Phil Cain in Graz, Austria -
Proposed restrictions on the amount that Austrian banks' Emerging European subsidiaries can lend have prompted reactions ranging from anger and disbelief to calm indifference. But this could herald the beginning of similar measures by other EU regulators under the banner of preserving the stability of their own banking systems, which would limit lending and profitability across the CEE region.
Under the Austrian financial regulator's proposals unveiled on November 21, Austrian banks have to reduce lending to below a fixed percentage of local deposits. The preliminary regulation stipulates that the ratio of new loans to local funding (which includes local deposits plus funding in local capital markets and funding from supranational institutions) is not to exceed 110%, though the numbers will be fleshed out at a later date.
The regulator's move is part of an effort to shore up Austria's credit rating after Fitch Ratings, another rating agency, said earlier in the month that its 'AAA' was "at risk". A downgrade would increase the cost of servicing Austria's debt, which stands at around 68% of GDP, a relatively modest sum by current European standards.
Despite having only 8m people, Austria topped the league table of CEE lenders in absolute terms, $290bn in total, not far shy of its yearly GDP. Italy, the next biggest lender in absolute terms, lent just over $200bn, far less of a blow to a country of seven times Austria's size.
Among those fuming at the news was Romanian President Traian Basescu. "You [Austrian bankers] have made huge profits and if you are now getting ready to leave Romania unfinanced during the crisis, we will think it is an act lacking fair play towards Romania," he said, addressing a conference in Bucharest on November 24. "I don't want to believe we will be left to pay the bills of banks' greed.
Basescu's rant is understandable - Romanians borrowed the most heavily from Austrian banks of all countries in Central and Southeast Europe. But Liviu Voinea of the Group of Applied Economics, a think-tank in Bucharest, warns that any move to impose an additional tax on banks would only be counter-productive. "It would only speed up the outflow of funds," he says.
Better, he argues, would be to allow ordinary citizens to buy state bonds more easily, he says. Currently it is only possible for people to buy bonds if they invest more than RON300,000 (€75,000) at a time. "A liberalised bond trade would allow the state to compensate for the possible exit of capital from foreign banks," Voinea says.
The European Bank for Reconstruction and Development (ERBD) has also criticised the move. Its chief economist, Erik Berglof, says the surprise element of the announcement meant it backfired by heightening the fear it was supposed to dispel. On reflection, however, the EBRD concludes that the practical effect of the new rules would not be significant because the level of lending has already fallen very low since the crisis hit in 2008.
Indeed, the largesse that Austrian banks showed to the financially inexperienced people of Emerging Europe before the financial crisis struck is a distant memory. A Hungarian TV ad from Raiffeisen Bank International's days of spendthrift lending shows a loan officer stubbornly ignoring a loan applicant's attempt to declare their income when applying for a loan secured on their flat. In Bulgaria, Raiffeisen's billboards once promised to customers "Zero percent interest!" for loans in Swiss francs, which have ended up costly for borrowers when the Swiss franc rose sharply against the region's local currencies. A drop in the value of the relative value of the forint has meant Hungarians who took loans in Swiss francs are now paying 50% more than they did in 2008. Romanians are paying a similar premium because of the drop in the leu. In Bulgaria, borrowers now need to pay 30% more, while in the second largest market for Austrian banks, the Czech Republic, the increase over the last three years has been a relatively modest 25%.
However, Moody's Investors Service notes that given the top Austrian banks - Raiffeisen, Erste Bank and UniCredit Bank Austria - are among the major players in many of the banking systems of Emerging Europe, the loan growth limitations will have a number of credit negative implications for the region's banks. "The instruction effectively limits the Austrian banks' subsidiaries' ability to enhance their position within the [Central and Southeast European] countries and will constrain their contribution to economic growth in the region, likely leading to weaker profitability," it says. "In addition to the probable negative effects on [Central and Southeast European] subsidiaries' franchises, this regulation may alter their business models. In particular, several subsidiaries of the larger Austrian banks currently have loan/deposit ratios that exceed 110%, and primarily rely on parental funding for their foreign-currency loan portfolios."
What worries people like Moody's is that the Austrian move could set off a round of similar moves by other countries whose banks have invested in the CEE region. In particular, Moody's notes that this risk exists in Italy, Germany, France, Belgium or Greece, which have significant operations in the region. "We believe that there is an increasing risk of regulators elsewhere introducing similar measures to preserve stability of their own banking systems. If such a scenario occurred, there would be a limitation on lending growth and profitability across the region, which will constrain economic growth and prove to be a significant credit negative for [Central and Southeast Europe] banks," Moody's says.
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