Working Paper 4/2010

Wolfgang Nitsche

The Vienna Initiative/European Bank Coordination Initiative: Assessment and Outlook

Contents

Contents

1. Summary 52. Introduction 63. History 7 3.1. The initial phase 7 3.2. Country meetings 7 3.3. Horizontal meetings 94. Assessment 10 4.1. Background 10 4.2. Initialaims 10 4.3. Outcomes 10 4.4. Structuralfactorsinfluencingtheoutcome 115. Conclusions for crisis prevention and management in Europe 136. References 157. About the Author 16

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1. Summary

The Vienna Initiative/European Bank Coordination Initiative (VI/EBCI) is an informal forum. It waslaunched by the EBRD, the IMF and the Austrian Ministry of Finance at the height of the systemic financial crisis in late 2008/beginning 2009. The aimwas to provide themissing settingwere all relevantstake holders for crisis management in vulnerableCentral-South-andEastEuropeanCountries(CESEE)couldmeet,andtoinitiatejointcrisisresponse. Thispaperassessestheresultsanddrawsconclu-siononthepossiblefutureuseofthisforumintheevol-vingcrisispreventionandmanagementframeworkoftheEU,basedondevelopmentsuptothefirstquarterof2010.Theassessmentreliesonananalysisofthepro-cess.Themainfindingsare: IntheperiodereviewedtherecordoftheVI/EBCIisverysatisfactory,inparticularifthedifficultinstituti-onalframeworkwithinwhichitwaslaunchedistakeninto account.

Theachievementsare:

• The VI/EBCI is widely perceived as a successful vehicleforpublic-privatesectorcoordinationinthefinancialcrisis,triggeredbytheLehmanfailureinSeptember2008.

• Itcontributedtoshortentheperceptionlagofpoliti-cianswithregardtothesuddenlyincreasedmacro- financialrisksintheforthquarterof2008.

• Ithelpedstabilizationandrecovery in individualcountries and it helped to build upmutual trustbetween the international banks, home and hostcountryauthoritiesandIFIs.

Thefailuresare:

• Theattempttoagreeonageneralframeworkwasnotsuccessful.Thiswasnotaproblemintheshorttermbutmakestheplatformveryvulnerable.

• It was not possible to arrive at a comprehensivecommonunderstandingondivisionsoftasksandburden sharing in crisis management. However,someelementsforsuchanagreementemergedinthe various country meetings.

There are two interrelated arguments for preservingthe VI/EBCI as a crisis management tool: There isstillnoalternativeforumwereallmajorstakeholderscouldmeetandfinancialsectorandrealsectorvolati-litieswillremainabovenormalinthemediumterm. TheVI/EBCIcouldalsoservewellincrisispreven-tion.ItcouldbeusedtoincludenonEUmemberstates

in the crisis prevention framework of the EU and itcouldbeusedasalaboratorytodeveloppublic-privatecooperationinsecuringstablefinancialmarkets. Toexploitthesepotentialbenefits,twoconditionswouldhave tobemet: First, to secure futurepartici-pationoftheprivatesectorandsecond,theinterestoftheECandEUMemberStatestousetheVI/EBCIforfurtherdeepeningintegrationwithnonmemberstates.

1. Summary

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2. Introduction

Financial integration in the CESEE region ischarac-terizedbyaspecificfeature:subsidiariesofarelativelysmallnumberofinternationalbanksfromEUMemberStatesmakeup for thebulkof thefinancial sector inmost countries.At the same time, thesebanks areofsystemic importance in their home countries. Theinternationalbankshadbeenhitbytheinter-nationalfinancialcrisissince2007tovaryingdegrees.CESEEcountrieswerebarelyhituptothethirdquarterof2008. At the end of 2008 in many of the CESEE CDSspreads soared, exchange rate plunged and GDPgrowthdeceleratedsharply.HungaryandLatviaexpe-rienced openmacro-financial crisis andmacro-finan-cialstabilityriskswerehighinseveralothercountriestoo. Spill over risks to countries with soundmacro- economic fundamentals were high, due to the close financialintegrationintheregion(OeNB, 2009, WIIW, 2009). Given the macro-financial outlook, there was anurgent need for crisis management. The key role of internationalbanksintheregionnecessitatedthepar-ticipationoftwogroupsofstakeholdersnormallynotpartinsuchanexercise:thenationalauthoritiesfromthe home countries of these banks and these banksthemselves. The existing economic policy coordinationfora at EU level were not adequate because of their membership ormandate. The EFC includesMemberStategovernmentsandnationalbanksbutneitherEUsurveillanceauthoritiesnornonmemberStateauthori-tiesorinternationalbanks.TheMemorandumofUnder-standingbetweenEUFinanceMinistries,SurveillanceAuthorities andNational Banks of June 2008provedinadequatebecauseitsmandateandprocedureswereconceivedfordealingwithcrisesinindividualbanks,andnotforwidersystemicones.Inaddition,countries outside the EU and international banks were not included. The lack of an appropriate coordination forum created a serious risk of policy failure, threateningthefinancialstabilityintheregion.

