18. 07. 11. - 16:04

ÖVAG flops in stress test

A leading Austrian bank has failed Europe’s most recent stress check as press claim that the check "looks doomed to irrelevance."

Volksbank AG (ÖVAG) did not meet the European Banking Authority’s (EBA) criteria including a core tier 1 capital ratio of five per cent under extraordinary economic circumstances in Europe such as a dramatic decline of the gross domestic product (GDP) of some states. ÖVAG’s equity ratio was found to be just 4.5 per cent.

The bank said after the release of the results on Friday evening that it would "of course" take them seriously. ÖVAG claimed it would carry out further measures to improve its position. The results of the so-called stress test – the second of its kind after a similar examination last year – came hours after ÖVAG and Sberbank agreed on a sale of Volksbank International (VBI). The powerful Russian bank agreed to take over ÖVAG’s international operations department. VBI operates in nine countries in Europe. It suffered a loss of 22.37 million Euros in 2010.

ÖVAG and Sberbank explained they were convinced of having finalised the deal by the end of the year. The financial institutes did not disclose a takeover price. However, ÖVAG dismissed claims that 570 million Euros would change hands as "too low a sum" in contrast to its agreement with the Moscow-based bank. ÖVAG initially hoped to rake in around one billion Euros by selling VBI. Sberbank agreed to take over all of VBI’s representations except its Romanian branch which has been struggling for years. ÖVAG underlined it wanted to sell the Romanian department, which has around 1,400 employees, as well. Hungarian banks are interested, according to reports.

ÖVAG explained it planned to pay back around 300 million Euros of so-called participation capital to the Republic of Austria from revenues of the Sberbank deal. The Vienna-based financial institute – which sustained a loss of 1.123 billion Euros after taxes in 2009 – received around one billion Euros from the state. Political decision-makers aimed to help strengthening the country’s biggest banks throughout the crisis with this measure.

Raiffeisenzentralbank (RZB), which cooperates with Raiffeisen Bank International (RBI), and Erste Group Bank AG (Erste Bank) recently also received financial support from the state. Both RBI and Erste Bank passed the second stress test with flying colours. RBI’s equity ratio was found to be 7.8 per cent, Erste Bank’s rate even exceeded RBI’s result by 0.3 per cent. Both banks expressed pleasure about the news that they reached "upper midfield" positions – as Austrian National Bank (OeNB) Governor Ewald Nowotny described it – among all of the 91 institutes which were checked.

Nowotny claimed the most recent evaluation of the EBA confirmed that the Austrian banking sector was "generally crisis-resistant." The OeNB boss pointed out banks’ attempts to further improve their equity ratios were "desirable." The International Monetary Fund (IMF) also appealed to the banks not to decrease such measures. Nowotny said he hoped the stress test’s results would help stabilise the European financial market. Asked why ÖVAG failed the stress check, Nowotny argued that certain steps taken by the bank were not taken into account by those who conducted the test.

Bank Austria’s (BA) equity ratio was investigated as part of checks carried out at UniCredit. BA is part of the Italian banking giant. BA, which handles UniCredit’s businesses in Eastern Europe (EE), has an equity ratio of around eight per cent, according to the check. Equity ratio describes the sum banks have available immediately from managed assets and investments and without help from the states in the case of a crisis.

Apart from ÖVAG, five banks based in debt-ridden Spain failed the stress check. Two Greek banks flopped as well. Overall, 90 banks based in the European Union (EU) and Norway were checked. While bankers criticised that testers released several details regarding banks’ inner life, international business newspapers hit out at the EBA. American press claimed "Europe messed up another stress test." Börsen-Zeitung, a German newspaper, labelled the examination as a "typical placebo." Other publications described it as a "missed opportunity" and even "fraud."

Most commentators criticised decision-makers for leaving out the possibility of a state bankruptcy within the EU or the Eurozone. The latter term describes the 17 EU members which use the Euro as their currency. Especially Ireland, Portugal and Greece have experienced enormous difficulties in recent months. Analysts have also expressed concerns regarding the economic condition of Spain and Italy. All of these EU member nations are part of the Eurozone. Austria, which joined the EU in 1995, introduced the Euro in 2002.

"If the European banking system was looking for a cathartic moment, this wasn't it," the Economist writes. The weekly newspaper – which has its headquarters in London, Great Britain – judges that the EBA "has done a better job than its predecessor did with the 2010 stress tests. But the 2011 version still looks doomed to irrelevance: too soft to reassure the markets, too unenforceable to prompt the recapitalisation that is needed."