VZCZCXRO9606
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHVI #1076/01 2361311
ZNR UUUUU ZZH
P 241311Z AUG 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 3205
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 001076 
 
SIPDIS, SENSITIVE 
 
TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/MAIER 
TREASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN AU
SUBJECT: Austrian Banks Remain Stable, CESEE Crisis Manageable 
 
REF:  (A) VIENNA 847; (B) VIENNA 839; (C) VIENNA 828 
 
Sensitive but unclassified -- protect accordingly. 
 
¶1. (SBU) SUMMARY: in meetings August 7-10 with Treasury 
Representative for Europe Mathew Haarsager, Austrian banks and 
regulators painted the country's financial sector situation as 
difficult but manageable.  Three of Austria's six major banks (Bank 
Austria, Erste, & Raiffeisen Zentralbank) are more solidly placed 
than the other three (BAWAG-PSK, Volksbanken, and Hypo Alpe Adria) 
-- however, all six "system-relevant" banks remain sufficiently 
capitalized.  The best performers reduced their CESEE exposure by 5% 
during the first quarter of 2009; used their strong first-half 
earnings to increase loan loss reserves; and are gradually 
streamlining their operations in Central, Eastern and Southeastern 
Europe (CESEE).  Austrian banks remain committed to CESEE, but worry 
about other players leaving the region's banking sector (which might 
precipitate Russian entry).  END SUMMARY. 
 
¶2. (U) Below is a summary of insights obtained during the August 
7-10 visit to Vienna of Treasury rep for Europe Mathew Haarsager in 
meetings with Raiffeisen International Bank (RI), the Austrian 
National Bank (OeNB), the Ministry of Finance (MoF), Austria's 
Financial Market Authority (FMA) and Erste Bank (EB). 
 
- - - - - - - - - - - - - - - - - - - - - - - - - 
Regulators: Austrian Banks Healthy, Stress-Tested 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶3. (SBU) Representatives of the Austrian National Bank (OeNB)-- 
which shares bank supervisory responsibility with Austria's 
Financial Market Authority (FMA)-- said that markets had hugely 
exaggerated Austrian banks' vulnerabilities earlier this year, but 
that sense had returned (reflected in the sharp recovery of bank 
stock prices since mid-March).  OeNB Director for Financial 
Stability and Bank Inspections Philip Reading said the market 
hysteria in early 2009 over Austrian bank exposure to CESEE was 
over, with most observers subscribing to a realistic view of the 
situation as difficult but manageable.  The three largest of 
Austria's six major banks -- Bank Austria, Erste Bank and Raiffeisen 
Zentralbank -- are strongly placed and have used their good 
first-half operating earnings to substantially increase loan loss 
provisions.  The next three are weaker, but still fully solvent: 
-- BAWAG-PSK (owned by U.S. private equity fund Cerberus Capital 
Management) reportedly has substantial "toxic" structured assets in 
its portfolio; 
-- Volksbanken, burdened by its stake in failed specialty lender 
Kommunalkredit, will likely not be able to pay its (optional) 
interest coupon this year on GoA equity participation capital; 
-- Likewise, Hypo Alpe Adria (the long-troubled subsidiary of 
BayernLB) likely cannot  pay this year's interest on its state 
equity capital. 
 
¶4. (SBU) Reading said Austrian banks are gradually streamlining 
their CESEE operations and in Q1/2009 have reduced their CESEE 
exposure by 5%, particularly their interbank exposure (ref C). 
Austria's positive stress test results (ref B) have been confirmed 
in subsequent testing coordinated by the Committee of European Bank 
Supervisors (CEBS).  The authorities are continuously monitoring 
Tier 1 capital ratios and, in a crisis, they would not wait until a 
bank's Tier 1 capital hits the 4% legal minimum, but rather would 
probably act as soon as it reaches 5%. 
 
¶5. (U) Two thirds of Austria's banks (including all major ones) 
introduced internal rating systems under Basel II.  OeNB/Reading 
opined that new international rules on capital adequacy will not 
necessarily endorse "arbitrary" current thresholds (8%/4%) but some 
kind of coordination is necessary; a new system might distinguish 
between systemic and non-systemic banks. 
 
¶6. (SBU) Helmut Ettl, co-CEO of the FMA, opined that Austrian banks 
are hurting but have sufficient reserves to last through 2010 and 
beyond, even if the crisis extends into 2011.  The FMA distinguishes 
between CESEE exposure in EU member states (Hungary, Romania, etc) 
and in non-member states.  All banks active in Ukraine are trying to 
minimize risks there; the Baltic countries are no problem for 
Austrian banks (only BA is active in Latvia), but there are fears of 
contagion effects from a currency crisis in Latvia/Lithuania. 
 
¶7. (SBU) Alfred Lejsek, Head of the MoF Financial Markets Unit, 
reported on the health of major financial institutions in Austria: 
-- no Austrian insurance company has chosen to use capital from the 
GoA's rescue package, but the MoF did help insurers by allowing more 
flexible accounting rules for 2008 (so that they didn't bear the 
full pain of portfolio losses). 
-- The MoF is currently negotiating with Kommunalkredit Bank, 
BAWAG-PSK and Bank Austria (BA) for state equity participation. 
With regard to nationalized Kommunalkredit, the MoF is looking into 
the bank's business plan. 
 