2. Introduction

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3.1. The initial phase

Inlate2008,agroupcomposedofrepresentativesfromtheIMF,theEBRDandtheAustrianFinanceMinistrytooktheleadtocreateaninformalcoordinationplat-formforfillingthegapmentionedabove.Tokickstartthe process, the Austrian Finance Ministry and theJointViennaInstituteinvitedtoaninformalseminarinJanuary2009.TheaimwastodevelopcommonviewsontheeconomicandfinancialchallengesintheCESEEregionandonstrategiestotacklethem. Thedecisivepointinthepreparatoryprocesswasto secure a critical mass of participants. In particular it was essential to secure the participation of the European Commission. This was delicate, given therole and mandate of the Commission. Both implythatitisitstasktoinitiateandleadnewcoordination instrumentsinEuropeifneeded.TogettheCommission on board it was necessary to arrive at a common understandingonthescopeofthefuturerisksandtheneed for a coordination platform, complementary totheonesavailableintheEuropeanUnionframework,totacklethem.EventuallytheCommissioncametotheconclusion that the proposed discussion was usefulanditdecidedtoparticipateandcontribute. ThesystematiclobbyingbytheIMFandtheEBRDsecured broad participation of the public authorities ofmosthomeandhostcountryauthoritiesofinternati-onalbanks1.FurtherparticipantsonthesideoftheIFIswere theWorldBankGroupandtheEIB. Inparallel,theinvestingIFIs,i.e.theEBRD,theEIBandtheWorldBank/IFChadstartedacoordinationprocessamongstthemselvesintheframeworkofaJointActionPlan2. InthatseminartheEBRDtabledaproposalforaninformaldiscussion/coordinationframework(“ViennaPlatform”). (EBRD, I, 2009).Therationalput forwardwas threefold: (1) to deal with the collective action problem in crisis management, (2) to send a strong signaltothemarketsand(3)toallowIFIstoeffectively complement each other. It was also suggested to contemplate about keeping the new platform as a forum for public-private sector policy dialogue in aglobalizedworldalsoafterthecrisis.Therewasabroadconsensusamongstallparticipantsthatclearcutburden sharing agreements were essential to allow quick, coordinated action and to prevent potential free ridingbysomeplayers.Theseminaralsocontributedto

awareness raisingof severalparticipantswith regardto the significantly increasedmacro-financial risks inmany countries. InFebruary2009,theAustrianMinisterofFinancevisitedfourcountries:Croatia,Bulgaria,RomaniaandtheUkraine.Theaimwastofurtherenhancethispro-cess of awareness raising and to signal theAustrian engagementintacklingtheemergingproblems. Thediscussiononacoordinationforumandprin-ciplesofburdensharingwastakenfurtherinafollow-upseminar inMarchin the JVI inViennaand there-afterininformaldiscussionsbetweenthepromotersoftheinitiativeandtheEC.InthemarginsoftheBrettonWoods meetings inApril 2009 an agreement on theinstitutional frameworkwas close, but finally failed,becauseofdisagreementbetweentheIMFandtheECon thedetails of the governance structure.However,itwasagreed toholdcountrymeetings for countries receivinginternationalmacro-financialassistanceandtorenametheinitiativeintoEuropeanBankCoordina-tion Initiative. Main stumbling blocks on the burden sharing issuewerereservationsbyseveralcountriestoenterinanysortofexanteagreementwhichwouldlimittheirroomformanoeuvreandtheCommissionwhichwasvigilantnottocompromiseanydecisionmakingbodyof the EU.

3.2. Country meetings

At thebeginningof2009,Romania faced the risksofsubstantial externalfinancing shortfalls in the rest oftheyear.Estimatesofthefinancinggapuptothefirstquarterof2011were inarangebetween19bn€and 23 bn € or 7% to 9% of GDP at that time.A crucial assumptionintheprojectionswereroll-overratesformaturingforeigncurrencydebt. Romania started negotiations with the EuropeanCommissionandtheIMFonmacro-financialsupportin late February 2009. Serbia,whichwas in a similarsituationasRomaniastartednegotiationswiththeIMFonaugmentingitsSBAinearlyMarch2009. The IMF and to some extent also the European Commission were wary to substitute decreasing commercial financing with official assistance.

3. History

1Bulgaria,Croatia,Hungary,Romania,Serbia,UkraineandAlbania,Austria,Belgium,France,Germany,GreeceandItaly2JointIFIActionPlaninsupportofbankingsystemsandlendingtotherealeconomyinCentralandEasternEurope.

