Europe News

Austrian Banks Told to Limit Lending to the East

By Eric Frey, Neil Buckley and Stefan Wagstyl, Financial Times

Austrian bank supervisors have instructed the country banks to limit future lending in their east European subsidiaries, a further sign of the potential knock-on effects of the euro zone crisis for economies around the world.

Eric Audras | PhotoAlto | Getty Images

The restrictions come as Austrian officials seek to defend the country AAA credit rating, amid concerns that the government might have to bail out its banks because of losses in central and eastern Europe, where they are the biggest lenders, and their exposure to Italy.

The moves by Austria, which appear to be unilateral, show how even the euro zones strongest economies are feeling the pressure of the sovereign debt crisis.

Neighboring Hungary on Monday officially requested precautionary financial help from the International Monetary Fund and the European Union, confirming a U-turn after it shunned further IMF support 18 months ago.

The Austrian central bank said in a statement that Erste Group, Raiffeisen Bank International and Bank Austria, owned by UniCredit of Italy, would be prevented from loaning significantly more in CEE countries than what they raise in local deposits. Subsidiaries that are particularly exposed must ensure the ratio of new loans to local refinancing is not more than 110 percent.

The three banks CEE exposure exceeds Austrian GDP , raising concerns that the government would be unable to bail them out if their loan portfolios turned sour. The announcement came just as the spreads of Austrian bond yields over German Bunds rose to record highs and was also designed to calm market jitters, a central bank official said.

Under the new rules, the minimum core tier one capital ratio of 9 percent by mid-2012 that the European Banking Authority has set as a temporary measure for EU bankswould be made a permanent requirement for Austrian banks.

Austrian banks shares fell sharply, with Erste closing down 9 percent and Raiffeisen down 4.7 percent.

Bank officials said the lending curbs would not have a significant impact on their east European businessesas they were already committed to funding future borrowing from local deposits. But analysts said the move was bound to affect availability of credit.

It is something that in principle makes Austrian banks [and thereby also the Austrian sovereign ] safer. However, it is also pro-cyclical and the immediate impact may not be helpful for countries where Austria's banks are active, said Christian Keller, emerging markets economist at Barclays Capital.

Ewald Nowotny, Austria's central bank governor, said the measures would not only benefit the stability of the local financial markets, but Austria's exposure to this region will also become more sustainable.

As well as the new lending restrictions, the central bank said the three lenders had to fulfil Basel III capital rules in full from January 2013, six years earlier than generally planned, though they will be able to include non-voting participation capital received from the state and other investors in a 2009 aid package. They must also hold an additional core capital buffer of up to 3 percent from January 2016.

Analysts said acceleration of the Basel III minimumseffectively a 7 percent core tier one capital ratio would have minimal impact on Erste and Raiffeisen as the EBA said in July that both were on track to have ratios of about 9 percent by the end of 2012. But they would be more challenging for Volksbank, the number four lender.