Michael Hysek Managing Director of Banking Supervision Financial Market Authority BSCEE Conference Macedonia, 15.-17. June 2010 Lessons Learned and Measures

Michael Hysek

Managing Director of Banking Supervision

Financial Market Authority

BSCEE Conference

Macedonia, 15.-17. June 2010

Lessons Learned and Measures Aimed at Strengthening the

Resilience of the Banking Sector

The Austrian View

Michael Hysek, FMA Macedonia, 15.-17. June 2010 2

Agenda

1. The Austrian Banking Sector

2. Austrian Exposure in CESEE and CIS

3. “Highlights” of the Crisis

4. The Way Forward

5. Conclusio

Michael Hysek, FMA 3

(1) Austrian Banking: Facts & Figures (as of 31 Dec 2009 in EUR)

yoy-change

Nom. GDP Austria 276.9 bn -1.8 %

Aggregated Total Assets 1034.1 bn -3.3 %

Expected Net Income 247.8 mio -87.1 %

Risk provisions 8.3 bn -19.5 %

Cost-Income Ratio 62.0 % +6.5 pb

Solvency Ratio 18.7 % +1.5 pb

Number of Subsidiaries in CESEE 67 -1

Aggregated Total Assets CESEE Subsidiaries 254.4 bn -4.9 %



(1) Diversity of Austrian Banks (as of 31 Dec 2009)

Number of Credit Institutions: 856

Savings Banks 55

Raiffeisen Credit Cooperatives 545

Volksbank Credit Cooperatives 68

Joint Stock Banks and Private Banks 51

State Mortgage Banks 11

Building and Loan Associations 4

Special Purpose Banks 92

Member States Branches 30


(1) Austrian Top 10 Banking Groups(consolidated)

As of 31 Dec 2009 Total Assets in Billion Euro

Erste Group Bank AG

Unicredit Bank Austria AG

Raiffeisen Zentralbank Österreich AG

Österreichische Volksbanken AG

BAWAG P.S.K. Bank für Arbeit und Wirtschaft AG

Hypo Alpe-Adria Bank International AG

Raiffeisenlandesbank Oberösterreich AG

Österreichische Kontrollbank AG

Raiffeisen-Holding NÖ-Wien reg.Gen.m.b.H.

Oberbank AG

201.7

194.5

147.9

48.5

41.2

41.1

35.4

34.3

33.6

16.0


CZRO HR HU SK

Oth

erPL

RU UA RS BABG

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

(Onbalance Obligo, Q4 2009, Source: BIS) in bn USD in bn EUR

(bill

ion

s)

(2) Austrian Exposure in CESEE and CIS (as of 31 Dec 2009)



(3) „Highlights“ of the Crisis

3.1 Austrian Bank Stabilisation Package

3.2 Crisis Activities of the FMA

3.3 Nationalisation of HGAA

3.4 “The Vienna Initiative”


(3.1) Austrian Bank Stabilisation Package

Strengthening the interbank market: provide liquidity to

the financial sector (Interbank Market Revival Act;

EUR 65 bn)

Strengthen equity capital of banks – “Recapitalisation

Package” (Financial Market Stability Act; EUR 15 bn)

Deposit insurance (EUR 10 bn): Securing deposits of

natural persons

Additional measures – Enhancing supervisory

efficiency, temporary restrictions on short selling



(3.2) Crisis Activities of the FMA

Permanent contacts with management of big banks

Close monitoring of key ratios

Regular liquidity reports

Involvement in the stabilisation package

Daily telephone conferences with the Central Bank

Ad hoc-surveys

Targeted on site-inspections

Supervisory Colleges / Ad hoc-Meetings

Information exchange with other supervisors



(3.3) Nationalisation of HGAA

10/11/2009: Ad hoc announcement: projected loss for 2009 significantly above € 1 billion

HGAA publicly expressed need for recapitalization until end of 2009

Nov/Dec 2009 Alert phase within liquidity management

04/12/2009: Downgrading by Moody‘s: BFSR from E+ to E;

Long Term from Baa1 to Baa2

14/12/2009: Agreement on takeover of Hypo Group Alpe-Adria by the Austrian government (closing on 30/12/2009)

Commitment of Republic of Austria and BayernLB for further capital injections to ensure compliance with minimum capital requirements



(3.3) Nationalisation of HGAA - Challenges

Influence of medial reporting on withdrawal of funds

Contagion effects in the case of insolvency

Guarantee by province of Carinthia appr. € 18 billion

Supervisory Communication (domestic and cross-border)

