The Vienna Initiative

The Vienna initiative was a plan undertaken in January 2009 by European banks and governments during the height of the financial crisis to control the situation and work towards a joint solution specifically in developing regions of Europe.

[1] It has been created to avoid a bank crash that was threatening the region because of the subprime crisis as the liquidity in the CESEE countries depended on the Western ones.

The development of the banking system in Eastern and Southern Europe in the 1990s was strongly influenced by the political and economic changes that took place in the region at that time.

With the fall of communism and the adoption of liberalisation and democratisation policies, many Eastern European countries began to open their economies to foreign investment and to encourage the creation of new businesses.

Being relatively well supervised, cross-border banking has been of great benefit to businesses and consumers, allowing capital to flow into the region, as well as providing abundant financing.

These vulnerabilities have been caused by the growing dependence of the Eastern European economies on foreign financing and the increasing indebtedness of companies and households.

[3] In order to help the CESEE countries during the 2008 crisis, the Vienna Initiative was created to avoid a total collapse of their economies.

The goal was to analyze “the following policy issues that would make financial sectors in emerging Europe more resilient in the longer term”.

Large European banks remained committed to their support and allowed for gradual deleveraging of the entire system and manage liquidity more efficiently.

The IMF[5] studied the effects of the Vienna Initiative on the CESEE countries through a set of data to analyze the evolution of loans in those regions.

According to the IMF, it seems that the Vienna Initiative had a relative success as it helped “reduce the negative externalities stemming from home countries of foreign banks”[5] and it also “softened the inevitable deleveraging”.

[3] The context of a credit crunch and rapid deleveraging in emerging Europe has necessitated enhanced coordination between host and home country banking supervisors.

The principle to govern cooperation between home and host countries of the CESEE regions was defined by the Committee of European Banking Supervisors.

[7] It again seeks to solve a short-term problem, which is to avoid an excessive and uncoordinated decline in bank lending in the region (IMF, 2012).

In addition, the Vienna 2.0 initiative focuses more on improving coordination, cooperation and information exchange between supervisors but also between host and home countries in order to achieve stability in cross-border banking.

The role of the Vienna Initiative and the Working Group is to assess the effectiveness of financial instruments and products best suited to the investment market gaps of the countries in the CESEE region.

[3] As a continuation of the Vienna 2.0 initiative, the working group still publishes several times a year reports on the assessment of cross-border bank strategies and deleveraging in these regions.

[9] The goal was to encourage parent banks operating in Romania to maintain their exposure and to recapitalize their subsidiaries for the duration of the IMF-EU programs in order to stabilize the balance of payment in the country.

The commitment of parent banks in Romania was to “increase the minimum capital adequacy ratio for each subsidiary from 8 to 10 percent” and to fully maintain their March 2009 exposure for the time of the IMF program.

This committee was constituted by the Governor of the National Bank of Romania, the President of the Authority of Financial Supervision, the Minister of Finance and the manager of the deposit guarantee.

The National Bank of Romania with its double position as monetary and supervisory authority was entitled to maintain the financial stability of the country.

This study has highlighted the lack and transparency of the group but it has also shown the not-so-good results it has achieved for the much exceeding social and economic costs.