Session III: The role of the Austrian Central Bank in the ongoing financial market turmoil

Session III:The role of the Austrian Central Bank in the ongoing financial market turmoil

Russian Economic and Financial Forum in Austria Vienna, 30 November 2008

Michael WürzHead, Financial Markets Analysis and Surveillance DivisionOesterreichische Nationalbank

www.oenb.at

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Financial market tensions emerged from the West

Source: OeNB, Bloomberg.

Loss in confidence resulting from US subprime-crisis

- Markets for structured products not/only to a limited extent functioning

- Significant write-downs by large international banks

- Increase in interbank interest rates

- Liquidity provision by central banks

- High stock price volatility

0

50

100

150

200

250

300

350

07.0

709

.07

11.0

701

.08

03.0

805

.08

07.0

809

.08

11.0

8

USD EUR

Interbank market - 3M OIS Spreads

in basis points

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Latest wave hit the Austrian banks too

First waves50

60

70

80

90

100

110

07/0

708

/07

09/0

710

/07

11/0

712

/07

01/0

802

/0803

/08

04/0

805

/08

06/0

8

DJ EURO STOXX Financial Services Erste Group Bank Raiffeisen International Bank Holding

20

30

40

50

60

70

80

90

100

110

120

07/0

808

/08

09/0

810

/08

11/0

8

Stock prices of Austrian banks1.7.2007 = 100 1.7.2008 = 100

Quelle: Bloomberg.

First waves Latest wave

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Indirect effects of turmoil affect operating profits and risk provisions

0.33 -0.33

5.47 6.09

2.052.59

3.533.21

1.171.15

-2

0

2

4

6

8

10

12

14

2007Q03 2008Q03

Other operating income

Net fees and commissions income

Securities and investment earnings

Net interest income

Trading income

in bn EUR

Source: OeNB.

-1,2%

-9,1%

+26,8%

+11,4%

-198,3%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2005Q42006Q22006Q42007Q22007Q42008Q2

-300%

-200%

-100%

0%

100%

200%

300%

Operating profit (cons.)Operating profit (uncons.)

Risk costs (uncons.) (right axis)

Growth of Operating Profit and Risk Costs (yoy)

Operating Income (unconsolidated): +1.4%

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Liquidity conditions are challenging and closely monitored

Funding markets dried up in autumn 2008, Austrian banks were also affected Tight liquidity conditions CHF and USD financing

Non-Euro liquidity situation has improved

General situation remains challenging

OeNB is closely monitoring the situation Introduction of new weekly liquidity report

The 24 largest banks report in- and outflows plus counterbalancing capacity

Time horizons: up to 1 week, 1 month, 3 months and 6 months

Currencies: CHF, EUR, GBP, JPY, USD and an aggregate of other FX

Additional regular information exchange with banks reporting liquidity mismatches

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High deposit growth in Austria and Central, Eastern and South-Eastern Europe (CESEE)

0%

3%

6%

9%

12%

15%

2005

Q02

2005

Q04

2006

Q02

2006

Q04

2007

Q02

2007

Q04

2008

Q020%

10%

20%

30%

40%

50%

2005

Q02

2005

Q04

2006

Q02

2006

Q04

2007

Q02

2007

Q04

2008

Q02

Growth Rate of Deposits of Austrian Subsidiaries in CESEE (yoy)

Growth Rate of Deposits in Austria (yoy)

Source: OeNB, unconsolidated figures.Due to changes in reporting requirements the comparability of CESEE growth rates before 2008 with more recent values is limited.

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CESEE exposure of Austrian banks focussed on New Member States (NMS) in the EU

AT banks are ….

… significant players in CESEE

… diversified across the region but

exposure to NMS dominates

Growth is redirected and partly cooling off

CESEE segment is highly profitable

Major banks depend strongly on CESEE0

10

20

30

40

50

60

70

80

90

RZB Erste Bank Bank Austria VBAG

Share of CESEE Segment in Consolidated Pretax Profit

Q2 2008

Q3 2008

Q3 2008

Q2 2008

Source: quarterly consolidated reports.