VIENNA 00001076  002 OF 003 
 
 
-- BAWAG-PSK owner Cerberus recently fulfilled a precondition for 
the GoA's EUR 550 million equity injection by giving the bank EUR 
205 million in fresh equity. 
-- As a condition for state support (both in Austria and Germany), 
by 2013 Hypo Alpe Adria (HAA) must look to sell its subsidiaries in 
6-7 CESEE countries and its owner, the German Bayerische Landesbank 
must sell its majority stake in HAA.  Those requirements are causing 
further uncertainty for HAA. 
-- Volksbanken was recently downgraded by Moody's and will not be 
able to pay interest this year on its GoA equity. 
-- the GoA is expected to provide EUR 1.5-2 billion in state equity 
for Bank Austria/BA, contingent on undertakings by BA parent 
UniCredit in Milan (e.g., restrictions in dividend payments from BA 
to UniCredit) and GoI willingness to provide equity to UniCredit. 
Austria's capital injection rules (up to 9% Tier I capital ratio) 
are more generous that Italy's (capped at 8% Tier I capital), so 
Austria may end up putting more state money into the UniCredit group 
than the Italian government does. 
 
¶8. (SBU) On regulatory reform, Lejsek sees many initiatives on the 
EU level and internationally (Basel process) but no clear direction. 
 Lejsek prefers a European system of supervision rather than one 
split among several authorities and locations.  The EU's desire to 
overhaul the Deposit Guarantee Directive will have a major impact on 
Austria's deposit guarantee scheme, which is organized as an ex post 
funding system within the sector. 
 
- - - - - - - - - - - - - - - - - - - - - 
Efforts to Graduate from OECD "Gray List" 
- - - - - - - - - - - - - - - - - - - - - 
 
¶9. (SBU) Lejsek told us that the MoF is currently renegotiating 
bilateral double taxation agreements (some negotiations are already 
concluded) to get off the OECD's "Grey List" of jurisdictions that 
don't share enough information with foreign tax authorities.  The 
process cannot go forward, however, until the government assembles a 
2/3 majority in Parliament to amend relevant laws; the GoA will try 
again in late August to pass amendments. 
 
- - - - - - - - - - - - - - - - - - - - - 
Abiding Frustration over Harsh FATF Review 
- - - - - - - - - - - - - - - - - - - - - 
 
¶10. (SBU) FMA/Ettl expressed frustration over 
the FATF's critical MER (Mutual Evaluation Report) on its 
Anti-Money-Laundering / Terrorism-Financing (AML/CFT) standards (ref 
A).  Ettl portrayed the MER as unfairly harsh and complained about 
the aggressive tactics of USG representatives at the FATF Plenary in 
Lyon June 24-26 -- asking about any "hidden U.S. agenda" behind the 
campaign to list Austria as a non-cooperative jurisdiction. 
MoF/Lejsek took a more moderate line, expressing the GoA commitment 
to further improve its AML/CFT standards via a "roadmap" currently 
under discussion (actual implementation, which requires a number of 
legal amendments, will take considerable time). 
 
- - - - - - - - - - - - - - - - - 
Banks:  No Cause for CESEE Alarm 
- - - - - - - - - - - - - - - - - 
 
¶11. (SBU) Raiffeisen International (RZB's CESEE subsidiary) 
representatives told us that the region's downturn is quickly 
morphing from a trade/industry crisis (currently ending) into a 
recession of the services and consumer sectors.  Even with higher 
unemployment and lower consumer demand, the region is adapting more 
quickly than western Europe -- suggesting that CESEE will rebound 
more strongly than the Eurozone.  Economic management in CESEE is 
generally good, with three caveats: 
-- Ukraine's monetary/banking authorities leave much to be desired; 
-- Host-country supervisors in CESEE are ring-fencing their markets, 
forcing banks to maintain exposure levels even when credit demand is 
lacking; and 
-- The region's banks are faced with a barrage of duplicative stress 
tests.  RZB has expressed this concern at the highest levels of the 
EU. 
 
¶12. (SBU) Erste Bank representatives echoed many of Raiffeisen's 
sentiments, complaining for instance that Czech and Slovak 
authorities are counterproductively trying to stop multinational 
banks from using excess deposits in those countries to fund lending 
elsewhere in the region.  Major Austrian banks are committed to 
stay, but Erste worries about peripheral players exiting the CESEE 
market -- including HAA, AIB/Ireland, Citibank, and OTP -- which 
would put downward price pressure on banking assets in the region. 
Moreover, such an exit would likely lead to an influx of Russian 
investment in the CESEE banking sector. 
 
COMMENT:  G-20 Commitment was Key 
- - - - - - - - - - - - - - - - - 
 
 
VIENNA 00001076  003 OF 003 
 
 
¶13. (SBU) Both Austrian regulators and bank representatives say the 
G-20's committment in late March to augment the IMF's resources was 
a decisive turning point which: 
-- made the Fund's efforts in CESEE more credible; 
-- removed fears of a broad-based crisis; and 
-- led the markets to differentiate much more among countries based 
on policy performance. 
 
¶14. (U) This message was coordinated with Treasury Representative 
for Europe Mathew Haarsager. 
 
EACHO