3. History

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Therefore, they aimed at a commitment of interna-tional banks tomaintain their exposure in these two countries, i.e a 100% roll-over rate of theirmaturingreceivables. To secure this, the IMFmade a roll-overcommitment of the international banks a conditionprecedentforconcludingthedesiredagreements. The framework conditions for achieving such acommitmentwereanexactapplicationofthegeneralsettingaddressedinthetwoprecedingseminars:avia-bleagreementbetweentheIMF/ECandthetwocoun-trieswasdependentonthemutualconsentofseveralother partners. First, by the international bankswhowere asked to accept restrictions in their commercialroom for manoeuvre. Second, by the home countrysurveillance authorities of these banks. Third by the financeministriesinthehomecountrieswhichdecidedonthetermsandconditionsofofficialsupporttothebanksthemselves.Inthecaseofdistressedhomebanks

also the EC in its function as competition authority comes into play (see chart).Todealwiththissituation,theVI/EBCIinthemakingwas used. The IMF and the EBRD togetherwith the European Commission took the lead to arrange country meetings for Romania (26 March, 2009) and Serbia (27 March, 2009). All relevant public, internationalandprivateplayersparticipated,including all international banks of systemic relevance in the individualcountry. The meetings were preceded by informal dis-cussions between IFIs and international banks Thesewerefacilitatedbycoordinationamongstinternationalbanks themselves. This process had started alreadyinNovember2008.Oneoutcomewasa joint letterof leadingbanksintheregiontotheEUPresidencyandtheEuropeanCommissiontoaddresstheproblemsofthefinancialsectorinindividualCESEEcountries. As a result of these meetings the international banks issued joint public statements (IMF I, 2009, IMF, II, 2009)which contained two key points: (1)Acoordinated commitment tomaintain their exposure.

Thiswasmadeconditionalontheorderlyimplemen-tation of an international support package and ontheconsentof theirhomeauthorities. (2)Apledgeto recapitalize their subsidiaries if necessary, based onstresstestsbyhostnationalbanks.ThesetestsweretobeconductedaccordingtoestablishedIMFmethodo-logy. Further, all banks committed their readiness toenterintobilateralcommitmentswiththehostnationalbanks,confirmingthejointcommitments.

These two meetings became a model for the involvement of international banks in internationallysuppor-tedadjustmentprogramsintheregion.Theother Europeancountriesreceivingmacro-financialsupportfrom the IMF and theEUwereBosniaHerzegovina,Hungary,LatviaandtheUkraine.MeetingsforthefirstthreeofthemwereheldinMay2009(Hungary),June2009 (Bosnia-Herzegovina)andLatvia (Sept2009). Inall three cases banks pledged to maintain exposure, recapitalizetheirsubsidiariesasneededandtoconfirm their commitments in bilateral letters to the host nationalbank. Follow-up meetings to the individual country meetings were held in parallel to milestones in the implementationoftheIMF/ECassistance.ForRomania this was the IMF board agreement of the SBA on 4 May, 2009. For Hungary, Serbia and Bosnia Herzegovina this were IMF/EC review missions inMay2009andend2009respectively. In these meetings the implementation of com-mitments by all playerswas reviewed. The standard format was as follows: The IMF, the EC and the authorities of the host country reported on the im-plementation of the international support packages, economic developments, future challenges and national policymeasures. Then an exchange of viewbetween the internationalbanksandauthorities tookplace. Finally, mutual commitments were up dated,were appropriate, in the light of the reports and thediscussionsheld.

3. History

Co-ordination needs

Homecountries

IFIsInternational banks

European institutions

Hostcountries

Structure of Commitments

Homecountries

IFIsInternationalbanks

European institutions

Hostcountries

em recap em, recap

em, e: exposure maintenance commitmentrecap, r: recapitalisationcommitmentp c: policy commitments

er

policy commitmentspolicy commitm

ents

pc

financial re

sources financial resources

fin. resources

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The most detailed and strongest set of bilateral commitmentsbybankswas concluded in the caseofRomania: Banks agreed to fullymaintain their expo-suretothecountryduringtheprogramduration.Thispledgewasbasedondetailedtechnicaldefinitionsformonitoring.Theyfurtheragreedtomaintainacapitaladequacyratiooftheirsubsidiariesofatleast10%.Thestress test results of theRNBwere accepted as basisto determine recapitalization needs.As a concessionbyRomaniaandtheIFItotheinternationalbanksthe latter receiveda shift in the cut offdate for the refe-renceexposurefromendFebruarytoendMarch2009whichresultedinareductionofthereferenceexposureofabout8%.LettersweresignedsoonafterthefollowupmeetinginMay2009.BilateralcommitmentlettersforSerbiaandBosniaHerzegovinalargelyfollowedthemodelofRomaniabut theydidnotcontainnumberswithregardtothecapitaladequacyratio. In the case of Hungary the coordinated bilateralcommitments were somewhat more flexible. Bankspledgedtomaintainat least95%oftheirexposureatthe start of the crisis, i.e. end September 2008. TheyagreedtoprovidetheHungarianFinancialSupervisoryAuthority (HFSA) with data to monitor their globalexposure toHungary.With regard to recapitalisationtheymadegeneralpromisestomeetrequirementsforadditionalcapitalwithoutdelay.Theprecisedefinitionofrequirementswasleftopen,butbankstooknoteofapossiblerequestbytheHungarianFinancialSupervi-soryAuthoritytomeethighercapitalrequirementsinlinewithpillar2oftheBaselIICapitalAccord. Therewereseveralreasonsforthisdecreaseinthestrengthof thecommitments:Hungarywas includedintheViennaInitiativeonlywellaftertheconclusion of the IMF/EC macro-financial assistance package.Banks put forward that most of them already had bilateral agreements with the Hungarian authori-ties going beyond the ones proposed, and by that questioned the value added of the exercise. Second,they had reservations against the proliferation of national stress tests and the associated country bycountry approach. They argued that this would prevent them from a commercially sound allocationofcapitalwithinthewholegroup.Third,theyarguedthat in a shrinking economy the notion of maintaining exposure needed to be redefined because in suchan environment adequate business opportunities forbankswerelacking. InthecaseofLatviabanksfinallydidnotenterintothe envisaged bilateral letters. The main reasons forthiswereprobablythelateinclusionintotheVI/EBCI

