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Austria Lenders Need More Capital, Stress Not Over

Austrian banks’ solvency is still below average and new requirements including Basel III rules mean the country’s banks will need to raise additional capital in the medium term, the central bank said.

“We continue to be below the international average” when it comes to core capital, Andreas Ittner, the central bank’s director responsible for bank supervision, said in a briefing in Vienna today, presenting the regulator’s last round of stress tests. “We still need more capital in the Austrian banking sector, partly because of new regulation.”

Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit SpA’s Bank Austria are the biggest lenders the central bank examined in the stress tests. In the worst-case scenario, which assumed a second global recession, the Tier 1 capital ratio of the six biggest banks dropped to 7.7 percent by the end of 2012 on average, from 9.6 percent today, the central bank said. It declined to give individual results and said it hadn’t defined a pass level for the banks.

Group of 20 leaders last month endorsed rules drawn up by the Basel Committee on Banking Supervision that will more than triple the highest-quality capital, such as shareholders’ equity, that lenders must hold to cushion against losses. Banks will have to have a Tier 1 capital ratio of at least 6 percent under the rules. Tier 1, a measure of financial strength, includes common equity and some equity-like debt instruments.

Basel III

The stress test didn’t apply Basel III rules, under which parts of Austrian banks’ capital would be disqualified. The test also counted the 5.9 billion euros ($7.9 billion) of state capital Austrian banks have been granted and that must be repaid. For both Basel and the state-aid payback, Austrian banks will have to raise 10 billion euros, according to central bank estimates released earlier this month.

Austrian banks may have to report a further 6.5 billion euros of writedowns following the 22 billion euros they recorded during the financial crisis, the central bank said today. The estimate is for the base case and would be higher under the economic-stress scenario, Philip Reading, head of the central bank’s supervisory division, told reporters. He declined to give an estimate for the stress case.

Eastern Europe

Austrian banks are the biggest lenders in eastern Europe and their profits were eroded as bad loans in the former Communist part of Europe surged. In Ukraine, 40 percent of all loans have become non-performing, the central bank said. In Romania, more than one in four is overdue. The central bank’s tests assumed a second dip into recession across the region and a 9 percent drop in output compared with the base-case scenario.

The tests “show that the resistance of the Austrian banking system against a possible new global crisis outbreak is intact,” the central bank said in a statement. Reading added, however, that the situation is uneven across the region. The bank pays “most attention” to Hungary, Romania and Croatia, which are all countries where Austria’s holdings are large, solvency is weak and growth is slow, he said.

Austria’s exposure to the peripheral countries of the euro zone is equivalent to 5 percent of its gross domestic product, the central bank said, less than half of that of Germany or France, where the rate is about 13 percent.

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