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S&P Says Banks’ Retrenchment in Eastern Europe Hitting Growth

Western banks are withholding “significant” funds from eastern Europe due to the euro area’s economic troubles, weighing on growth prospects in countries such as Hungary and Poland, Standard & Poor’s said.

The cash withdrawal is “visible,” and is “depressing” consumer demand in some countries, S&P analysts told a conference in Vienna today. New regulatory requirements mean financial support for the banks’ units in the region in the case of financial crisis can’t be taken for granted, they said.

“It’s clearly a concern that parent banks are visibly withdrawing their financing,” said Frank Gill, a sovereign rating analyst. “We’ve seen a reduction in external funding from the Hungarian financial system of 15 percent of gross domestic product. That’s a really significant outflow.”

Western banks led by UniCredit SpA, Raiffeisen Bank International AG, Erste Group Bank AG and Societe Generale SA own three quarters of banking assets in eastern Europe. Investors have fretted that a retrenchment by western banks, whose lending the International Monetary Fund says added 1.5 percentage points to economic growth annually until 2008, will hijack the region’s recovery from recession.

New Rules

Regulations including the Basel Committee on Banking Supervision’s Basel III rules on capital and liquidity, as well as newly-introduced funding curbs for Austrian banks, which are among the biggest in the region, are prompting the capital outflows, S&P said. The increased cost to banks of raising capital also means the lenders are drawing on the deposits they hold at the units, according to the ratings company.

Many banks with units in eastern Europe have capital adequacy ratios of less than 7 percent, which S&P sees as a minimum level for sufficient financial strength, S&P banking analyst Markus Schmaus said at the same briefing. The ratio shows bank’s capital as a percentage of loans awarded.

UniCredit, Erste, Raiffeisen, Societe Generale and KBC Groep NV all have capital below the 7 percent threshold, Schmaus said. Raiffeisen has the lowest ratio at 3.9 percent, he said.

Western banks “own highly systemically important banks in eastern Europe,” Schmaus said. “But obviously the support is limited.”

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