framework,thesmoothevolvementoftheengagementofinternationalbanksinthecountryandtherelativelysmallcontributionoftheIMFtotheoverallpackage.

3.3. Horizontal meetings

In theMay 2009 country meetings on Romania and Hungary, international banks had requested a horizontalmeetingtodealwiththeregionaldimensionofcommitmentsmadeforindividualcountries.AfirstsuchmeetingtookplaceinSeptember2009inBrussels and a follow-up thereon in March 2010 in Athens. Participationwascomprehensiveinbothcases:Itinclu-dedtheauthoritiesofthefivecountrieswerebankshadsigned joint commitment letters, thehomeauthoritiesof international banks in the region, 15 internationalbanks,theIFIs,theEuropeanCommissionandtheECBas an observer. InAthens Polandwas represented in addition.3 Topics dealt with in Brussels were general stock takingoftheinitiativeandhorizontalaspectsofexpo-suremaintenanceandcapitaladequacy. ThefocusinAthenswasonthefutureremitoftheVI/EBCI.Overall,therewasbroadconsensusonthreepoints: (1) That the initiative had helped to avert a systemicfinancialcrisisintheregion,(2)thatitshouldbe preserved in themedium term, because the highfragilityof the stabilizationand recoveryunderway,(3)thatfutureworkcouldfocusonconcrete,mediumtermfinancialsectorchallenges. Itwas agreed to setup twopublicprivate sectorworkinggroups.Oneon the absorptionof structuralfunds in the region and one on the development of localcapitalmarkets.Bothgroupsweretaskedtodeve-lopforwardlookingproposalsandreporttoafurthermeetingofthefull forumtotakeplaceendJuly2010in Brussels.

3. History

3)EuropeanCommission,EIB,IFC,IMF,WorldBank.ListofparticipantsinthemeetinginAthens:Hungary,Latvia,Romania,Serbia,Bosnia-Herzegovina,Austria,Belgium,France,Germany,Greece,Italy,TheNe-therlands,SwedenandPoland.AlphaBank,BayernLB,ErsteGroupBankAG;EurobankEFG, INGBank, IntesaSanpaolo,KBCGroup,NationalBankofGreece,OTBBank;PiraeusBank, RaiffeisenInternational,SkandinaviskaEnskiladaBanken,SocétéGénérale,UniCredit,VolksbankInternational.

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4. Assessment

4.1. Background

ThestraightforwardwaytoassessaforumliketheVI/EBCIistocompareoutcomeswithinitialaims.Acom-plementarymethodwouldbetocomparetheresultsofthepresentinitiativewithsimilaronesinthepast.Themost suitable candidate in this respectwouldbepu-blicprivatesectorcoordinationintheaftermathoftheAsiancrisisin1997:mainsimilaritieswerethatinbothcasesexternalfinancingneedsweredrivenmainlybytheprivatesectorandfinanceintheboomphasewasprovided largely by foreign banks (EBRD, II, 2010). However,theadditionalvalueofsuchanexercisestillwouldbe limitedduetoremainingdifferences intheinstitutionalsetting,inparticularinthebusinessstra-tegiesofinternationalbanksintherespectiveregion.

4.2. Initial aims

TheaimofthepromotersoftheVI/EBCIwastoignitea comprehensive coordination process amongst all institutionsneededforeffectivecrisismanagementinCESEEcountriesfacinghighmacro-financialrisks. How this was to be achieved, was a question of secondaryimportance.However,itwasclearthatsomesort of annew forumorprocesswasneeded. Itwasfurtherclearthatthestructurehadtobeflexibleontheonehandbut adequate formakingmutually reliablecommitmentsontheotherhand. Theinitialapproachwastocreateastructurecon-sistingoftwomainelements:(1)aforumfornationalauthorities,EuropeaninstitutionsandIFIstodealwithhorizontalissues.(2)thematicorcountryspecificwor-king groups. In these groups representatives of the bankingsectorshouldbeincludedasappropriate.Theplanwastobrokerageneralagreementonthedivisionoftasksinmanagingthecrisis.Basedthereoncoordinatedactioninparticularcasesshouldbeimplemented. On operational level, the following points wereconsideredimportantfordealingwithsystemicfinan-cialstabilityrisks:

• Raisingawareness,inparticular,ofthepoliticiansinvulnerableCESEEcountries.

