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Emerging Markets

East Europe bank plan poised to expand

A system of written promises by parent institutions of “systemic banks” to stand by emerging European economies could soon be extended to Hungary, Ukraine, Bulgaria and other vulnerable countries.

Formal undertakings given by parent institutions of Serbian and Romanian banks, made to the IMF at meetings in Vienna in March, could serve as a model in some other countries.

Marek Belka, director of the European department at the IMF, told Emerging Markets in an interview that the Washington lender is “working in the same vein in Hungary, to prove that this is a needed approach that could be needed in other countries.

 “This is an exercise to prevent disorderly unwinding of the existing business models,” he said. Commitments from banks “concern stress testing and, when necessary, additional recapitalization of these banks”.

The banks’ business models in Romania and Serbia had been “unsustainable and we all know it” – but unwinding them “has to be carried out in an orderly gradual manner.

“All these banks have an interest to stay. They consider their past investment as very good ones. They need an environment in which nobody will try to take a free ride, or drop the business and escape,” Belka said.

He added that the IMF is “initiating a regionally coordinated stress testing exercise. But we have to do it in a coordinated way so we can reconcile numbers and arrive at something realistic. Many numbers being floated do not seem realistic.”

There is a broad consensus that a similar agreement is also vital in Ukraine, although no deal was in place before its $16.5 billion IMF package was announced in October. But the IFIs have held two preparatory meetings in Kiev, one with parent banks and the second with local subsidiaries.

At the EBRD meeting in London tomorrow, the issue will be high on the agenda of policy-makers who fear that further damage may still be done to eastern Europe’s fragile financial systems. “This is one of the main issues that will be debated at the EBRD meeting this week”, Serbian Central Bank governor Radovan Jelasic told Emerging Markets.

The parent banks’ statements on Romania and Serbia, published on the IMF web site, amount to promises not to desert subsidiaries in those countries – as it had been widely feared they might.

The statement on Romania greets the IMF rescue package, and recognises that “it is in our collective interest” to “subscribe to coordinated commitments to maintain our overall exposure to Romania”. It adds that “additional capital [...] will be provided as necessary”. It is signed by Erste Bank, Raiffeisen International, Eurobank Unicredit, Societe Generale, Eurobank EFG, Alpha Bank, Volksbank and Piraeus Bank.

The statement on Serbia, signed by a similar group of banks, is less specific. There is no mention of “additional capital”; instead there is agreement to “work towards making specific commitments in the next few weeks” on support for subsidiaries.

Herbert Stepic, chairman of Raiffeisen Bank, said that the purpose of the arrangements is to ensure that system banks “do not pull out” of economies into which the IMF is pouring in funds. There is “no question” that Raiffeisen would support its eastern European subsidiaries, he said.

“We will capitalise them, and provide sufficient liquidity” for them to “survive and follow the business practices necessary” in the crisis. But local central banks had to play their part too, by easing lending procedures and introducing other flexibilities.

Alongside the IMF’s dialogue with banks, the Austrian finance ministry has initiated a series of meetings with other governmental authorities, central banks and IFIs, Stepic added.

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