The International Monetary Fund and other lenders, who spent $42 billion to stem an eastern European banking crisis after 2009, may be forced to commit more aid to the region to cushion the effects of banks cutting assets.
The IMF, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank should “stand ready to provide external assistance and financial support to banks” in eastern Europe, the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital yesterday.
“In the absence of coordination, excessive and disorderly deleveraging as well as a credit crunch may be the outcome,” said the group, which also includes the European Commission, the European Central Bank and bank regulators in eastern Europe as well as in countries including Austria, Italy, Belgium, France and Germany.
Regulators and policy makers are trying to shield economic growth in eastern Europe as western lenders must meet higher capital requirements to withstand the euro area’s deepening debt crisis. About three-quarters of the banking market in eastern Europe is controlled by western European banks, the biggest of which are all raising capital and shedding assets, causing concerns that credit may become scarce.
The Vienna group urged western European regulators and policy makers to work together to recapitalize banks and consider the effects on subsidiaries in other countries.
UniCredit, Erste, Raiffeisen
Italy’s UniCredit SpA, the largest lender in eastern Europe by assets, needs 7.97 billion euros ($10.2 billion) of capital, or equivalent asset cuts, to meet the new requirements, according to the European Banking Authority.
Erste Group Bank AG, the region’s second-biggest, requires 743 million euros, while Raiffeisen Bank International AG, the third biggest, has a 2.1 billion-euro shortfall. While all of them have said they remain committed to eastern Europe, the banks have also said that they are raising their capital ratios at least partly by reducing assets.
Societe Generale SA, KBC Groep NV and Intesa Sanpaolo SpA are next in the ranking of eastern European banks.
On top of the capital requirements come efforts by some regulators to limit the amount of funding parents pass on to their subsidiaries in eastern Europe.
Austria, whose banks collectively lent $266 billion to eastern European households, companies and governments, according to the Bank for International Settlements, told them to limit lending to 1.1 times the funding they can raise locally. It also put a capital surcharge defined by the eastern European business on its three biggest lenders.
“It is important that home country authorities internalize the cross-border effects on EU and non-EU countries in formulating their measures,” the Vienna Initiative said in its statement. “In particular, the recapitalization plans of international banks submitted to the EBA should be scrutinized” for their “systemic impact on host economies.”
Eastern European regulators and central banks “should further the development of local sources of funding as market size permits so that banks can reduce excessive reliance on capital inflows,” the group said. “Information sharing between home and host authorities should be stepped up to avoid unnecessary ring fencing of liquidity.”
Their engagement prompted Austrian lenders, together with their Finance Ministry and central bank, to start the group that met in the Austrian capital yesterday dubbed the “Vienna Initiative” in 2009. The group helped stabilize the region that year by a collective commitment by the banks not to reduce their lending in the region.
At the same time, the IMF, EBRD, EIB and World Bank pledged 24.5 billion euros in 2009 to avert a systemic banking crisis and increase lending to companies and businesses in eastern Europe. The lenders eventually disbursed 33 billion euros in the region, they said in March 2011.
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