Macro-financialrisksforcountrieswithweakfun-damentalshadincreasedsuddenlyintheaftermathoftheLehmaninsolvency.However,perceptionoftheserisksoftenwasincompleteinthefirstmonth

followingthetrendbreak.Therefore,focussingtheattentionofpolicymakersonsafeguardingagainsta potential financial crisis was an immediate priorityat thebeginningof2009.Akeyaspect inthiscontextwastosecurethetimelyinvolvementoftheECandIFIs.

• Keepingbanks engaged in the region.The largerpartofexternalfinancingintheregioncamefromalimitednumberofinternationalbanks.Atthesametime, most of the international banks involved sufferedfromtheglobalfinancialcrisisandwereinneedforpublicsupport.

• Avoidingnationalringfencingoffinancialresour-ces. At the peak of the financial crisis, financialmarketsandinstitutionswereincriticalconditionsinall countriesacrossEurope.Fromashort termnationalperspectiveattemptstoringfenceresour-ces made sense. Cases in point were to prevent resources from national stabilization packagesfrom spilling over to other countries and to prevent profit repatriation from subsidiaries to mother banks.At the same time, such strategieswere detrimental to effective crisis management,given the close integration of European financialmarkets.

• Avoiding discrimination between home banksand subsidiaries of international banks by hostcountries.Onceagain, fromashort termnationalperspectiveafavourabletreatmentofhomebankswouldhavemadesense.However,thisrancounterthe logic of the integratedfinancialmarket, crea-ting severe risks both to international banks andhost countries.

4.3. Outcomes

In the periode reviewed the results of the VI/EBCIare very satisfactory, in particular if the difficult in-stitutionalframeworkwithinwhichtheinitiativewaslaunchedistakenintoaccount.

InthefollowingrespectstheVI/EBCIwassuccessful:

• The VI/EBCI is widely perceived as a successful vehicle for public-private sector coordination in the financial crisis, triggered by the Lehman failureinSeptember2008(EC, II). This is in itself the most important positive feature. It was achieved in an iterative process: agendas and aims of individual meetings built on the outcome of previous ones. In addition, they built on infor-mal discussions between meetings, led mostlyby the EBRD. There were two decisive elements

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for the favourable outcome: The first was thesuccess in gathering of a critical mass of parti-cipants in the two preparatory seminars. Thesecond was the success of the first two countrymeetings on Romania and Serbia inMarch 2009.This was at a time when the systemic financial crisiswasstillgoingon.

• Thejointcommitmentsbythebanksmadepublicimmediately after the meetings were a tangible element in restoring confidence in these twocountries. Indirectly, they positively influenced confidenceintheregionasawhole.

• TheVI/EBCIprocessmost likelyalsocontributedto thedecision ofRomania to enter intonegotia-tionswith theECandthe IMFonmacroeconomicsupportforprecautionaryreasons.Totheextentthisiscorrect,italsocontributedtoawarenessraisinginacountryofconsiderableimportanceforthestabilityoftheregionasawhole.

• Commitmentsmadeinthecountrymeetingswerebroadlyhonoured (EBRD, II, EC, I, IMF, III). This helpedeconomicstabilizationandrecoveryintheindividual countries and also helped to buildupmutualtrustamongstdifferentplayers.o National authoritiesbroadly livedup to their

obligations in internationally supported adjustmentprograms.Therewereimplementa-tiondelaysinsomecasesbutfinallyallagreedmeasures were taken. All program reviewsdueuntilfirstquarterof2010wereconcluded successfully.

o Hostcountrysurveillanceauthoritiesrelation-ship with international banks were broadlyin accordancewith the understandingsmadein the individual countrymeetings. Thiswas confirmedbyinternationalbanksinthefollowupmeetingswiththeindividualcountries.

o Banks broadly lived up to their exposure commitments.

• There were positive synergies not expected by participants at the outset: in particular IMF/ECconditionalitywasenforcedbybanks,makingtheirexposuremaintenanceconditionalon thecompli-anceofhostcountrieswithprogramconditionality. Further, banks received support from IFIs in safeguardingagainstdiscriminatorybehaviourbyhost country supervisory authorities.

• Cooperation in the VI/EBCI framework helpedto develop standard procedures for cooperation betweentheIMFandtheECinprovidingmacro-financialsupport.Thisprovidedausefulbasisforformal decisions with regard to this cooperationwhich were taken by the respective governing authoritiesofbothinstitutions.

InthetwofollowingaspectstheVI/EBCIdidnotliveup to initial aims

• The initial attempt to agree on a general frame-work for the discussion process failed. This wasnotaproblemintheshortterm;theresultsofthe coordination process on country level were satisfactory.Coordinationcostsintermsofprepa-ration andholdingmeetingsprobablywere evenlowerthanwiththetwo-prongedstructure,alongthe lines described above.At the same time, thelack of any agreed structuremakes the platformvulnerable and complicates its preservation inthemediumterm.Whythiswouldbedesirableis arguedinsection5.

• Second,itwasnotpossibletoarriveatacommonunderstanding on division of tasks and burdensharing in crisis management. However, some elements for building such an understanding emergedinthecountrygroups.

