20th Mar 2019

New rules may hit eastern Europe, banker warns

  • (Photo: Burning Robot Factory)

New EU rules currently being worked on to make banks take less risks and hold more capital may have "unintended consequences" on the eastern European economies where companies are more reliant on bank loans than in the West.

"I'm only advocating for central and eastern Europe because it is the most dynamic region of the EU," Gernot Mittendorfer, chief risk officer at Erste Group Bank - an Austrian bank active in countries like Hungary, Romania, Serbia.

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"We have to be careful what impact all these regulations will have in the region, because I think Europe will be better off having this area well-funded," he told this website on Tuesday (27 March).

The Austrian banker explained that because financial markets are relatively new to the region, bank loans remain the main source of funding for small and medium enterprises in the area.

But once the so-called Basel III standards agreed with the US on capital requirements and risk management are transposed into EU legislation, many such companies in eastern Europe will be deemed too risky for banks to give them credit.

"In eastern Europe capital markets are not so developed, so all the access for corporate and small and medium enterprises for capital market funding is less developed than here in western Europe. 85 percent of businesses are relying on bank financing in comparison to 70 percent in western Europe. It's important here as well, but it's much less important in the US, where only 25 percent is done through the banking system," Mittendorfer said.

He said that nobody in the banking sector was disputing the need for these lending institutions to hold more capital, but the question was how quickly these new standards had to be implemented.

"If you do it too fast, there may be an incentive for banks to reduce or even stop lending in certain areas. I see special difficulties in countries where the governments as such are facing problems in borrowing," he added.

The EU's eight former Communist members are varied in their economic performance. They range from powerhouse Poland - the only EU country not to have been hit by recession and projected to grow by 3 percent this year - to troubled Hungary whose government wants to secure an international 'stand-by' loan.

Not much better

Apart from the impact on eastern economies, the Basel III rules have also come under fire for lacking a clear concept on how the banking sector should be reformed and funded.

Martin Hellwig, a German economy professor at Bonn university told an audience at a conference organised by the Brussels-based think-tank Finance Watch that just like the previous "Basel II" rules, the updated standards are heavily influenced by lobbyists telling lawmakers their financial operations are "much too sophisticated" for them to understand.

The Basel III provisions - broken down in several pieces of legislation such as capital requirements - have still to be approved by the European Parliament and transposed into national law.

But Hellwig warns that "some negotiators don't want to reform anything, they see banks as a source of funding, irrespective of the risks. And bankers have no incentives for better models since the current ones allow them to hide the risks."

"What I said ten years ago is valid now too: Of course Basel 2 is better than Basel 1, just as Brezhnev's 5-year plan for the Soviet Union was better than Stalin's," he quipped.

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With large parts of their banking sector in French, Austrian or Greek hands, eastern European countries are wary that upcoming rules on bank recapitalisation will allow regional subsidiaries to be drained of money, putting their economies at risk.

Banks queue up for cheap ECB loans

Over 500 European banks rushed to borrow almost half a trillion euro in cheap loans from the ECB on Wednesday, highlighting the credit squeeze on the market. The cash injection only marginally increased investor confidence, however.

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