ECB Tells Volksbanken to Up Capital, Improve Governance

The European Central Bank told Austria’s Volksbanken cooperative group to increase its capital ratio by three percentage points by July and improve governance.

Volksbanken-Verbund, the combination of Oesterreichische Volksbanken AG and a group of regional banks that own it, must increase its core equity Tier 1 ratio to 14.6 percent by July 26, compared to 11.5 percent at the end of September, according to a draft ECB ruling, OeVAG said in a statement today. Volksbanken-Verbund failed the ECB’s stress test this year with an 865 million-euro ($1.1 billion) capital shortfall.

“The draft ruling furthermore takes a very critical view of the governance structure of Volksbanken-Verbund,” OeVAG said. “That will have to be considered when implementing the new Volksbanken-Verbund structure.”

Volksbanken was bailed out three times since 2008 when a decade-long rapid expansion started to unravel. The Austrian government owns 43 percent of OeVAG since the last rescue in 2012 and said it won’t provide more aid. The group plans to address the capital gap found by the ECB by turning OeVAG into a wind-down vehicle and accelerating asset sales.

The ECB’s capital requirement is based on OeVAG’s end-2013 structure and doesn’t reflect measures such as the sale of its Romanian unit and the planned spinoff of OeVAG, a spokesman for OeVAG said. OeVAG and the Volksbanken-Verbund will continue to implement the planned measures to decrease risky assets and improve capital ratios, he said.

An extraordinary meeting of OeVAG shareholders today voted in favor of its restructuring plan, which still needs to be approved by the ECB and the European Commission, OeVAG said.

OeVAG will report a 2014 loss of about 750 million euros, wiping out more than half of its equity due to writedowns needed because it won’t continue as a going bank concern, the company said.

While holders or other investors aren’t expected to inject fresh capital, the plan relies on OeVAG continuing without a banking license, which would relieve it of specific bank capital requirements, OeVAG said.

Before it's here, it's on the Bloomberg Terminal.