THE AUSTRIANS DON'T WANT TO GIVE UP: Austrian banks will limit their exposure to Eastern Europe

Austria will impose the norms designed to enhance the safety of the financial system, by forcing major Austrian banks to reduce their lending to banks in emerging Europe, in spite of discontent in the region, according to sources close to Wednesday's meeting held in Vienna, quoted by Reuters.

"The decision has been made. The instructions will be published shortly", an official said, who wanted to remain anonymous, saying that Wednesday's meeting of the regulatory authorities of seventeen European countries, was "a routine one".

Adrian Vasilescu, the advisor to the Governor of the National Bank of Romania (NBR), said that there can be no assumptions made about what has been discussed in Vienna. He said: "Here at the NBR, we do not speak and we do not make assumptions about what has been discussed. It is an event that is happening over there. These are major talks".

The officials of the press department of the Central Bank of Austria said that the Wednesday meeting which took place in Vienna, which was attended by regulators from Central and Eastern Europe, was "fruitful and constructive", but made no further comments.

In an attempt to keep its "AAA" top rating, in the context of the crisis in the Eurozone, and the concern over the exposure of Austrian banks to Central and Eastern Europe, in November 2011, Austria announced new regulations for its largest banks.

The regulations concerning capital and liquidity have been proposed by the Central Bank of Austria and by the Austrian financial markets regulator (FMA), and they require Erste Group Bank, Raiffeisen Bank International and UniCredit Bank Austria to limit lending in Eastern Europe to 110% of the deposits and financing raised on the markets in question.

The proposals, intended to ensure that Austria maintains its AAA rating, were criticized by Eastern European officials, who were concerned that such lending restrictions could slow down the economic growth in the region.

Some of the Eastern European officials which expressed their discontent also included president Traian Băsescu. At the end of 2011, he said that he wants to believe that the announcement of the National Bank of Austria concerning the reduction of capital flows from Austrian commercial banks to countries outside the Eurozone area was a mistake or the result of a failure to understand the effects it could have. Traian Băsescu expressed his concern over the possible behavior of some banks, after the Central Bank in Vienna advised Austrian commercial banks to reduce their financing to their branches in Central and Eastern Europe.

The market regulators in the Eastern European region are concerned that the major banking groups in Europe will limit or even reduce their exposure to the emerging countries, which are viewed as having a higher risk, in order to more easily meet the new capital adequacy requirements, which involve reaching a level of 9% for Tier 1 capital, in relation to assets weighted based on risk.

Austrian banks have the highest exposure to Czech Republic, Romania and Hungary, according to data from the Bank of International Settlements (BIS). In June 2011, the total consolidated assets of the lenders in question amounted to 1.14 trillion Euros, according to the central bank, or the equivalent of Austria's 2010 GDP.

According to its financial stability report for 2011, the Central Bank of Austria considers that it is important that Austrian banks no longer be reliant on the "relatively high" profits of their subsidiaries in Central, Eastern and South Eastern Europe.

"The Central Bank of Austria considers that it is important for Austrian banks to reduce, in the medium term, their current structural weaknesses, which affect its profitability. In the interest of long term sustainability of banks, the approach of structural deficiencies is needed not just to consolidate the capital bases of the banks, but also to put an end to their dependence on the relatively high profits generated by their operations in Central, Eastern and South Eastern Europe", the document states.

• • Daniel Ionescu: I doubt that Austrian banks will lower their exposure to Romania

Austrian banks will not reduce their exposure to Romania, they will more likely slow down the pace at which their exposure increases, Economics PhD Daniel Ionescu considers.

He said: "The 1% increase of the required reserves mentioned in the press release only means that the volume of loans granted using money created out of thin air by 11.2%! Also, invoking the need to restructure the risk exposure of Austrian banks starting from the fact that the rate of return in Central and Eastern Europe is made at higher costs (which is actually the cost of the hedging instruments which the banks involved in these loans need to buy) is hard to understand, considering the fact that the rate of the usurious and speculative profit keeps pace with the risk exposure. Romania still has a reasonable CDS rate! I doubt that Austrian banks will lower their exposure to Romania. They will more likely slow down the pace at which their exposure increases, but this will only happen if the loans are too expensive. What is certain is that, in the coming period, the cost of loans drawn from the private market in Romania will increase, since the economy is getting worse from one day to the next".