Legislation is being discussed that could make parent company funding eligible for bail-in, and lead to more funding from parent banks to subsidiaries.
Vienna 2.0 is a European Commission-led scheme that is looking at ways to minimize the risk of chaotic deleveraging in Central and Eastern Europe (CEE).
The draft legislation — the European bank recovery and resolution directive — has been under review at the European Commission since June.
The most recent draft appears to imply it will make more economic sense for parent companies to provide financial assistance to their CEE subsidiaries than to cease funding, said Fitch Ratings on Thursday.
"Proposals stipulate every bank should have around 10% of bail-in liabilities," said Artur Szeski, senior director financial institutions.
If parent funding is considered as eligible for bail-in — which Szeski argues would make sense if it became mandatory to have around 10% of bail-in liabilities — then this would act as an incentive for parent banks to keep funding available for their CEE subsidiaries to meet bail-in liability demands.
"And for banks that don’t have parental funding, it could encourage parents to lend to the bail-in-able level," Szeski added. Parent bank funding is particularly important for CEE subsidiaries because it is difficult for them to increase their bail-in liabilities in the same way as their parents— by issuing debt on the public market.
"CEE banks are smaller than their parents. Many of them have sub-investment grade stand-alone profiles," said Szeski. "So international markets could be difficult to access and domestic markets are not developed enough."
Fitch’s analysis remains hypothetical until the draft legislation is finalized, but it will offer some hope to the Vienna 2.0 initiative.
To read the full article, subscribe to Euroweek.com.