Austrian law doesn’t allow the government to impose losses on investors in a going concern, putting it at odds with European Union law, which requires some bail-in as a condition for state aid, Ittner said.
“In Austria, we still need to update the bail-in rules,” Ittner said in Alpbach, Austria. “We have no backstop option right now, because every state intervention needs to be preceded by bail-in, and we can only do that in an insolvency, which is precisely what we’d be trying to avoid.”
EU governments can provide “precautionary” aid, without triggering resolution, to banks unable to raise funds privately after a stress test, according to the bloc’s state-aid rules in effect since last year. Yet they must force losses on shareholders and junior creditors before public money can flow, according to the European Commission.
Six Austrian banks are covered by the ECB’s health check, which the central bank is conducting before it assumes full oversight of euro-area lenders on Nov. 4. Results of the exam are due in the second half of October.
The Austrian lenders include a group of cooperative banks led by Oesterreichische Volksbanken AG (VBPS), which yesterday reported rising losses and said it has a “limited ability” to sell securities suitable to close any capital gap.
The ECB’s assessment will show that Volksbanken, also known as OeVAG, has a capital shortfall of 600 million euros ($791 million) to 800 million euros, Der Standard reported yesterday. Ittner declined to comment on that number because the ECB test hasn’t concluded. Volksbanken spokesman Walter Groeblinger declined to comment on the report, saying the ECB test results haven’t been published yet.
“OeVAG is primarily an issue that has to be addressed by its owners now,” Ittner said.
Volksbanken has been bailed out three times by the Austrian government since 2008. Less than two months after the collapse of Lehman Brothers Holdings Inc. in September 2008, Austria nationalized OeVAG’s Kommunalkredit Austria AG, a municipality lender it co-owned with Dexia SA (DEXB), to prevent its demise. The next year, OeVAG got its first 1 billion-euro tranche of state aid.
In 2012, it received another 250 million-euro state capital injection, this time in return for a 43 percent stake for the Austrian government. The EU approved the aid in the same year, demanding Volksbanken to sell assets and restructure.
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