In thesequenceof thesemeetings,astandardformatfor the involvement of the private sector in macro- financial adjustment programs emerged (paragraph3.2).Thisrelatestotheircommitmentsintermsofex-posure maintenance and recapitalisation and to theconditions attached to these commitments, i.e. theconcessions the banks received in return. Importantelementsoftheseconditionswereprescriptionstothehostsupervisoryauthoritieswithregardtothemodali-tiesofstresstestinganddealingwithforeignbanksub-sidiariesmoregenerally.Themutualagreementswereenshrined in joint commitment letters and bilateral commitmentlettersofinternationalbanks. However, there was less progress with regardto the respective roles of home and host finance ministries.Thereasonisthat-fortunately-scenariosofopensystemiccrisiscouldbeavoided.Itisonlyinsuchscenarioswerehomeandhostfinanceministriesturninto key players.

4.4. Structural factors influencing the outcome

Therewere several structural factors relevant for therecordoftheVI/EBCI,someofthemfavourable,someofthemlessso.Together,theygoalongwaytoexplainthe overall results.

Thefavourablefactorswere:

• The threat of a systemic failure of the financial system. All players without exception stood

4. Assessment

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to loose heavily form a systemic break down, triggeredbyinefficientcrisismanagement.There-fore,thepotentialbenefitofcoordinationi.e.dama-geavoidedwasveryhigh.Thisoffsetbothexpectedcoordinationcostsandthelossofpossiblebenefitsfromfreeridingstrategies.Thisfactorwasprobablythemostpowerfuloneup to the thirdquarterof2009.Thentheacutesystemicriskstothefinancialsystemabatedandthispointbecamelessrelevant.

• The IFI and the EC were able and ready to contributemuchhigherresourcestojointsupportpackages than in comparable previous episodes(IMF III). This gave them a strong position to broker compromisesbetween international banksandhomecountryauthoritiesontheonehandandhostcountryauthoritiesontheotherhand.

• The business relations of international banks totheir host countries. Bank strategies in the region were focussed on long term profitmaximizationand growth in their host countries. This impliedthattheyhadastronginteresttostayengagedontheirown.

Thelessfavourablefactorswere:

• Theheterogeneityofinterestsamongstplayers.o Interests of home and host countries initially

were focussed onnational costs andbenefits.This implied, inter alia, that the interest ofhomecountries incoordinatedcrisismanage-mentvariedwiththeroleoftheirbanksintheregion.Theirinterestincoordinationalsotendstobenegativelycorrelatedtoeconomicsize.

o Forhostcountries,theinvolvementoftheEC/IMF in crisis prevention has high domestic policy costs.Therefore, they tend toadvocate an observant approach to internationally coordinated crisis management. Such costsarenorelevantfactor forhomecountries.ForIFIsandinparticularfortheIMF,international crisis management is a core activity. They gain institutional reputation from their successful involvement.

o International banks compete for short andlongtermprofits;thelatterimplyingthatthey competealsoformarketshares.Theydesirealiberalregulatoryenvironmentnotinterfering with their business strategies and official support in times of crisis. Macro-financial conditionsforthemarejustpartofthemarketenvironment.

• BoththeECandtheIMFhavemandatestosupportEuropean economies. How these two mandatesrelatetoeachother inpractical termswaslargelyunchartedterritoryatthestartofthefinancialcrisisintheCESEEinthethirdquarter2008.

• Potential negative signalling effects to financialmarket participants.Assessment by the IMF, theECandnationalauthoritiesarearelevantsourceofinformationforfinancialmarketparticipants.Thiscreatesthedangerofundesiredsignalstofinancialmarkets through leaking information on forwardlooking risk assessment. In addition, regional discussionsoncrisismanagementcantriggerspillover effects to countries with sound economic fundamentals.

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TherearethreeinterrelatedargumentsforpreservingtheVI/EBCIasacrisismanagementtool:

• TheadjustedEU framework for crisispreventionandmonitoringwill not remedy the institutionalcharacteristics which were the rational for laun-chingtheVI/EBCI.ParticipationintheEUframe-workremainstobeconfinedtoMemberStatesandEuropeaninstitutions.Financeministries,nationalbanksandsupervisoryauthoritiesfromnonmem-ber countries remain excluded. The latter couldbe invited to supervisory colleges for particularbanks,ifallparticipantsfromtheEUagree.PrivatebanksandIFIarealsonotincluded.

• The present ownership structure in the financialsectorwhichischaracterizedbythedominanceofa relatively small number of international bankswillremaininplacealsoinfuture.Thisimpliesthatthe participation of international banks in crisis management frameworks for this region will continuetobeimportant.

• Financial sector and real sector volatilities will remain above normal in themedium term.Mostprobably the absorption of the shock deliveredto the European economic system through the financialcrisiswilltakeseveralyears.

Asdescribedinthetext,thestructureoftheVI/EBCIisvolatile.Defactoitscontinuationisdependentontheoutcomeofeachmeeting.Therefore,thereareonlytwooptionstosecureitsavailabilityinthemediumterm:

• Either,byusingitalsoasacrisispreventiontoolor• tolookforsomeformofinstitutionalstabilization.

