Bulgarian politicians wear protective suits during debates in the parliament in Sofia on Friday
Can banks and policymakers in emerging Europe put aside their differences and work together to support the real economy? That’s the question many bankers in the region are asking as the Covid-19 crisis gains momentum.
Already, authorities in countries across central and south-eastern Europe (CESEE) have indicated they expect banks to step in to help their customers, either by deferring payments on existing loans or extending new credit to hard-pressed businesses.
Unsurprisingly, Hungary has been the most aggressive, with policymakers demanding a moratorium on all loan repayments until the end of this year, but even relatively moderate governments – such as that in Croatia – have mooted similar, if shorter-dated, schemes.
For the most part, banks are happy to comply. For one thing, as Hannes Mösenbacher, the chief risk officer of Raiffeisen Bank International (RBI), pointed out on the Austrian group’s annual reports call last week, in many cases it makes business sense.
“Say we have a mortgage client who has demonstrated willingness and capability to honour his monthly instalments for 10 years and now he needs a payment holiday of three months – come on, this is not an issue,” he said.
In return for their readiness to step up to the plate, banks in emerging Europe are hoping for some reciprocity from policymakers.
Central banks across the region have ensured the provision of liquidity to the sector, but what bankers really want is regulatory forbearance and relief from swingeing levies.
Countercyclical capital buffers
Perhaps surprisingly, and in contrast to western Europe, the regulatory focus in CESEE is not on IFRS 9 and the classification of non-performing exposures (NPEs) – although the central banks of Romania, Croatia and Czech Republic have indicated their willingness to be flexible in this respect.
Rather, what CESEE bankers are asking for is a reappraisal of high countercyclical capital buffers (CCBs). At 1.75%, the Czech Republic’s CCB is the highest in the European Union (EU). Slovakia is close behind with 1.5%, while Bulgaria has a buffer of 0.5%.
During the past year, all three countries announced plans to increase their CCBs, to 2% in the case of Czech Republic and Slovakia, and 1.5% for Bulgaria.
“We are saying, ‘Look guys, please think about this’,” says a regional banker. “We accepted these measures while the regional economy was booming over the past few years, but the cyclical situation has changed completely.
“Now it’s time for regulators to cautiously revisit this issue, abandon the planned increases and maybe consider some reductions. If things improve, then fine – we can add the buffers once again.”
It’s exactly the wrong time to start this conversation. Given the current levels of uncertainty, it’s obvious that no shareholder is thinking about dividend policies
– Regional banker
There are some signs that central banks are listening. The Czech regulator has announced that the increase of the CCB to 2% will not take place on July 1 as planned and indicated it will consider reductions to the present level on a case-by-case basis.
This may not be necessary in Czech Republic, where capital adequacy ratios are among the highest in the EU and returns on equity have been close to 20% for the best part of a decade.
It is a different story in Slovakia, where even before the current crisis bankers were warning that a combination of rising capital buffers and sector levies could eliminate bank profits and prompt a credit crunch.
With Slovakia heading for one of the sharpest Covid-19 downturns in CESEE, thanks to its dependence on auto manufacturing and high exposure to South Korea, bankers are now pleading with policymakers to reconsider the decision to increase the CCB in August and double bank taxes from January.
“Lowering the CCB would at least help to make the banking sector more sustainable,” says a regional banker.
Similarly, the Hungarian Banking Association has asked Viktor Orbán’s Fidesz government to consider phasing out bank levies from next year in return for the loan moratorium, which could cost the sector as much as HUF450 billion.
Cash cows and scapegoats
Bankers are also eager for reassurance that CESEE’s more populist politicians will resist the temptation to treat them as convenient cash cows or scapegoats during the current crisis.
Some have been worried by recent rhetoric around the payment of dividends to parent groups, a persistent political talking point in a region where many markets are still heavily dominated by foreign banks.
Several central banks, including those of Hungary and Czech Republic, have already called for the suspension of dividend payments – a move bankers insist is unnecessary.
“It’s exactly the wrong time to start this conversation,” says a regional banker. “Given the current levels of uncertainty, it’s obvious that no shareholder is thinking about dividend policies.”
To avoid any escalation of political rhetoric, CESEE bankers are working to ensure good communication with governments and regulators.
“The biggest risk for regional banks is not having a professional dialogue with policymakers,” says the banker. “We need to make a common front with politicians and central banks to prop up economies in the region and to do it in a manner that is not counterproductive.”