are already seeing significant liquidity withdrawals by Western European banks from the region, a report published today by troubled Italian bank Unicredit (itself one of the banks that appears under most pressure to withdraw liquidity from its central and eastern European subsidiaries) presents conflicting evidence (see chart below).
While some of the larger economies in the region (Russia, Ukraine and Turkey) saw continued foreign capital inflows into their banking systems during the second half of 2011, many others countries (most notably Hungary, but also Romania, Poland and Bulgaria, have already suffered sharp outflows.
Unicredit’s Gillian Edgeworth downplayed the severity of the risks, suggesting that banks in Turkey, as well as the Middle East and Asia may step in and fill the gap left by any Eurozone bank deleveraging and that “though foreign inflows may be much more selective, a permanent sudden stop seems unlikely”.
But, as this chart from RBC Capital Markets shows, the scale of the exposure of many of the region’s banking sectors to Western European ownership shows that the threat is very much real – and that, in fact, it is not only central and Eastern Europe that is at risk.
Given the systemic importance of Western European banks to the global financial system, and the exposure in turn of US and UK banks to the eurozone banking system, perhaps the focus of Vienna 2.0 needs to be broadened beyond CEE in any case.
Vienna 3.0, anyone?