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Michael Hysek Managing Director of Banking Supervision Financial Market Authority

Lessons Learned and Measures Aimed at Strengthening the Resilience of the Banking Sector The Austrian View. Michael Hysek Managing Director of Banking Supervision Financial Market Authority. BSCEE Conference Macedonia, 15.-17. June 2010. Agenda. The Austrian Banking Sector

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Michael Hysek Managing Director of Banking Supervision Financial Market Authority

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  1. Lessons Learned and Measures Aimed at Strengthening the Resilience of the Banking SectorThe Austrian View Michael Hysek Managing Director of Banking Supervision Financial Market Authority BSCEE Conference Macedonia, 15.-17. June 2010

  2. Agenda • The Austrian Banking Sector • Austrian Exposure in CESEE and CIS • “Highlights” of the Crisis • The Way Forward • Conclusio Macedonia, 15.-17. June 2010

  3. (1) Austrian Banking: Facts & Figures (as of 31 Dec 2009 in EUR) Macedonia, 15.-17. June 2010

  4. (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 Macedonia, 15.-17. June 2010

  5. (1) Austrian Top 10 Banking Groups (consolidated) Macedonia, 15.-17. June 2010

  6. (2) Austrian Exposure in CESEE and CIS (as of 31 Dec 2009) Macedonia, 15.-17. June 2010

  7. (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” Macedonia, 15.-17. June 2010

  8. (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 Macedonia, 15.-17. June 2010

  9. (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 Macedonia, 15.-17. June 2010

  10. (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 Macedonia, 15.-17. June 2010

  11. (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 Macedonia, 15.-17. June 2010

  12. (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 Macedonia, 15.-17. June 2010

  13. (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 Macedonia, 15.-17. June 2010

  14. (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 Macedonia, 15.-17. June 2010

  15. (4.2) The New EU Supervisory Architecture • 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 Macedonia, 15.-17. June 2010

  16. (4.3) Cross-Border Cooperation • 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 Macedonia, 15.-17. June 2010

  17. (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 Macedonia, 15.-17. June 2010

  18. (4.4) Dealing with Foreign Currency Lending • Loans to private households in Euro Area, end 2009 Macedonia, 15.-17. June 2010

  19. (4.4) Dealing with Foreign Currency Lending • Foreign Currency Lending is both a domestic issue ... Macedonia, 15.-17. June 2010

  20. (4.4) Dealing with Foreign Currency Lending • ... as well as a CESEE issue Macedonia, 15.-17. June 2010

  21. (4.4) Measures taken on domestic market Macedonia, 15.-17. June 2010

  22. (4.4) The New Minimum Standards • 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 Macedonia, 15.-17. June 2010

  23. (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 Macedonia, 15.-17. June 2010

  24. (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! Macedonia, 15.-17. June 2010

  25. (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 Macedonia, 15.-17. June 2010

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