Austrian Credit Exposure

by Steven van Groningen on 9 February, 2012

As photographer I know exactly what exposure means. It is the amount of light that hits the film or sensor in the camera. It is adjusted by increasing or decreasing the time of exposure and/or the diameter of the diaphragm. In financial terms exposure can have more meanings or at least more interpretations. Nothing very complicated but apparently still confusing for some. So let’s shed some light on this. I’ll try not go into too much detail as to overexpose the subject but I also wouldn’t like to leave the subject in the dark because of underexposure.

Financial Exposure

When someone asks me what out exposure is on – for instance-  the real estate sector, he wants to know what the volume of loans is that the bank has given to this sector. Financial exposure refers to the amount of money one might lose in an investment. A financial exposure can also be on a country. Country exposure is defined as the volume of loans to and investments in entities in the respective country  (including the country itself). Under the so called Vienna Initiative international banks agreed to maintain their exposure on Romania. In this case exposure is the sum of the capital invested in the Romanian subsidiary bank, the amount of loans given to these subsidiaries and the loans that parent banks (group members) have given to Romanian companies and the state directly.

Exposure Statistics

Ziarul Financiar (ZF)  published a few days ago, on the front page over 4 columns an article with the titles “International Statistics Contradict Bankers”  and “Austrians Withdrew 2 Billon from Romania in Q3 2011…….”  The same article can be found on the ZF website here but with a different title. In a nutshell the article claims that, because BIS statistics show a 2 billion lower exposure for Austrian banks, this means that these banks have pulled 2 billion of money out. Even though I only have access to the data of the bank I am responsible for it was clear to me that – if there had been any outflow at all – if would certainly not have been in the range of 2 billion EURO and the article is wrong.

BIS statistics

The article is based on the preliminary statistics from the Bank of International Settlements (BIS) that were published on January 27th. One of the functions of the BIS is to collect data from member countries (Romania is not a member but Austria is) and to publish all sorts of statistical reports. A quick look at the web site of the BIS tells us that :

The consolidated banking statistics report banks’ on-balance sheet financial claims on the rest of the world and thereby provide a measure of the risk exposures of lenders’ national banking systems. The quarterly data cover contractual lending by the head office and all its branches and subsidiaries on a worldwide consolidated basis, ie net of inter-office accounts. Reporting on this contractual lending on an immediate borrower basis allows the allocation of claims to the bank entity that would bear the losses as a result of default by borrowers.”

In other words, exposure in BIS terms means exposure of the banks’ head offices on a country plus the exposure of their subsidiaries in the country minus the inter group accounts. This is basically the size of their combined loan book. This is of course different from the exposure of a banking group on Romania as a country. This explains the high amount of 29 million EUR mentioned by ZF as “remaining exposure” . This amount is much bigger than the combined amounts that parent banks have invested in terms of capital and have provided as liquidity it in the form of loans to their subsidiaries (about 9 billion EUR). A large part of this 29 billion EUR is financed by local deposits.

Possible Explanation

Now that we have clarified what type of exposure BIS statistics refer to we can try to understand what could have caused the shift in the BIS statistics. There is probably a very simple explanation. Volksbank Romania had announced a change in their shareholder structure in the third quarter of last year. As a result, Volksbank Romania is no longer 100% owned by an Austrian bank but only 51%. A French and a German Bank now own each 24%. The was reported in the press and the information is also available on the website of Volksbank.

Now some simple maths. Volksbank Romania had about 20 billion RON of assets at the end of 2010. This translates into 5 billion EUR. Of course not all assets are loans and included in the BIS statistics. Let us assume the that 80% of the assets are credits to banks and non banks (BIS exposure).This means 4 billion. In the second quarter of 2011 these assets were reported as 100% Austrian. In the third quarter the shareholder changes took place and only 2 billion were reported as Austrian, 1 billion as German and 1 billion as French. This would not only explain the drop in the statistics for Austria but also the increase for Germany (but not the drop for France)

Overexposed Or Underexposed

I don’t know if this is indeed the explanation or the whole story.  I just wanted to expose the wrong interpretation in he ZF “The Austrian bankers have cut their exposure on Romania in the third quarter of 2011 with about 1,9  billion euro in comparison to mid 2011, under pressure to reduce the vulnerability to risk and to consolidate the capital…….”

I leave it up to the reader to decide if the journalist over exposed or underexposed the subject.

BNR Has The Final Word

After a few days the Head of Banking Supervision of the BNR had the final word. He declared that the Austrian exposure had decreased by 517 million for the full year of 2011 (link). Here we have another simple explanation. Erste Bank in Vienna made a adjustment in their books to the value of BCR of 700 million, which reduced their exposure on Romania. You can read about it here. No money changed countries.

PS

Like with my previous post, one of my colleagues commented on the same topic in the Ziarul Financiar. This time it is Dan Pascariu and you can read his article here.

{ 5 comments… read them below or add one }

bhuttu February 10, 2012 at 01:52

Upon reading this, I would say ZF is not technically wrong, it is only manipulating the data and adjusting the tone to illustrate a pre-determined thesis. As far as I’ve seen, this approach is as much unethical as it is flawed. However, their point was sustained by the BNR report, so the truth is, yet again, somewhere in-between.

Reply

SvG February 10, 2012 at 12:42

Thank you for your comment, after reading this I realized I forgot to add the explanation for the decrease mentioned by BNR. I added this in the meantime. The underlying point is that no cash flowed anywhere, no money was withdrawn from Romania.

Reply

Alexander Fuhrmann February 10, 2012 at 15:28

Hello Steven,
thank you for your remarks. I seldom read Romanian Press because it lacks credibility. Much is sloppy reporting and often materials are published without regard to accuracy or possible damage. I’ll make a mental note to visit your blog more often.

Reply

Adrian February 10, 2012 at 22:51

Actually your Austrian banks are minuscule in terms of everything(assets, capitalization) and does not represent to much in terms of global economy. So please do not exaggerate with the influence of Austria or Austrian banks over our economy because is not true. The effects are limited in time.

Reply

Catalina February 14, 2012 at 17:14

I am so pleased to see you are also an important educator! I have pinched my finger while reading Bursa a couple of weeks ago(nb meanwhile I have stopped this activity). I am wondering, is this just poor writing skills, Machiavellic intentions, narcissism, all the above, etc. Who knows….Please continue with explaining clearly the operating mechanisms in various areas of the economy and market behaviours. And mostly, the difference between description, interpretation and evaluation….somehow I get the feeling it would help many!Until next time, best regards

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