Ten years of the Vienna Initiative 2009-2019

European Investment Bank

• Publisher: European Investment Bank
• Year: 2019
• eBook ISBN: 9789286143656
• Topic: Business
• Subtopic: Business General
• Index: Business

This year, the Vienna Initiative marks its 10th anniversary. For this special occasion, the Steering Committee has prepared a commemorative book, with essays and contributions from the key actors and institutions instrumental to the work of the Vienna Initiative since its inception. This volume provides a unique window on the Vienna Initiative's innovative crisis mitigation activities, its subsequent evolution and its current scope. At the time of the Lehman crisis, international institutions, national authorities and international commercial banks collaborated closely, taking full responsibility for their strategies in the CESEE region and voluntarily providing firm commitments on their activities. In the form of the Vienna Inititive, they built a functioning coordination platform, capable of transforming and evolving according to changing needs. Ten years later, this coordination platform remains an important of effective inter-institutional and private-private sector cooperation. The establishment of the Vienna Initiative was far from easy. However, given the size of euro area banks' cross-border operations in CESEE, a disorderly deleveraging would have been very costly for both CESEE countries and the foreign banks. With this in mind, the main stakeholders eventually got together to participate in the Vienna Initiative and achieve its main objective. The foreign banking groups committed to maintain their presence in the region, while the EIB, EBRD and the World Bank Group provided substantial financing to banks and the real economy. These efforts had a major positive impact on the region. They helped curb liquidity disruptions and restore confidence in the banking system, while alleviating balance of payments pressures. This coordinated response from commercial banks and IFIs was a prerequisite for the success of the IMF-funded macroeconomic adjustment programs in several CESEE countries.Over time, the Vienna Initiative has transformed itself from a crisis mitigation instrument to a broader coordination platform, dealing with the unique challenges of widespread cross-border banking with regulatory and supervisory interdependence, while supporting the emergence of an efficient, deep and sound banking and financial sector that supports growth in the region. In particular, with CESEE countries on a solid recovery path, the focus has shifted to tackling the legacy problem of high NPLs, or to dealing with the impact of the EU's upgraded institutional framework – particularly the creation of the Banking Union – on the host countries, most of which do not participate in the Banking Union. With the region needing to transform, up-scale its innovation capabilities and adjust to technological change, a dedicated working group has been set up to propose measures that could improve access to finance for innovative firms which typically lack tangible assets and thus may have hard time obtaining standard bank loans in a system that still offers limited alternatives.The Vienna Initiative has been a major achievement of international coordination and an important instrument for the future of the CESEE region.

CHAPTER 1

Ten years of the Vienna Initiative: a chronology

Mark Allen

EBRD, IMF and CASE Research

Introduction

The Vienna Initiative[1] was launched in early 2009 to help the countries of Central and Eastern Europe overcome the impact of the global financial crisis on their economies. It was designed as a cooperative approach to ensure that the cross-border banks, which owned the major part of the banking system of most of the countries in the region, did not exacerbate the crisis by withdrawing funding and capital from their subsidiaries. The adjustment programmes implemented by several countries facing difficulties in the region, supported by the Vienna Initiative process, allowed them to overcome their problems and reduce their vulnerabilities over the next couple of years.

But in 2011, the global financial crisis took another turn, with sovereigns in the euro area and their banks coming under pressure. The measures taken by the euro area countries to provide support to sovereigns and strengthen their banking systems ran the risk of creating negative spill-overs to the functioning of the banks’ subsidiaries in Central and Eastern Europe. The Vienna Initiative was relaunched at the start of 2012, and rechristened Vienna Initiative 2.0, with a new focus on managing the tensions that might follow from new supervisory actions applied to the banks by their home supervisors, or other pressures on cross-border banks. The transposition of international financial standards into European law, and the creation of the European Banking Union, has affected cross-border banking and the functioning of the financial systems of the region, which the Vienna Initiative has tried to mitigate.

The Origins of the Vienna Initiative

The expansion of cross-border banking into Central and Eastern Europe was an important driver of the transition process. The region had been underbanked and provided a profitable market for expansion for several West European banking groups in the late 1990s and early 2000s. In turn, this allowed the rapid penetration of modern and what appeared at the time to be relatively well-supervised banking into the region, with considerable benefit to business and consumers. The cross-border banking links created a channel for capital to flow into the region, providing abundant finance particularly during the years of the Great Moderation at the start of the new millennium. This financing channel was supported by the narrative of the convergence process within the European Union, which many of the countries joined in the enlargements of 2004 and 2007, and to which many of the remaining countries aspired. The larger financing flows were also supported by a general view that new financial technology allowed credit risks to be better handled than in the past.

At the same time, however, the flow of capital through the cross-border banking system and the increase in financial leverage created vulnerabilities. The banking systems in the region were dependent on parent banks and international financial markets for funding, with the value of loans being considerably higher than the stock of local deposits. This left the system vulnerable to a shock to the funding model. External funding also provided funds mainly in foreign currencies, in part as the result of the thinness of local currency financial markets. But this also gave the banks an incentive to denominate their lending in foreign currency, which satisfied a strong demand for foreign exchange finance by local borrowers, particularly in the mortgage market, on account of the lower interest rate costs such borrowing entailed. The abundance of financing promoted asset price booms.

