Public sector officials from within the European Bank Coordination "Vienna" Initiative met in Vienna on Monday with the aim to enhance the coordination of national policies affecting the economies of emerging Europe, the European Bank for Reconstruction and Development (EBRD) announced late on Monday.
Although the circumstances are different from 2008/9, there is a similar need for collective action to avoid suboptimal outcomes: this is the new Vienna initiative -- Vienna 2.0, EBRD said.
The participants of Monday's meeting agreed on principles home and host country authorities and international institutions should follow, and decided to invite major cross-border banks to future meetings.
The first meeting, where banks will also be invited, will be hosted by the European Commission in Brussels in the near future.
Monday's meeting was attended by supervisors, central banks and fiscal authorities from host and home countries of major cross-border banks, as well as officials from EU institutions (the European Commission, the EBA, the ESRB) and International Financial Institutions (IMF, EBRD, EIB, and the World Bank Group). The European Central Bank participated as observer.
Vienna 2.0 aims at preventing excessive and disorderly develeveraging and a credit crunch which could arise from uncoordinated and competing policy responses to the euro zone crisis. The crisis prompted several regulators both in home and host countries to tigthen liquidity provisions.
The public sector parties within the Initiative are keen to cooperate to avoid adverse cross-border effects of the emergence of uncoordinated and competing policy responses in Europe’s closely integrated financial markets, EBRD said. They stressed the need for coordination and effective dialogue in a regional context between home and host country authorities - including regulators, central banks and fiscal authorities, for which Vienna 2.0 offers a framework.
Summarising the principles agreed, EBRD said that home country authorities must internalize the cross-border effects on EU and non-EU countries in formulating their measures, and coordinate the implementation of macro-prudential/regulatory policies and their communication with host authorities. In particular, the recapitalization plans of international banks submitted to the EBA should be scrutinized by the supervisory colleges for their systemic impact on host economies, taking into account ESRB's focus on systemic risks.
As to host countries, authorities there should promote the development of domestic funding sources in order to reduce banks' reliance on capital inflows. Home and host authorities should share information more closely "to avoid unnecessary ring fencing of liquidity", and also when systemacially important subsidiaries are sold, and take each other's concerns into account, the statement said.
The international institutions will assess the impact of the aggregate recapitalization plans on the host countries to identify systemic risks and advise on policy actions. They should stand ready to provide external assistance and financial support to banks in host countries within their mandate and balance sheet capacities. They pledge to collaborate closely to maximize their impact.
The European Bank Coordination Initiative launched in early 2009, helped to preserve financial stability in the Central-East European region at the height of the global financial crisis. Cross-border banking groups maintained their exposures in Central-East Europe in the aftermath of the global financial crisis and recapitalized their subsidiaries under programmes supported by the IMF and the EU with positive spillovers to other countries in the region.
The initiative was successful and systematic risks in emerging Europe abated in 2010 but renewed with the euro zone crisis which prompted several regulators both in home and host countries to tigthen liquidity provisions.