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Erste, RZB May Need Less EBA Capital as Austria Backs Banks

Erste Group Bank AG and Raiffeisen Zentralbank Oesterreich AG may have to raise less capital to meet requirements by the European Banking Authority as their home regulator backed their demand to recognize hybrids.

Austria’s Finanzmarktaufsicht regulator will argue the EBA should recognize non-voting capital that the Austrian lenders sold to private investors in 2009 in a combined deal together with state aid, the FMA’s two co-heads, Helmut Ettl and Kurt Pribil, said in Vienna today. The final decision about the capital recognition is up to the EBA, they said.

“We have always said that it makes sense to include that in the overall calculation,” Ettl told journalists. “There will be further discussions about that on the EBA level in the coming days” about “controversial capital instruments” and “borderline cases,” Ettl said. “We will make our case and present our arguments.”

The EBA told banks in October to increase their core reserves to 9 percent of risk-weighted assets by the end of June as part of measures introduced to respond to the euro area’s fiscal woes. It excluded hybrid capital from the core reserves definition, counting them only if provided in state aid measures since 2008. European Central Bank policy makers including Austria’s Ewald Nowotny and Luxembourg’s Yves Mersch have joined banking lobby groups in saying that those capital requirements may curb economic growth in the euro area.

Dilution Threat

RZB, the majority owner of listed Raiffeisen Bank International AG, sold 750 million euros ($976 million) of so-called participation capital to private investors along with 1.75 billion euros it got from the state in 2009. After an internal revamp, 500 million euros of that was disqualified by the EBA when it found a 2.1 billion-euro shortfall at RZB on Dec. 8.

Raiffeisen considered swapping the participation capital into contingent convertible bonds because exchanging it into common shares may dilute shareholders, RZB Chief Executive Officer Walter Rothensteiner said Dec. 21.

Erste sold 540 million euros to private investors in 2009 as part of an agreement in which it also got 1.2 billion euros of state aid. That capital was disqualified by the EBA when it determined a 743 million-euro shortfall at Erste. Erste plans to fill the gap by retaining earnings and reducing assets outside of the central and eastern European region it regards as its core geography, it said Dec. 9.

Shares Decline

Raiffeisen and Erste fell as European banks retreated. Raiffeisen dropped 3.1 percent to 23 euros in Vienna. Erste declined 5.7 percent to 15.95 euros.

Ettl and Pribil said they would argue for including the capital because it was issued under the same terms as the state aid that is recognized by EBA.

“There was one prospectus, it was one issuance, there was a close link” between the state and the private portion of the capital, Ettl said. At the time, that was done to fulfill requirements by the European Commission. “The industry has a point” when arguing for the inclusion, he said.

The FMA won’t suggest that other hybrid capital instruments be counted toward the EBA’s requirement, Ettl said. RZB has sold more than 800 million euros in participation capital outside of the state-aid deal.

Impact on Economy

Ettl, a member of the EBA’s 29-strong board of supervisors, said the body will “evaluate” its entire recapitalization exercise in the coming days together with bodies including the European Systemic Risk Board, whose chairman is ECB President Mario Draghi. The review will focus on whether the measure reduces the availability of credit for the European economy to a degree where it crimps growth.

“There will be a check whether the exercise leads to outsized deleveraging, which may cause economic problems in Europe,” Ettl said. EBA’s board of supervisors will then discuss on Feb. 8 “whether the exercise is all right or whether there needs to be amendments,” he said.

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