First of all, CEE is not CEE. The umbrella-term CEE covers countries as diverse – economically and politically – as the Czech Republic and Poland on the one hand and Kazakhstan and Ukraine on the other. Second, the challenges of regulators of banks with subsidiaries in CEE do not, broadly speaking, differ from the challenges of other regulators of international banks active in emerging markets. Looking at the challenges from this angle, they are indeed time-consistent: the OeNB, just like any other home supervisor, has to make sure that banks are able to bear those risks, for example through adequate capital positions or stable funding sources, both at group level and at subsidiary level.
In principle, we adhere to the European legal framework. On top of that, the OeNB and FMA [Financial Market Authority] introduced the sustainability package, which was drafted to secure financial market stability in Austria and CESEE [central, eastern and southeastern Europe], as well as to improve the sustainability of Austrian banks’ long-term commitment to CESEE during crises times and beyond. The sustainability package consists of three pillars: first, proactively avoiding costly boom-bust cycles in lending [liquidity]; secondly, establishing risk-adequate [capital] buffers; and thirdly, recovery and resolution plans in case of potential crisis situations.
The OeNB’s approach seeks middle ground between very active regulators from countries such as Sweden, Switzerland and the UK, and other countries that aim to work on the implementation of the Basle III rules first.
Talk of ‘the risk of deleveraging’ confuses two issues. One of the lessons of the crisis is that there has been too much leverage in the banking system; so in the longer term this will have to come down. The challenge is for this to happen in as orderly a way as possible, without a widespread credit crunch and without excessive home bias at the expense of vulnerable emerging economies. This is where the Vienna Initiative has been an exemplary force towards stability.
In Austria, the big banks and the authorities have always agreed that the CESEE region is a core market — an extended home market, if you like. Overall, the Austrian banks’ exposure to it has increased moderately of late.
Regulators – home and host – should indeed take each other’s interests into account. However, beyond economic arguments and possibly moral suasion, there are limits to the role of a regulator in influencing bank behaviour – at home and abroad. After all, no regulator interferes with banks’ managerial decisions in a market economy, unless there are serious doubts about either the health of an institution or the proper conduct of business. Direct influence is therefore limited. However, regulators should keep in mind unintended consequences with regard to deleveraging. The European regulatory community has recently proven – as part of the European Banking Authority’s (EBA) recapitalization exercise – that they were aware of the threat of disorderly deleveraging and designed the process accordingly. Successfully, I might add, as the preliminary results published by the EBA have shown.
If this is a question related to the Austrian sustainability package in relation to which some commentators have raised concerns, I would argue that the calibration has been performed in a way that the local stable funding ratio [of 110% for new loans to local refinancing] is only a binding constraint during periods of excessive credit growth. Secondly, thorough impact assessments and discussions with banks, host supervisors and international bodies have been conducted before releasing the package. Thirdly, the objective of the sustainability package is financial stability as the ultimate guarantor of stable funding throughout the cycle. The only possible distortion I see is curbing excessive growth, for which the OeNB should be congratulated and not criticized.
The OeNB, as one of the driving forces behind the initial Vienna Initiative, fully supports the objectives of the Vienna Initiative 2.0, particularly as the three main objectives – ensuring cross-border financial stability, avoiding disorderly deleveraging, and achieving policy actions in the best interest of home and host countries alike – have been a strategic focus of the OeNB for years.