Source: BIS, Q2 2008.CIS13%

SEE14%

NMS-200717%

NMS-200456%

CESEE Exposure

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Business model of Austrian banks in CESEE faces short runchallenge

Business model of Austrian banks in CESEE is in principle fit for future

–Retail banking based on a strong deposit base will emerge as a winner of the financial turmoil

Cut and run – no option for Austrian banks–Costs would outweigh benefits by far

Turmoil in CESEE represents a short run jeopardy for the long and medium term growth potential

–CESEE is an important contributor to EU-15 growth rates

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Austria‘s comprehensive financial stability package

• Strengthening Banks‘ Confidence– Interbank Market Strengthening Act (up to 75 bn EUR):

- Clearing house- Federal guarantee for securities issued by banks

• Strengthening Banks‘ Capitalisation– Financial Market Stability Act (up to 15 bn EUR):

- „Recapitalisation measures“

• Strengthening Depositors‘ Confidence– Deposit insurance

- physical persons: until end-2009 unlimited amount; afterwards up to 100,000 EUR- legal persons: 90% of up to 20,000 EUR.

• Further measures: - Amendment in the Banking Act: „Capital Add-On“- Prohibition of Speculative short selling

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OeNB‘s role in banking supervision and financial stability

1. Banking Supervision: - 2 institutions (FMA and OeNB), but 1 process & joint responsibility

- OeNB: fact finding, including risk assessment

 On-site

inspectionsOff-site analysis

ReportingAuthority function

OLD FMA/OeNB FMA/OeNB OeNB FMA

NEW OeNB OeNB OeNB FMA

2. Financial Stability: - Comprehensive and recently extended mandate, based on the EC-Treaty

and the National Bank Act: Monitoring of all circumstances that are of relevance for the safeguarding of financial stability in Austria

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Thank you for your attention!

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Austrian Clearingbank/Oesterreichische Clearingbank AG (OeCAG)

• Legal basis is a temporary law to stabilise the Austrian interbank market– Austrian government backs a clearing house (OeCAG) to unfreeze

interbank lending and debt instrument issuances of financial institutions

– Guarantees amount up to 75 bn EUR– Expiration date of law is Dec. 31st, 2009

• Austrian Clearingbank (OeCAG):– Founded on Nov. 14th, 2008 by major banks; Initial own funds: 180 mn

EUR – Business activities are conducted by OeKB and guaranteed by the

Austrian government – Participants are banks and insurance companies– So far three auctions have taken place

• Allocated volume in sum: 804.6 mn EUR; decreasing rates and increasing volume

– Intention to raise additional funds through commercial paper auctions

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OeNB‘s financial stability mandate

Financial stability mandate inherent central banking task

in Austria: comprehensive monitoring responsibility explicitly stipulated by the National Bank Act- combined with the obligation to report observations and findings of

fundamental nature or particular importance to the MoF and the FMA

Recent extension of data availability allows for integrated financial stability analyses

Structured processes for core stability issues:

- CESEE Risk Assessment

- Risk Transfer

- Extension of stress testing

- Liquidity

Links/feedback-loops to banking supervision and vice versa!

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Specific focus on CESEE activities in banking supervision and financial stability

Specific CESEE-meetings with the relevant Austrian banks

Further extension of cross-border supervisory cooperation

- Cooperation in the framework of so-called “colleges”

- Joint/simultaneous on-site inspections

- Joint seminars, conferences

- ad-hoc meetings, cooperation in EU fora etc

„CESEE Risk Assessment“ as core issue within the extended stability mandate of the OeNB

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Cross-border banking supervision in the EU

Consensus: cross-border banking groups require responses in the supervisory process, but: Quo vadis?

OeNB‘s perspective:

- “Lead Supervisor” is no option

- decentralized European System of Banking Supervisors might emerge in the long-term (masterplan with milestones and timeline needed)

- For the time being: evolutionary development of the model “national supervisory authorities & CEBS”

→ Colleges (delegation of tasks ok, but no change in home/host responsibilities)

→ via CEBS: European supervisory culture

→ ensuring that all banks are subject to the same (high) standards