Using the VI/EBCI as a crisis prevention tool couldbringvalueaddedto theEUintworespects.Bothofthemarebasedonthebroadrangeofparticipants:

• It could be used to include accession candidatesandselectedneighbourhoodcountriesintotheEU-crisispreventionframework.

• Itcouldbeusedasalaboratorytodeveloppublicprivate cooperation in securing stable financialmarkets.Theparticipationofprivatebanksallows to complement a regulatory approach with a negotiation/moral suasion approach. This wouldbe valuable, because sucha combination ismoreeffectiveincomplexsettingsthanpureregulation. Privatesector inputsgofarbeyondtheonesthey

would make in consultation processes. This isso because in the VI/EBCI framework they are involvedinconcretenegotiationsituationwhichisnot the casewith consultationsonnew lawsand regulations.

To exploit these potential benefits two conditionswouldhavetobemet:

• To secure participation of the private sector. Toachievethis,threestrategiclinescouldbepursued:o Toraiseawarenessof thebanks that therisks

tothefinancialsectorwillremainhighandthattheywillbeamongsttheprimarylosersofnewturbulences; in other words: that their gainsfromcooperation in termsof avoiding longerrundamagestillremainsveryhigh.

o To raise awareness of banks that negotiated solutionsforbehaviouralprescriptionstendtobelesscostlyforthemaspureprescriptions.

o To kick start the process with a topical pro-blemanddemonstratethevalueaddedofthe approach.

• TobetterlinktheVI/EBCIwiththeEUcoordination framework proper.A satisfactory solution to thisproblemwouldberelevantfortheEuropeaninte-gration process more generally.

AnoptionmightbetocreateasmallsecretariatoftheVI/EBCIwhichwouldhave tobeclose to theEUinstitutions.TheIMFshouldplayanimportantrole in sucha secretariat. It couldprovide a firsthand linkupwithcrisispreventiondiscussion intheG-20framework.

Itwouldbecriticaltokeepadditionalcoordination costs to a minimum. Here, innovative solutionswouldbeneeded.

UsingtheVI/EBCIaspartintheEUcrisispreventionframeworkwouldbethemosteffectivewaytopreser-veit.Asecondbestoptionwouldbetoincreasethein-stitutionalstabilityoftheprocess. Onewaywouldbetonegotiategeneralprinciples amongst all participants. These could build on the featureswhichhaveevolvedinthecountrymeetings.The agreement would have to contain also a trig-germechanisms for callingmeetings. Sucha generalagreement could be further developed into a lightversionof thehorizontal agreementwhichwasenvi-saged at the time when the initiative was launched. To secure the stability of the financial system is

5. Conclusions for crisis prevention

5. Conclusions for crisis prevention and management in Europe

14

of paramount importance. It is important for the pre-servationof agrowthmodel for theCESEEwhich is relyingonsubstantialcapitalimports.Beyondthatitisdecisiveforthelongrunthrivingofthemarketbasedeconomicsystemasawhole. The present coordination and crisis prevention frameworkprovedinadequate,toliveuptothistask,both on global and on EU level. Now reforms are underway.Howeffectivethisreformswillberemainstobeseen. The importance of the tasks requires that all possiblewaystoimprovefinancialstabilityareseized.TointegratetheVI/EBCIprocessintheEUcoordination frameworkwouldbesuchanpossibility.

5. Conclusions for crisis prevention

15

6. References1. EBRD,I,Berglof,E.,Nagy,P.,CoordinatedPolicy

Response to the Financial Crisis in Europe, Presentationatan informalseminarofhomeandhostcountriesinVienna,January,2009.

2. EBRD, II, Transition Report 2009, Transition in Crisis,EBRD,London,2010.

3. EBRD,III,Nagy,P.,TheViennaInitiativeinSouthernEastern Europe: Record and Way Forward, Pre-sentation at the High Level EC-JVI Conference, Vienna,22March,2010.

4. EC, I, F. Keerman, EU Balance of Payments Assistance and the Experience with ExposureMaintenance, Presentation at the European BankCoordinationMeetinginAthens,March,2010.

5. EC, II, European Bank Coordination Mee-ting, Full Forum Meeting in Athens on 18, 19 March, 2010, Concluding Statement by the Organizers, http://europa.eu/rapid/pressRelease-sAction.do?reference=IP/10/335&format=HTML& agee=EN&guiLanguage=en(6April,2010).

6. IMF, I, Financial Sector Coordination Meetingon Romania: Concluding Statement by Partici-pating Banks, http://www.imf.org/external/np/cm/2009/032709.htm(2April,2010).

7. IMF, II, Financial Sector Coordination Meetingon Serbia: Concluding statement by Participa-ting Banks, http://www.imf.org/external/np/cm/2009/032709.htm(2April,2010).

8. IMF, III, Gulde-Wolf, A.M., Overview of the EconomicSituationinEurope,Presentationatthe EuropeanBankCoordinationMeeting inAthens,March,2010.

