Last Monday the Austrian banking supervisors, the FMA and the Austrian National Bank (OeNB) announced measures that may limit the possibility of subsidiaries of Austrian banks to continue to extend credit under certain circumstances. These measures came as a total surprise to all involved.
President Basescu has made strong statements about this at The Economist’s Bucharest Summit event this Thursday. Afterwards I has the pleasure of commenting on this to the press immediately after. More on what President Basescu said can be found here. He makes his point very clear.
What Is This All About
All we know is that the OeNB issued a one page press release, which can be found on their website (link here). The document states that the Austrian Financial Markets Authority (FMA) and the Austrian National Bank (OeNB) have “devised a set of measures to make the business models used by Austrian bank operating in Central, Easter and Southeastern Europe (CESEE) more sustainable. These measures will be published as prudential guidelines before the end of 2011.”
Further down it explains that “To promote the subsidiaries’ refinancing structure, credit growth will be in the future be conditional on the growth of sustainable local refinancing (compromising mainly local deposits, but also local issuance activity and supranational tuning, e.g. by the EBRD or the EIB). In the future, subsidiaries that are particularly exposed must ensure that he ratio of new loans to local refinancing (i.e. the loan-to deposit ratio including local refinancing) does not exceed 110%”
What Does This Mean ?
Although many things need to be clarified in the “prudential guidelines”, I feel there are a few things we can say without too much speculations. This is only my personal opinion and things might prove to work out differently later on.
How will the loan-to-deposit ratio be calculated?
In the document is already mentioned that besides local deposits also other “local” funding and lines from supranationals like EBRD and EIB will be included in the deposit number, which improves the ratio for banks that have those facilities. (We have them and we are not the only ones).
On what has to be included on the loan side I think it is reasonable to assume that international standards will be used (as opposed to Romanian accounting standards) and amounts will be net after provisions.
In conclusion this means that the ratio that will be used by the Austrian regulators will be much better that the standard loan-to deposit ratio. (To give you an idea, the bank I am running has already a ratio of about 80%, so way better than the limit, even without taking into account the elements mentioned above)
Which subsidiary banks will be affected ?
Only the ones that are “particularly exposed”. I read this as banks that rely very much on funding from their Austrian parent, maybe defined as having a loan-to-deposit (as described above) ratio exceeding 110%.
How will these banks be affected.
My speculation is that these banks will not be asked to reduce there loan-to-deposit ratio to 110% before allowing to continue its credit activity because this would be a very harsh and unnecessary measure. What is more likely is that these banks will need to limit their credit activity for new loans to 110% of new deposits (as defined above). In other words, rather than a static number, the flow might become the limiting factor.
Very Little If Any At All
As mentioned above, this is my personal interpretation is and some of it is speculation. Still, I don’t expect any impact for our bank and would expect the impact for Romania to be very modest, if any at all. The Romanian press has already published ratios for the subsidiaries of Austrian banks in Romania (ZF article here). Based on this there is probably only one “particularly exposed” subsidiary of an Austrian bank in Romania.