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Before the global financial crises, bankers in Vienna dreamt of a future as a regional financial hub for fast-growing central and eastern European economies.

In the years that followed, however, their expansion plans suddenly looked high-risk. As banks worldwide retrenched, those in Austria retreated from eastern Europe. Subsidiaries were sold and the focus shifted to domestic Austrian operations, to less politically risky foreign markets — and to cost cutting and strengthening balance sheets.

What is left is a Viennese financial centre which still seeks to serve the former communist economies of central and eastern Europe (CEE) as well as Austrian corporate and retail clients. But it is more modest in its ambitions.

“The worst is probably over in terms of retreat and provisioning but you can’t expect strong expansion,” says Josef Christl, a former central banker who now runs Macro-Consult, a financial advisory company. “Could Vienna become a regional financial centre again? I think the story is over now. I don’t think anyone has fantasies about that any more.”

“The real advantage of Vienna is that, compared with other countries, it continues to be more politically and legally stable. It offers a good lifestyle and people like to come to Vienna,” says Andreas Treichl, chief executive of Erste Group bank. “But in terms of being a business hub for eastern Europe, that is long gone.”

The pattern is neatly illustrated by Wiener Börse, the city’s stock exchange which was founded in 1771 and is largely owned by Austria’s banks. Since last summer, the company has sold its exchanges in Budapest and Ljubljana, in Slovenia, although it has continued service contracts with both capitals. It retains its exchange in Prague.

With European financial markets still policed by national regulators, synergies were elusive, says a Wiener Börse spokesman. But that does not mean giving up on Austria’s cultural and historical links with the wider region.

“The strategy now is to be as lean as possible and at the same time bring as much activity as possible to our exchanges in Vienna and Prague while securing our position as an IT provider and technology broker for our co-operation partners,” the spokesman adds.

It is a similar story at Raiffeisen Bank International, which in February last year announced it would pull out of Poland and Slovenia as well as Asia and the US. But RBI, which is owned by the Raiffeisen network of co-operative banks, continues to run a highly profitable Russian business, and Karl Sevelda, its chief executive, sees Vienna as still having a broader regional role.

“Of course the boom years of the first decade of this century are over,” Mr Sevelda says. However, “Vienna is still a hub for doing business in CEE. The infrastructure is here, you have the flight connections, the banks which deal with CEE and the law firms and the specialists.”

Retrenchment has strengthened the finances of Austria’s banks. In some cases, expansion has resumed — Austrian banks have been among the first to test the possible reopening of links with Iran, following the lifting of sanctions. However, in other instances, the retreat has threatened to undermine Vienna’s status as a financial centre.

At Bank Austria, another top-tier bank, central and eastern European subsidiaries have been transferred to the holding company of UniCredit, the Italian parent company in Milan. But UniCredit says its objective was to reduce the complexity of its organisation rather than to reduce the role of Vienna. The CEE division of Bank Austria remains an important growth driver and the bank expects to keep most if not all of its 500 employees in Vienna. UniCredit is meanwhile restructuring the domestic retail business of Bank Austria.

The city faces other weaknesses. In recent years, Austria’s financial system has been blighted by a long-running clash between the government and creditors of Hypo Alpe Adria, a regional lender which had to be nationalised and rescued during the financial crisis.

International bondholders insisted the provincial government of Carinthia should stand behind financial guarantees it offered to allow Hypo’s pre-crisis expansion. After a deal collapsed in March, a settlement was reached in May, but not before the sector felt the effects as investors demanded a higher yield when investing in Austrian assets.

Vienna’s bankers also know they face a series of challenges as European policymakers seek to shift economies away from their dependence on banks and instead encourage capital market integration. Austria’s economy has traditionally relied on bank loans rather than financing through debt instruments. Encouraging a more vibrant equity or debt capital market culture requires the support of politicians, however.

“Austria has never been a country with a strong capital market tradition,” warns Mr Treichl at Erste Group. But it has other strengths — including a backbone of small and medium-sized industrial enterprises, and “a lot of very good, well-capitalised, decent banks that nobody writes about”.

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