The future of European banking – A central bank perspective

IIEA Conference Dublin, 2 December 2013

Philip Reading Director, Financial Stability and Bank Inspections Oesterreichische Nationalbank www.oenb.at

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Source: BIS 2012Q4, Eurostat 2012.

Austrian banks’ foreign exposure focuses on CESEE, …

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Austrian banks with a commitment to CESEE and a focus on EU and investment grade countries

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Austrian Banks in Central, Eastern and Southeastern Europe (CESEE)

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Returns are higher than in Austria, but so are (credit) risks …

Source: OeNB.

Profitability •  Activities of Austrian banks remained profitable

throughout the crisis •  Profitability weakened mainly due to worsening

credit quality, but also goodwill write-offs and materialization of political risks

•  CESEE activities contribute significantly to consolidated profitability on an aggregate level

Credit quality •  Consolidated credit quality driven by CESEE

activities •  Heterogeneous developments in individual

CESEE countries (next slide)

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… and both are becoming more concentrated in only a few countries.

Source: OeNB. *2013Q2 net profit after tax not annualized.

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Challenges of Austrian banks are being addressed Strengths Challenges Responses

Retail-orientated business model -  Customer loan and deposit

business -  Financing the real economy -  Liquidity position intrinsically solid,

low dependence on wholesale funding

-  Profitable throughout the crisis -  Main markets in Austria and

CESEE

CESEE -  Unfavourable economic and political

environment in some countries -  Capital ratios at group level below

CESEE peers -  Dependence on intra-group funding Foreign currency loans -  High stock of foreign currency loans

in Austria and CESEE -  Underperformance of repayment

vehicles Structural aspects -  Net interest margins, low profitability

in the domestic business

Sustainability Package

Minimum Standards /

Guiding Principles

BIRG and RRPs

(in progress)

International Environment -  European banking sector: Deleveraging, balance sheet repair, sovereign-bank

linkages -  Sovereign debt market: Reduced pressure, remaining uncertainties -  Weak macroeconomic environment in the Euro Area

ECB: Liquidity, CRR/CRD IV, Banking Union

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The „Vienna Initiative“ played an important role in containing spillover effects from the global financial crisis…

Public/private cooperation: •  IFIs (IMF, EBRD, EIB, World

Bank) •  European Commission and

ECB •  Home and host regulators •  Large banking groups

Objective: •  Maintaining of European

banks‘ exposure in the region

Follow up: •  Development of local currency

and capital markets •  Role of banks in absorbing EU

structural funds •  Impact of new regulatory

standards •  Management of NPLs

Results of an IMF working paper “Foreign Banks and the Vienna Initiative: Turning Sinners into Saints?”, 2012 •  Banks committed to the VI:

•  Foreign banks that participated in the Vienna Initiative were relatively stable lenders

•  VI banks did not retrench from non-VI countries

•  Rather positive spill-over effects to non-VI countries

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… but a leopard can‘t change its spots.