ÖVAG ‘is not a glorious chapter’

Bank Austria (BA) chief Willibald Cernko has welcomed plans to create a bank bankruptcy regulation.

Austrian law currently fails to feature rules which determine under which circumstances a financial institute with headquarters in the alpine country can start regulated insolvency procedures. Real economy businesses benefit from such an option on a regular basis. It is often an opportunity to get back on track and avoid a quick collapse inducing layoffs and negative effects on the gross domestic product (GDP).

Social Democratic (SPÖ) Finance Secretary Andreas Schieder said earlier this month that his party and the People’s Party (ÖVP) wanted to nominate “renowned financial sector personalities” to work on concepts for an insolvency law for banks. Schieder explained that the plan was to pass a bank bankruptcy law in parliament within this year.

Now Cernko has spoken out in favour of the project. He said yesterday (Tues) such a law affecting the domestic financial sector could be one aspect of a reform of regulations. The banker surprisingly failed to criticise the SPÖ-ÖVP government’s decision to increase the federal bank solidarity tax. Schieder and ÖVP Finance Minister Maria Fekter recently agreed that the charge must increase this year. The coalition wants to earn 625 million Euros in 2012 after having taken in half a billion Euros thanks to the bank tax last year.

Fekter announced that the full amount would be invested in the restructure of Volksbank AG (ÖVAG). The Viennese bank had to be partially nationalised last month. Cernko said he was pleased to hear that the additional revenue would not be channelled into the public budget but used to stabilise ÖVAG.

The BA CEO said another possible reform could be providing supervisory institutions with more rights. Cernko – whose bank manages the Eastern European (EE) operations of Italy’s UniCredit – underlined that the federal financial market authorities only reacted in crisis times. “The case ÖVAG is not a glorious chapter. The state should have got involved much earlier,” Cernko said yesterday.

The SPÖ-ÖVP administration announced last month that the state would soon increase the small stake it currently held in ÖVAG to around 49 per cent to rescue the bank from going bust. The partial nationalisation could diminish the influence of ÖVAG’s minor stakeholders and its regional representations as the government is determined to get the bank back into the black. ÖVAG is the third Austrian financial institute to be nationalised since 2008. Hundreds of ÖVAG employees could lose their jobs in the coming months.

Karl Aiginger, the head of the Austrian Institute for Economic Research (WIFO), said there were two ways how the financial industry could be stabilised. He said an “offensive”, rather drastic reform based on international cooperation was one option while another possibility was a “defensive”, rather careful and solely domestic reform. Aiginger explained yesterday that the disputed ways of the shadow banking industry and hedge funds would not be affected in the latter opportunity.

Earlier this week, European Commissioner for Internal Market and Services Michel Barnier presented plans to install stricter rules on Europe’s booming shadow banking industry. “What we do not want is for financial activities and entities to circumvent existing and foreseen rules, allowing new sources of risk to accumulate in the financial sector,” Barnier – who reportedly pushes for a change of European regulations in such regard until 2013 – announced.