The economic recovery in the region remains fragile in the light of increasing downside risks. Several factors are significantly contributing to the slowdown of the growth momentum in the euro area as well as the CESEE region, including the mounting geopolitical tensions across the globe, the still ongoing process of balance sheet repair in the financial and nonfinancial private sectors, and the continued need for further fiscal consolidation in some countries.
As the most recent growth forecasts have been revised downwards for the world economy, the euro area, as well as for the CESEE region, the challenges are clear. The recovery is lagging and uneven, mostly due to crisis legacies resulting in lower growth potential. Investment has been subdued and demand remains weak. Hence, reinvigorating (credit) growth in Europe appears high on the agenda of policymakers. Beyond the support of accommodative monetary policies, targeted reform measures are needed in order to avoid recoveries which go hand in hand with prolonged periods of weak output and employment growth. In general, structural reforms to strengthen growth potential or make growth more sustainable are needed.
Due to its geographical and cultural proximity to CESEE, Austria has always had a special interest in the region. Austrian banks were among the first to enter the region, realizing the possibilities and potential of the region and thereby acting as a driver for banking sector development. Their long-term commitment to CESEE is also reflected in their broadly maintained total exposure to the region in the past years, which amounted to EUR 97.5 billion by mid-2014.11 With a total number of 62 subsidiaries as of June 2014, Austrian banks are still the major players in the region and contribute to a stable flow of credit to the local economies. Thanks to their traditional business model and higher than EU growth rates in CESEE, their activities in the region also continue to be an important contributor to the profitability of Austrian banks on a consolidated basis.
However, CESEE operations also come with higher risks. Higher NPL ratios, goodwill write-downs, and political uncertainty in some countries pose challenges to Austrian banks operating in the region. These risks have translated into higher risk costs over
11 CESEE exposure of majority Austrian-owned banks (BIS definition).
the past few years. What is more, in the past, the profit sources of Austrian subsidiaries had been evenly distributed across CESEE, which also yielded risk diversification benefits; in recent years, by contrast, profits have increasingly come from just a few countries, namely the Czech Republic, Slovakia, Russia, and Turkey. This highlights a concentration risk and the need for a sustainable growth strategy in the region. Recent turmoil in some of these markets has also underlined the fragility of the current earnings situation. The reduction of exposure in some countries with a difficult economic environment or unorthodox economic and financial policy was more than compensated for by an increase in other CESEE countries, where Austrian banks’ subsidiaries have generated profits and registered a relatively stable credit quality in recent years.
As far as foreign currency lending of Austrian banks’
subsidiaries to CESEE is concerned, these loans, which have declined by 7.1 percent year on year, amounted to EUR 4.2 billion at end-2013, taking into account exchange rate effects. Yet, the outstanding volume of foreign currency loans continues to pose a material risk both to households and to Austrian banks.
The decreasing trend in foreign currency lending of Austrian banks reflects the success of the macroprudential tools already implemented by the Austrian authorities before 2014, most recently the revised minimum standards on risk management and new lending in foreign currency from early 2013. Furthermore, in March 2012, the Oesterreichische Nationalbank (OeNB) and the Financial Market Authority provided supervisory guidance12 with a view to strengthening the sustainability of the business models of large and internationally active Austrian banks, in
12 For further information see http://www.oenb.at/en/Financial-Stability/Systemic-Risk-Analysis/Sustainability-of-Large-Austrian-Banks-Business-Models.html.
order to ensure that they increase their capital buffers, rebalance the funding position of subsidiaries, and prepare recovery and resolution plans for potential crisis situations. Monitoring results from the end of the first quarter of 2014 indicate that a large majority of Austrian banks’ subsidiaries in CESEE have sustainable business models (on a year-on-year basis).
Strengthening of the long-term stable funding of foreign subsidiaries goes hand in hand with developing domestic capital markets, which can be more difficult in small economies that have not (yet) adopted the single currency. These measures also reflect the spirit of the Vienna Initiative13 to promote a sustainable growth model underpinned by strengthened capitalization, while at the same time proactively preventing pronounced boom-bust cycles.
Coming back to the conditions for reinvigorating credit growth, it is important to note that potential output growth is still higher in the CESEE region compared to the euro area. Many CESEE countries have followed a remarkable economic catching-up process over the past two decades, but have not yet reached the levels seen in most of the euro area countries. These differentials imply a great potential for above-average growth, not only for the CESEE region, but also for the countries with which the region maintains close relations. Owing to the slump in growth in the CESEE region caused by the global financial crisis, the previously substantial growth differential between the CESEE EU member states and the euro area has declined in recent years.
13 The European Bank Coordination “Vienna Initiative” is a platform for cooperation and discussion of all the relevant public and private sector stakeholders of EU-based cross-border banks active in emerging Europe, such as home and host country supervisors, the European Commission, international financial institutions like the IMF, and banks. The Vienna Initiative was launched at the height of the global financial crisis in January 2009 and played a key role in stabilizing the situation in the CESEE region. It helped to prevent a systemic banking crisis in the region and ensured that credit kept flowing to the real economies during the crisis.
Nevertheless, this growth differential is projected to persist until 2019 according to the most recent WEO by the IMF.14
Countries with a geographical proximity and traditionally strong ties with the region, like Austria, are in an excellent position to support this process. Austrian banks stay committed to a retail-oriented business model and continue to focus on CESEE. In this regard, with a more sustainable business model, banks play a key role in providing finance to the real economy. This is particularly important as higher investment can boost demand, which—in the end—supports economic recovery. In order to tackle the policy challenges and possible responses in connection with reinvigorating credit growth in CESEE, it is critical to learn about the various experiences of different countries in the region and to exchange opinions. Moreover, as CESEE and the euro area are economically and financially integrated, close coordination between home and host authorities is vital.
Panelist 3: Jan Tóth, Deputy Governor, National Bank of