The Vienna Initiative

KNF Conference on Household Lending

Warsaw, October 20, 2010

Mark Allen
Senior IMF Resident Representative for Central and Eastern Europe

The problem
Parent Banks severely affected by the crisis

European banks badly affected

(billions of US$) 1,000 800 600 400 200 United States Euro Area United Other Mature Kingdom Europe Asia percent 14 12 10

8 6
4 2 0

Realized writedowns/loss provisions (2007q2 - 2009q4) Expected additional writedowns/loss provisions (2010q1 - 2010q4) Tier1/RWA capital ratio end-2009 (right scale)
3
Source: IMF, Global Financial Markets (April 2010)

The problem
Parent Banks severely affected by the crisis CEE worst hit region in crisis Risk of capital outflows worsening outlook

Foreign Banks Exposure in relation to GDP (peak = 100) 100 Asia 90 (Sep 1997) 80 70 60 50 40 30 20 10 0 t-20
5

Deleveraging expected to follow previous crises

Latin America (Dec 1983)

Emerging Europe (Jun 2008)

t-15

t-10

t-5

t+5

t+10 t+15 t+20 t+25 t+30

Source: BIS; IMF, International Financial Statistics

Credit growth is related to cross-border flows

Cross-border bank deleveraging Central and Eastern Europe Emerging markets and other countries 8 4

BIS Cross-Border Bank Flows, 2009Q3 to 2010Q1 (percent of GDP)

Poland
Hungary

0
-4 -8 -12 Russia Ukraine Czech Romania Croatia Bulgaria Turkey

Estonia Lithuania Latvia

-10 -5 0 5 10 Real Growth in Credit to the Private Sector, 2009Q3 to 2010Q1 (percent)

Bank flows threatened balance of payments

External positions of reporting banks (USD billions, estimated exchange rate adjusted changes) 50 40 30 20 10 0 -10 -20 -30
Other Czech Rep. Ukraine Romania Hungary Poland Baltics Serbia Latvia B&H

Excludes: Russia, Turkey

Vienna Initiative

Source: BIS

Vienna initiative structure

Vienna Initiative (VI) (Launched Jan. 09)
Joint IFI Initiative European Bank Coordination Initiative (EBCI)

Participants in Vienna Initiative

MDBs (World Bank, EBRD, EIB) and IMF European Union and ECB Program countries (Bosnia and Herzegovina, Hungary, Latvia, Romania, Serbia (Central Banks and supervisors) Home country supervisors (Austria, Italy, France, Germany, Belgium, Greece) Foreign banks active in country

Vienna initiative structure

Vienna Initiative (VI) (Launched Jan. 09)
Joint IFI Initiative European Bank Coordination Initiative (EBCI)

EBRD, World Bank, EIB Financial Assistance to strengthen banks in the region

10

Commitments and Delivery under Joint IFI Action Plan

Commitments 2009-2010 Available as of end-August 2010

Of which: signed as of end-August 2010

EBRD EIB

6.0 11.0

6.8 13.1

4.9 10.2

World Bank Group

TOTAL
11

7.5
24.5

7.2
27.1

6.4
21.5

Source: EBRD

Vienna initiative structure

Vienna Initiative (VI) (Launched Jan. 09)
Joint IFI Initiative European Bank Coordination Initiative (EBCI)

EBRD, World Bank, EIB Financial Assistance to strengthen banks in the region

Country Meetings Romania Serbia Hungary Bosnia & Herzegovina Latvia (Ukraine) Private Sector Involvement (PSI)

Full Forum Meetings Policy Discussions

12

Country Meetings
Informal and voluntary In support of IMF arrangements

Exposure commitments (PSI) Capitalization commitments based on stress tests Meetings to agree on adjustments to
commitments

13

Experience with PSI commitment

Target Bosnia and Herzegovina Hungary Latvia Romania
Maintain at end 2008 Maintain overall exposure Maintain overall exposure Maintain at 95% -

Adjustment

Actual (end 2010)

98.5% 114% 87% of end 2008 level

Maintain at end March 2009

Maintain at end 2008

Maintain at 95%
Maintain at 80% effective April 2010

99.5%
98%

Serbia
14

Exposure agreements have been generally effective

External positions of reporting banks (estimated exchange rate adjusted changes as percent of December 2008 volume) 25 Bosnia and Herzegovina 20 15 10 5
Hungary Latvia Romania Serbia (rhs)

50
40 30 20 10

0
-5 -10 -15 -20

0
-10 -20 -30 -40

15

Source: BIS

Post-crisis deleveraging has been modest

Foreign Banks Exposure in relation to GDP (peak = 100) 100 Asia 90 (Sep 1997) 80 70 60 50 40 30 20 10 0 t-20
16

Latin America (Dec 1983)

Emerging Europe (Jun 2008)

t-15

t-10

t-5

t+5

t+10 t+15 t+20 t+25 t+30

Source: BIS; IMF, International Financial Statistics

Bank outflows have stabilized for VI and other countries in the region
External positions of reporting banks (USD billions, estimated exchange rate adjusted changes) 50 40 30 20 10 0 -10 -20 -30
Other Czech Rep. Ukraine Romania Hungary Poland Baltics Serbia Latvia B&H

Vienna Initiative

Excludes: Russia, Turkey

17

Source: BIS

Vienna initiative structure

Vienna Initiative (VI) (Launched Jan. 09)
Joint IFI Initiative European Bank Coordination Initiative (EBCI)

EBRD, World Bank, EIB Financial Assistance to strengthen banks in the region

Country Meetings Romania Serbia Hungary Bosnia & Herzegovina Latvia (Ukraine) Private Sector Involvement (PSI)

Full Forum Meetings Policy Discussions

Working Group Local currency capital markets

Working Group Absorption of EU structural funds

18

Working Group on development of local currency capital markets

Foreign exchange loans created serious vulnerabilities Current account deficits financed by banking flows in foreign exchange Change strategy to rely on domestic savings Discourage foreign exchange lending and promote local currency sourcing

19

Working Group with participation of banks, supervisors, and Hungary, Romania, and Serbia to report in November

Challenges ahead

Uncertainties about parents strength Impact of financial sector taxation Duration of adjustment and external support Developing Vienna Initiative as forum for policy discussions

20

Thank you!

21