Impact of the global financial crisis on CESEE and the Vienna Initiative Response

When the global financial crisis began, international funding markets began to dry up, and this affected European banks disproportionately. The vulnerabilities of some of the Central and Eastern European countries became obvious. With the parent banks scrambling for funding, their generous provision of finance to subsidiaries in the region came into question. And for the countries involved, an interruption of cross-border bank funding was experienced as a sudden stop in the capital inflows that had financed very large current account deficits. The depreciation of exchange rates, or pressure for such depreciation, worsened the financial position of those companies and individuals with debt denominated in foreign currencies. This in turn led to payments difficulties and to a growing non-performing loan (NPL) problem. The rollover needs in 2009, particularly of the private sector, were substantial. There was a risk that the rise in NPLs would require a considerable injection of capital into the region’s banks.

The chairmen of the main banks involved in cross-border lending to the CESEE region (Erste, Intesa San Paolo, KBC, Raiffeisen, Société Générale and Unicredit) expressed their concern over the financial situation in emerging Europe in a letter to the European Commission and G20 Chair on 27 November 2008. They called for the measures to increase the provision of liquidity in these countries and strengthen deposit insurance to be supplemented with action to revive the real economy, including more IFI funding and various forms of regulatory accommodation.

The first CESEE countries that were hit by the crisis were Ukraine, Hungary and Latvia. Internationally supported adjustment programmes, with assistance from the IMF, the World Bank Group and (in the case of the EU members) the EU, were agreed in October, November and December 2008, respectively. In December 2008, the Austrian Ministry of Finance agreed with a proposal of the EBRD to organize an urgent meeting with the home and host supervisory and fiscal authorities of the large EU-based bank groups operating in emerging Europe, together with the IFIs, namely the EIB, the EBRD and the IMF. This meeting and informal seminar took place in Vienna on 23 January 2009, with some seven host and six home countries represented.[2] The establishment of a “Vienna Club” as a collective action platform was proposed, but the name actually assigned was “Vienna Initiative” to reflect the nonbinding nature of the movement.[3] This was intended as a way to deal with the collective action problem among the banks, to send a signal to the markets and to allow the IFIs to complement each other’s work. It was agreed that the IMF would draw up a proposal for burden-sharing rules between home and host authorities. Such a proposal was presented and broadly approved at a follow-up meeting of the group at the Joint Vienna Institute on 17 March 2009. The Vienna Initiative was formally named the European Bank Coordination (Vienna) Initiative.

The Initiative was complemented by the announcement on 17 February 2009 by the EBRD, the EIB and the World Bank Group of a Joint IFI Action Plan to channel €24.5 billion into the region over the next two years, including for the purpose of supporting parent banks in maintaining their exposures.[4] This responded to the November 2008 call by banking group chairmen. Between March and June 2009, the EIB, the European Bank for Reconstruction and Development (EBRD) and the World Bank/International Finance Corporation (IFC) met jointly with each of the seventeen cross-border banking groups to assess what assistance they might need under this exercise.[5] By the end of September 2009, some €16.3 billion of IFI support had been disbursed in the form of senior loans, tier 1 and 2 capital, trade finance, facilities for small business loans and syndicated loans.[6]

The spread of the crisis was marked by further programmes with Serbia (January 2009), Romania (May 2009), and Bosnia-Herzegovina (July 2009). These programmes provided for financing to cushion the fiscal adjustment path, action to repair the banking system and deal with non-performing loans (NPLs) and somewhat formal arrangements with individual banks to maintain exposures as part of an international support package with the approval of their home authorities and to recapitalize subsidiaries should stress tests performed by the host authorities require it. These agreements to maintain exposure and capitalization were the central feature of the original Vienna Initiative.

From the time of the Latin American debt crisis of the 1980s, if not before, action to encourage creditors to maintain exposure and not to succumb to the temptation of withdrawing financing precipitately from a debtor country in distress had been a feature of the international handling of debt crises. In the Latin American crisis case, where the main form of distressed debt was syndicated bank lending to sovereigns, bank steering committees were established to provide a forum to negotiate with the debtor and to communicate with the IFIs, and also to resolve the collective action problem by restraining those banks that might have preferred to dump their claims. Similarly, in the Asian crisis, where most of the debt was in the form of bonds or credit to non-sovereign entities, adjustment programmes provided for the close monitoring of daily developments in exposures by individual creditors, and moral suasion was applied to prevent any exit of capital from disrupting the economic adjustment. Those earlier experiences guided policy makers in setting up the Vienna Initiative, a similar arrangement for these CESEE countries where the funding of international bank subsidiaries was the main channel of capital market pressure.

The international banks with subsidiaries in the region faced different sources of pressure. They were finding it increasingly difficult to fund their balance sheets. They also knew that in the wake of the Asian crisis of 1996-98, European policymakers had been particularly insistent on private sector involvement (PSI) as a central part of the support for a country facing capital account pressures. This had been interpreted to mean that the official sector would not provide massive financial resources to a country if a large part went simply to repay private sector creditors. And the bank...

Table of contents

• Ten years of the Vienna Initiative
• Contents
• Introduction: Managing a supra-national public-private platform still based on sovereign interests
• PART I. HISTORICAL PERSPECTIVES
• PART II. THE EFFECTIVENESS OF THE VIENNA INITIATIVE DURING THE 2009-11 CRISIS
• Part III. VIENNA INITIATIVE 2.0: POST-CRISIS STRESSES ON CROSS-BORDER BANKING
• Part IV. THE FUTURE OF CROSS-BORDER BANKING
• Part V. CONCLUSIONS ON THE ACHIEVEMENT OF THE VIENNA INITIATIVE
• ANNEXES
• Copyright