Austrian Banks Face Downgrade Amid Change in EU Bailout Rules

Austrian banks face rating downgrades and reduced profits after European Union rules to end government bailouts kick in next month, according to the central bank.

The country’s banks benefited from lower borrowing costs in recent years than they would have if creditors hadn’t assumed the government would come to their rescue if need be, , the central bank said in a financial stability report today. It estimated that without that implicit state guarantee, the cost of borrowing would have been higher by an amount equal to between 25 percent and 40 percent of their profit from 2006 to 2013. The EU’s Bank Recovery and Resolution Directive will curb that advantage and put pressure on banks to improve their capital levels, Vice Governor Andreas Ittner said.

“The abolition of the implicit state guarantee is going to happen,” Ittner told reporters in Vienna. “It was a central lesson from the crisis that it must be possible for banks to exit the market. And it’s a fact that creditors must take part of the burden in the context of possible market exits.”

Austria’s government has injected about 8.1 billion euros ($10 billion) into three banks that were on the brink of collapse in the last six years. Reacting to public anger over the bailouts, parliament last week endorsed a law that will put senior creditors in the firing line a year earlier than required by the EU, as is already the case in Germany and the U.K.

‘Systemic Shock’

Under the new rules, banks in general won’t be able to seek support from taxpayers unless their losses amount to at least 8 percent of their liabilities. Ordinary shareholders will face losses first. If that’s not enough, holders of other instruments that count as capital, such as preferred shares and junior bonds, would be targeted, followed by senior unsecured creditors.

The removal of the implicit government guarantee “is likely to lead to rating downgrades and increasing funding costs as well as a potential systemic spread shock unless banks increase their capitalization,” the central bank said in the report.

Junior notes of Austrian lenders were the worst performers among subordinated debt of banks in core euro countries last week. Investors were selling on concern that losses in eastern Europe may coincide with the new bail-in rules.

Austrian banks as a whole had a Tier 1 capital ratio, a measure of financial strength, of 11.8 percent at the end of June, the central bank said. The top three lenders -- Erste Group Bank AG, UniCredit Bank Austria AG and Raiffeisen Zentralbank Oesterreich AG -- were weaker at 11.2 percent, below comparable peers.

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