Taking the appropriate supervisory measures at the right time



(3.4) The Vienna Initiative

European Bank Coordination Initiative („Vienna Initiative“):

EBRD / IMF-coordinated agreement between the parent banks

of the largest local banks in the region

15 parent banks have made specific rollover and recapitalization

commitments in five countries (Bosnia, Hungary, Latvia,

Romania and Serbia)

Joint IFI Action plan (EUR 25 bn support in October 2009)

Next steps (“Vienna Plus”) to promote local currency lending

and funding in the region



(4) The Way Forward

4.1 A New Legal Framework

4.2 The New EU Supervisory Architecture

4.3 Cross-Border Cooperation

4.4 Dealing with Foreign Currency Lending



(4.1) A New Legal Framework

Better risk coverage

More stringent capital requirements

Constraint on procyclical effects

Limitation of leverage

Higher liquidity standards

Hightened supervisory attention towards systemic relevant

financial institutions (SIFIs)

Strengthen resilience of financial sector

Careful phase-in / grandfathering


Macro-prudential supervision

European Systemic Risk Board (ESRB)

Effective risk warning system

Microprudential supervision

European System of Financial Supervisors (ESFS)

Establishment of sectoral EU-level authorities (ESAs: EBA, ESMA,

EIOPA)

Colleges of supervisors

(4.2) The New EU Supervisory Architecture



Supervisory Colleges

Continuous and reciprocal information flow (in normal times and times of

crisis)

Common understanding- Joint decision on models

- Joint risk assessment / joint agreement on capital adequacy

- Measures to be taken

- Future examination programme

Joint on-site examinations

Strengthening of operational network

(4.3) Cross-Border Cooperation



(4.4) Dealing with Foreign Currency Lending

Financial crisis: ancillary risks relating to foreign currency loans

(FCL) and loans with repayment vehicles (LRV) have become

immanent

Banks: refinancing risk, concentration risk, lawsuit risk,

reputation risk

Customers: exchange rate risk, interest rate risk, performance

risk arising from the repayment vehicle

Systemic risks: potential for adverse effects on financial market

stability



Loans to private households in Euro Area, end 2009




Foreign Currency Lending is both a domestic issue ...

5%

10%

15%

20%

25%

30%

35%

Nonfinancial CorporationsPrivate HouseholdsDomestic Non-Banks

Share of foreign currency lending

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

CHFJPYUSDInterest rate advantage JPY vis à vis CHF (right axis)

Currency composition**

** only CHF, USD and JPY used.

in %




... as well as a CESEE issue


(4.4) Measures taken on domestic market

Michael Hysek, FMA 21Macedonia, 15.-17. June 2010

Issuance: 22 March 2010

Scope: No new FCL to private households

Exceptions:

Households with a natural hedge

Households with highest creditworthiness

Households with expected cash flow in FC

Other important items

Extended rules to inform borrowers about inherent risks of FC loans

Banks’ support of customers planning to convert their existing FC loans

Banks have to present a strategy to reduce funding risks

(4.4) The New Minimum Standards


(4.4) Austria’s CESEE FCL Initiative

Target: Reduction of volume and share of unhedged FCLs in CESEE via new

business

Scope: Initiative is exclusively focused on the flow and not on the stock of FC

loans, yet banks should facilitate voluntary conversions.

Challenges:

Achieving a level playing field

Coordination among home/host supervisors and IFIs

Lack of long-term refinancing facilities in the local currency

EBRD: Working Group on local currency development- Aim: joint public and private sector proposal on FC-lending and the

development of local currency markets

- Next Full Forum Meeting of the ‘Vienna’ Initiative in September


(4.4) The Need for Coordination

FC lending creates excessive risks

threat for financial market stability

International awareness is bound to increase:

European Systemic Risk Board (ESRB)

IFIs such as the IMF or the EBRD

Sooner or later a number of supervisors/regulators will be faced

with the issue of FCL.

A timely coordination process can only improve our position!


(5) Conclusio

The appropriate supervisory response to the financial crisis has to

comprise a combination of several measures:

Strengthening international coordination and cooperation

Strengthening supervision as a complement to regulation

Focus on strong, independent governance and risk

management

Need for stronger shock absorbers – however, careful phasing-

in of new requirements as financial conditions improve

Macroprudential overlay to capture systemic risks


Documents

Michael Hysek Managing Director of Banking Supervision Financial Market Authority BSCEE Conference Macedonia, 15.-17. June 2010 Lessons Learned and Measures