A Renewed Multilateral Effort to Protect East European Banks

Excerpt from an article in

The New York Times

Thursday, March 15, 2012

A Renewed Multilateral Effort to Protect East European Banks

By JACK EWING FRANKFURT — A group of officials and bankers who helped prevent Eastern Europe from being thrown into the financial crisis in 2009 has reconvened, seeking to avoid a credit squeeze and economic downturn caused by problems at parent banks in Western Europe.

The International Monetary Fund, European Commission, World Bank and other institutions this week formally revived an effort known as the Vienna Initiative, which three years ago succeeded in preventing panicked West European banks from draining capital from their subsidiaries in Eastern Europe.

Vienna Initiative 2.0, as it has been named, is concentrating on ensuring that national regulators do not work at cross purposes, inadvertently provoking a flight of capital as banks respond to pressure to reduce risk.

The first Vienna Initiative “was based on voluntary commitment by banks,” said Otilia Simkova, an analyst at the consulting firm Eurasia Group in London. “Now it seems everything is focusing on regulators.”

Banks in the euro area supply 80 percent of the foreign lending in emerging Europe, which includes countries like Poland and Hungary as well as Turkey. That means problems among euro area banks can quickly spread east.

In fact, West European banks drained $35 billion from the region in the third quarter of 2011, according to figures published this week by the Bank for International Settlements in Basel, Switzerland.

A shortage of credit would undercut economic growth at a time when countries like Romania are still recovering from the last crisis.