Austrian bank regulators set ‘public precedent’ for supervision

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Austrian regulators’ new lending guidelines for bank subsidiaries in Central and Eastern Europe set a public precedent for cross-border supervision and could prompt similar regulations elsewhere in Europe, Debtwire reports.

The Oesterreichische Nationalbank (OeNB) and Austria’s Financial Market Authority (FMA) announced on Monday (21 November) measures that make credit growth at Austrian banks’ Central and Eastern European subsidiaries conditional on the growth of sustainable local financing.

Major lenders such as Erste Bank, Raiffeisen Bank International (RBI) and Bank Austria (part of Italy-based UniCredit) must now ensure that new loans at units that are “particularly exposed” do not exceed 110% of local financing, such as deposits. Banks that are “particularly exposed” are defined as those with ratios above that level, an OeNB spokesperson said.

The ratio will not apply retroactively, so overextended subsidiaries will not have to quickly unwind large portions of their loan books. Subsidiary banks can also count funding from multilateral lenders such as the European Investment Bank and European Bank for Reconstruction and Development (EBRD) for the purposes of calculating their funding base.

Nevertheless, the regulators’ statement implies that Austrian banking supervisors can place de facto curbs on lending activities at banks that operate entirely within other countries – 19 other countries, to be precise – and are overseen by other national regulators.

Lending limits

“I am not aware of any specific recent public announcements by bank regulators of measures to reduce exposure to particular regional economies,” said Stuart Willey, head of the regulatory practice at White & Case’s banking and capital markets group in London.

“But we should assume they will have done this privately, for example, in relation to bank exposures to Greece and other stressed European countries,” Willey continued, noting that under the Capital Requirements Directive (CRD), banking groups are regulated on a group-wide consolidated basis by the home state regulator of the parent bank.

Michael Foundethakis, a partner at Baker & McKenzie in Paris and head of the firm’s EMEA banking practice, also said he was unaware of any precedent. “However, in the case of Austria, I can clearly understand the reasons for this decision,” he said. “Austrian banks have been committed to Central and Eastern Europe for far longer and to a wider extent than any other banks [and] consequently they have some of the highest exposures.”

Erste Bank had four subsidiaries with a loan-to-deposit ratio above 110% at end-September, not taking into account any EIB or EBRD funding. Its Croatian subsidiary had a loan-to-deposit ratio of 145%, its Romanian subsidiary 135.5%, Hungarian 177.5% and Ukrainian 263%, said an Erste Bank spokesperson.

But two of the group’s largest operations, in the Czech Republic and Slovakia, had respective ratios of 67.3% and 77.9%, well below the regulatory advice.

Raiffeisen Bank International’s operations in Bulgaria, Croatia, Romania and Serbia had a loan-to-deposit ratio above 110% at end-1H11. The bank reports third-quarter financials on Thursday (24 November).

“RBI will, of course, comply with the measures that our regulators have established,” said a spokesperson for the bank, noting that loan/deposit data in the group’s financial reports was not directly comparable with the new regulatory framework.

“From today’s perspective we feel quite comfortable, as only a couple of our network banks are likely to be affected by the regulators’ ‘ratio of new loans to local refinancing’ provisions,” the spokesperson added.

Banking groups as a whole must meet the capital and risk exposure limits set down in the CRD, said Willey at White & Case. “In this case, the Austrian bank regulator is imposing controls on the level of funding that the Austrian banking groups can provide [...] by insisting that subsidiaries observe a 110% deposit-to-loan ratio.”

It’s the powers conferred on home state regulators with regard to consolidated supervision that underpin this, Willey added, noting that Austria is imposing Basel III standards early via consolidated supervisory powers.

Similar announcements from other banking regulators in order to meet European Commission and European Banking Authority (EBA) deadlines for 9% core capital by June 2012 could follow.

Earlier this month, German lender Commerzbank announced that it was temporarily suspending lending outside Germany and Poland while it builds core Tier 1 capital to 9% in anticipation of the EBA’s deadline. In October, the EBA estimated that Austrian banks needed to raise EUR 2.9bn to meet the new target; banks in France and Italy, which also have subsidiaries in Eastern Europe, needed to raise more.

Politics and populism

Against that backdrop, a Moscow-based banker working for a large Central European lender said the OeNB/FMA announcement was to be expected. “RBI, Erste, UniCredit and [Belgian bank] KBC account for over 50% of European Union business in CEE, and with Austria handling two and a half of these banks it is understandably cautious.”

But some were critical of the move.

“What the Austrian regulator is doing is the opposite of what the UK government is trying to do,” said one London-based institutional finance lawyer. “The UK coalition wants to see London as an international market and it is trying to preserve its status. For Austria this is a bad political play; they will effectively make their banks small national entities and strip them of international business.”

A lawyer based in Vienna called it populism. “Austrians expected the government to do something, to toughen regulations, to defend national interests, but economically this will not have a good outcome,” he said.

That may not deter other regulators from taking similar action, however. Several bankers attending Euromoney’s 8th Annual Syndicated Loans CEE Conference in Vienna this week said they expected comparable moves from regulators in Western Europe.

“Germany has a more diverse foreign [lending] business so similar regulation is not expected, but France might follow,” said a banker at a development finance lender.

“I don’t think anyone should be surprised about this,” said Willey. “The role of post-crisis banking regulation will be to second-guess the business model of banks that they regulate. In the UK, both the FSA and the Bank of England have said that one of the weaknesses of the pre-crisis regulatory regime was an unwillingness to question the business model of banks that they regulated.”

Questions are certainly being asked in Austria.

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