Setting up an international framework for global financial crisis management is critical to its successful resolution.
After the escalation of the global financial crisis in the second half of 2008, it became increasingly uncertain whether western European banks with local subsidiaries in the emerging markets of Central, East and South European countries would decide to withdraw from these markets. The problem was that the withdrawal of these banks which had systemic importance in these emerging markets would have exacerbated the already deep systemic crisis. For this reason, at the proposal of the European Bank for Reconstruction and Development, key international financial institutions (IFIs) agreed to set up an international framework for coordination and cooperation in crisis management – the Vienna Initiative.
The initiative has served as a platform for private and public sector institutions that have a shared interest in ensuring successful operations of cross-border banking groups domiciled in the European Union and active in emerging Europe. The initiative is supported by the International Monetary Fund, European Bank for Reconstruction and Development and World Bank, European institutions (European Commission, European Central Bank as observers), regulators and fiscal authorities from home and host countries of large cross-border banking groups, as well as the major banking groups operating in the region.
Since its launch, the Vienna Initiative has changed in response to new risks and circumstances in the financial sector of the region, going through three phases of development:
- Vienna Initiative 1.0, focused on response to global financial crisis that spilled over to countries of the region, highlighting the weaknesses of their financial systems (January 2009 – early 2010);
- Vienna Initiative plus, focused on financial crisis prevention (March 2010 – end-2011);
- Vienna Initiative 2.0, focused on mitigating systemic risk resulting from the recent European Union crisis (from January 2010 onwards).
The key objective of Vienna Initiative 1.0 was to preserve financial sector stability in East European markets, by encouraging cross-border banking groups to maintain their exposures and ensure adequate solvency and liquidity to their subsidiaries. As part of the Initiative, IFIs provided joint financial assistance to banks as agreed by EBRD, EIB and World Bank. The purpose of such assistance was to enable banks to maintain their exposure to the region, meet their capital requirements and direct their lending activity to the real sector. Maintaining parent bank exposures was part of the overall balance-of-payments support to countries where support programmes of the IMF and the European Union have become necessary. Vienna Initiative 1.0 also aimed to ensure that national support packages of cross-border bank groups should benefit their subsidiaries in emerging Europe. With regard to crisis management, different participants in Vienna Initiative 1.0 had different commitments. For instance, host country authorities were responsible for appropriate macroeconomic policies, liquidity support in local currency irrespective of bank ownership and supporting their deposit insurance schemes. Parent bank groups and the home country authorities behind them were responsible for providing funding in foreign exchange and recapitalising subsidiaries where needed.
The Vienna Initiative 1.0 successfully met its objectives. Banking groups maintained their exposure limits in the region and lending to the production sector continued, paving the way for economic recovery in 2010 and 2011.
Vienna Initiative Plus was an interim phase, in which it acted as a venue and a virtual think-tank for discussion and analysis of matters significant for financial crisis prevention. Foreign currency lending was discussed and a report drawn up on this subject. The Initiative continued as its participants were aware of its importance as a platform for public-private cooperation in the event of future systemic risks. This proved to be the right approach and the Vienna Initiative soon moved to phase 2.0.
The second phase of Vienna Initiative activities is a response to renewed risks to the region stemming from the international environment. Euro area crisis deepened in mid-2011 and was even graver than the 2008 crisis which prompted the creation of the Vienna Initiative in the first place. This time, the crisis affected not only banks but public finances of home countries as well. National assistance schemes became impossible to sustain, as home countries were too indebted to even settle their obligations to banks. This triggered a process of deleveraging and lowering of banking groups’ exposures to the region. Some countries took measures without considering their consequences for host countries of their banks’ subsidiaries. Despite Europe being a single market, crisis management measures were left to national authorities. In such circumstances, coordination of measures within a wide forum of participants in the Vienna Initiative gained importance. As a result, Vienna Initiative was revived in January 2011.
The key features of Vienna Initiative 2.0 are as follows:
- primary goal – coordination of the process of deleveraging of banking groups through cooperation of home and host country supervisors to get a better picture of systemic risks that could spill over to host countries’ financial systems;
- supervisory groups to monitor developments in individual countries, particularly with regard to cross border deleveraging and movement of capital.
By contrast to the first phase of the Vienna Initiative, the second phase does not aim to maintain a given level of banks’ exposure to countries of the region. As a result, no mechanism of IFIs’ financial assistance to banking groups has been envisaged. Rather, the aim is to create sustainable bank business models instead of models reliant on external assistance. This also involves greater reliance on local sources of funding, rather than funding by parent banks.
A possible result of the Vienna Initiative 2.0 is a regional memorandum of cooperation between relevant authorities of home and host countries on crisis management measures, taking account of their repercussions for the financial stability of host countries.
At the meeting of 12 and 13 March 2012 of the Full Forum of the European Bank Coordination “Vienna” Initiative in Brussels, basic principles were adopted which aim at boosting coordination between host and home countries on cross-border banking activities. These principles stress the central role of European and international financial institutions in promoting such cooperation. They should play a central role in supervisory coordination, macroprudential oversight and mediation among national authorities, and support the implementation of the agreed principles by their involvement in surveillance, data collection, regulatory recommendation and financial support.
Vienna Initiative’s importance for the Central, East and South East Europe region is indisputable. It is a forum for exchange of views but also for joint action and coordination for the purposes of financial crisis management. In this way, it provides an active contribution to the preservation of financial stability in participating countries, boosting the resilience of national financial systems and the European financial system to systemic risks. We therefore believe that the participation of local representatives in this forum is significant and contributes to preserving financial stability of our country.