9. OeNB, 2009, J. Schreiner and C. Zauchinger,2009, Developments in Selected Central, Easternand Southeastern European Countries, Focus on EuropeanEconomicIntegrationQ2/09,pp.6-54.

10. WIIW,2009,Gligorov,V.,Pöschl,J.andS.Richter,2009,WhereHaveAll the Shooting Stars Gone?,wiiwCurrentAnalysesandForecastsNo.4,July.

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16

7. About the Author

Wolfgang Nitsche has been the Deputy Head of theDivision for EU Coordination and General Trade Policy since 1999 and Director at the Board of the European Investment Bank since 2005. He holds anMBAinEconomicsfromtheUniversityofVienna.

7. The Author

17

The Working Paper Series:

Dr. Arnd Einhaus (2010)GeschlechtundSteuerwirkung–EinkommenundeinkommensabhängigeAbgabenvonMännernundFrauen.WorkingPaper3/2010

Maga. Monika Fischer, Maga. Marlies Gatterbauer (2010) GenderBudgeting–EinLeitfadenzurUmsetzung derHaushaltsrechtsreform.WorkingPaper2/2010

Dr. Iris Leixner,LL.M. (2010) KomitologieundLammfa-lussyverfahrenimFinanzdienstleistungsbereichimLichtederJüngstenReformen.

WorkingPaper1/2010Caroline Haberfellner, Peter PART (2009).DieVerbesse-rungderQualitätöffentlicherFinanzenalsTeilderRecovery-StrategienachderKrise.

WorkingPaper3/2009Peter Brandner, Harald Grech (2009). Unifying EU RepresentationattheIMF–AVotingPowerAnalysis.

WorkingPaper2/2009Caroline Haberfellner, Peter Part (ed.) (2009) Austrianpensionprojectionsfor2007-2060 WorkingPaper1/2009

Veronika Meszarits, Johann Seiwald (2008). BudgetaryReform in Austria: Towards tighter couplingwithin the financial and management system. WorkingPaper3/2008.

Silvia Janik, Bernhard Schatz (2008). Implementie-rung von Wirkungsmessung und Evaluierungein praktischer Zugang für die Verwaltung. WorkingPaper2/2008.

Manfred Claus Lödl (2008). Stufungen im neuen Haushalts(verfassungs)recht.

WorkingPaper1/2008.Peter Brandner, Harlad Grech, Kamran Kazemzadeh (2007). YieldDifferences inEuroAreaGovernmentBondMarkets–AViewfromtheMarket.

WorkingPaper7/2007.Verena Farré Capdevila, Ulrike Mandl (2007).EuropäischeWirtschaftspolitik:DieIntegriertenLeitlinien2008-2011.WorkingPaper6/2007.

Wolfgang Nitsche (2007).DieEuropäischeInvestitions-bank in der EU und in Drittstaaten: Wirtschafts-politische Einschätzung und Strategieoptionen. WorkingPaper5/2007.

Philip Schweizer (2007). Koordinierung der Unter-nehmensbesteuerunginderEU.

WorkingPaper4/2007.Wolfgang P.E. Müller (2007).RollederRegionalbankenam Beispiel derAfrikanischen Entwicklungsbank.WorkingPaper3/2007.

Kurt Bayer (2007).HowtoRuntheGlobalEconomy.AFrameworkforMoreEffective,RepresentativeandEquitableGlobalEconomicGovernance.

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Thomas Micholitsch (2007). Facing the Challenge of aLowCarbonEconomyinAustria.

WorkingPaper1/2007.Veronika Meszarits, Florian Wukovitsch (2006). A newbudgetfortheEU.Thenegotiationsonthefinancialframework2007-2013fromamemberstateandpre-sidencyperspective.WorkingPaper9/2006.

Franz Rabitsch (2006).DieIWFQuotendiskussion–EinÜberblick.WorkingPaper8/2006.

Manuel Schuster (2006). Lateinamerika: ein Export-marktfürdieEU?EinVergleichmitdenUSA.

WorkingPaper7/2006.Wolfgang Nitsche (2006). Die Zusammenarbeit derEuropäischen Gemeischaft mit Drittstaaten: Rahmenbedingungen, Abläufe und Reformvor-schläge.WorkingPaper6/2006.

Peter Part (2006). AUSTRIA: Pension Projects 2004– 2050, Austrian Contribution to the EU Ageing ReportbytheEconomicPolicyCommitteeandtheEuropeanCommission.WorkingPaper5/2006.

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Kurt Bayer (2006).EuropeandAsiaintheMacroecono-micsofGlobalisation.WorkingPaper3/2006.

Arnd Einhaus, Edith Kitzmantel, Anton Rainer (2006). Ist die Einkommensbesteuerung geschlechtsneutral?WorkingPaper2/2006.

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Ertl Birgit (2004).DerKampfgegenGeldwäschereiundTerrorismusfinanzierung.WorkingPaper4/2004.

Vitzthum Elisabeth (2004). Reformvorschläge für eineverstärkteZusammenarbeitzwischenWelthandels- organisation und Internationalen Finanzin- stitutionen.WorkingPaper3/2004.

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