1 Dr. Herbert Stepic, born 31.12.1946, CEO of RBI from 2010 to 2013. From 1995, Deputy Chairman of the Managing Board of RZB and from 2001 to 2010, CEO of Raiffeisen International Bank-Holding AG.
In early spring 2008, the head of the research division at Raiffeisen Zentralbank Österreich AG (RZB, the predecessor of Raiffeisen Bank International (RBI)) informed the management board about his expectations and forecasts concerning problems in the US real estate sector. He described them as serious, without of course being able to quantify their effects on Europe or the European financial system. Information received from our New York office painted an even worse picture. Consequently, we started to take preparatory measures in the group’s head office in Vienna.
By October 2008, it was evident that the seriousness of the problem had turned out to be well beyond our expectations, not to mention our fears. And while I could well imagine possible future measures by Western European central banks to help the region’s financial industry to overcome possible liquidity shortages, I could not imagine how this could be done for Central and Eastern Europe (CEE). Unlike in Western Europe and other countries with well-developed financial markets, the liquidity supply in CEE was primarily provided by foreign, i.e., Western European, banks. (These banks’ market share in Central Europe and Southeastern Europe exceeded 80% at the time, and capital markets barely existed.) As the banking market in CEE was expected to double in size every five years, any disruption to lending activities would have seriously endangered the region’s transformation process.
The two most important groups needing credit, namely small and medium-sized companies and households, would have suffered particularly badly if the liquidity supply were to come to a sudden stop. A complete breakdown of CEE financial markets was also a possible scenario....
At about the same time, several initiatives and actions were developed in Western Europe. An “Overall European Framework for Action” was set up, initially at the ECOFIN Council in Brussels on 4 November 2008 and then at an extraordinary European Council on 7 November. We knew that the European Commission would propose raising the capital base of the European Investment Bank (EIB) by doubling the current ceiling for euro-denominated bonds. As a matter of fact, such fresh money would only be relevant for troubled EU Member States. The Commission clearly saw the need for strong support of the financial system from both the European Central Bank (ECB) and local central banks.
The financial crisis had by then begun to affect the new EU Member States from CEE. In order to meet this threat, the EU considered providing substantial medium-term financial assistance together with the International Monetary Fund (IMF).
However, such funds would generally be lent directly to the countries involved (e.g., to offset financial deficits or to meet financial stability parameters) without any specific allocation to individual banks. This would also mean that the Western banks primarily active in CEE, which carried out the lion’s share of liquidity transformation at a time when capital markets were essentially non-existent in the region, would run the risk of being excluded from any sort of stabilisation measures from Brussels or Western supranational institutions.
In September 2008, I therefore started to liaise with my executive colleagues at the largest Western banks in CEE to convince them of the need for concerted action focusing on three “targets”:
• Brussels decision makers and the ECB;
• supranational institutions such as the European Bank for Reconstruction and Development (EBRD) and the EIB;
• Central European finance ministers and central bank governors.
The goals were: to convince Western banks not to reduce refinancing lines for their subsidiaries in CEE (initially, this was the wish of the Austrian National Bank, among others); the Brussels authorities to stand by with liquidity lines through their
institutions; and CEE central bank governors and finance ministers to support the money market needs of those of their local institutions not owned by foreign investors.
Under the title “CEE Concerted Action”, representatives of EIB, EBRD, Erste, UniCredit and Intesa met at RBI on 6 November 2008 in order to align and coordinate actions in Brussels and CEE capitals. Considering major government interventions (such as liquidity enhancement profiles in Western Europe and CEE, government guarantees and deposit schemes) as well as the interventions of international and European authorities (such as the declaration of a concerted European action plan on 12 October or the EU’s International Financial Architecture on 28 October), a concrete master plan was prepared, discussed, adapted and finally agreed upon.
Each bank or financial institution, including the subsidiaries of Western banks in CEE, undertook certain tasks within a specified time frame, such as organising meetings with CEE governors and finance ministers. The lobbying activities were shared between the Western bank executives, depending on their individual personal contacts. In a letter dated 1 December 2008 and signed by Andreas Treichl, Corrado Passera, André Bergen, Frédéric Oudéa, Alessandro Profumo and me, we officially presented our request for “Stability for the Financial Sector in EU Member States and Candidate Countries” to Christine Lagarde, Manuel Barroso, Joaquin Almunia and EU Commissioner Charlie McCreevy.
In a follow-up meeting at RBI on 17 December, there was a detailed discussion and summing up of all interventions so far by all members of the group. In the meantime, I had entrusted six senior RBI staff members with the coordination of the action plan in both Eastern and Western Europe. While overall feedback was positive – after all, we did make substantial progress – there were severe problems with the ECB’s rule at the time that local currency bonds were not eligible as collateral or for repo transactions. We thought that the IMF could be supportive in this matter. Time was of the essence, so we decided to differentiate CEE countries by their macroeconomic status as “fragile” (double-digit current account deficit and inflation, real estate bubble), “intermediate” (high inflation and current account deficit) or “somewhat stable”.
Some countries, such as Hungary and Serbia (National Bank Governor Radovan Jelašić was extremely supportive) had already responded with concrete measures;
Bulgaria and Poland were about to prepare special packages to stabilise lending.
The alignment with the Czech Republic was especially important due to their upcoming EU Presidency.
We also agreed to offer to selected countries a reduction of lending against a gradual reduction of reserve requirements. Several other proposals for requests to the central banks of the individual banks’ home countries were agreed, such as their accepting local currency collateral or providing local currency/euro swap facilities and repo transactions. The EBRD offered to provide a coordinated response to the needs of all banks in the region, bank by bank and product by product, to be proposed to international financial institutions (IFIs), who then could approach the ECB and International Finance Corporation (IFC), thus offering coordinated support.
Discussions took place between banks on the one side and the EBRD, the EIB and the IFC on the other to open credit lines for the then 37 banks active in the region to the sum of approximately €5 billion. In the meantime, we actively communicated with the media. There were several interviews with the Financial Times and other leading newspapers to raise awareness of our initiative.
One should not forget that, by the end of January 2009, money markets in Western Europe had started to dry up. Banks became terrified because they did not know whether, and to what extent, their counterparties might have toxic assets on their books. This led to a drastic reduction of credit lines/short-term money market lines even between parties with a long historical track record. The worst period was between January and March 2009, a time when our action plan, now branded the
“Vienna Initiative”, had successfully alerted major decision makers in both Eastern and Western Europe of the need to counteract the effects of the fall of Lehman Brothers with a concerted action safeguarding their financial industries and, in some cases, even their countries.
On 23 January 2009, the group – which by this time had been joined by Swedbank, Eurobank EFG and Skandinaviska Enskilda Banken – addressed a further letter to the ECB, calling on it specifically to support the stability of new EU Member and Candidate Countries with concrete measures.
When we started the Initiative, we had yet to learn that no official platform existed where regulators of Western and Eastern European countries could informally exchange their views, let alone talk about coordinating or jointly designing important measures. The “Vienna Initiative” has existed ever since to serve exactly this purpose, as a platform where regulators meet with their peers and representatives of IFIs, as well as with the active cross-border banks, to coordinate activities in the region for the benefit of the financial industry and national economies.