Forward-looking Implications of the Vienna Initiative

• In Event: The Politics of Financial Markets

Abstract

In recent decades, the banking markets of Central Europe (CE) and South Eastern Europe (SEE) have provided unprecedented opportunity for foreign investment, particularly for Western European multinational banking groups. These unusually open CE and SEE economies, even in strategic sectors such as banking, led to the region becoming the most highly foreign-penetrated banking market in the world by the early 2000s. Overall cross-border banking integration in CE/SEE has gone further than in the rest of Europe. Starting in 2007, however, the Global Financial Crisis put severe pressure on the CE/SEE banking sector growth model. That crisis also raised questions, in both Eastern and Western Europe, about the wisdom of foreign ownership when bank bail-outs and banking sector governance were still primarily national concerns. In hindsight, we have learned that transnationalized bank ownership, in part owing to the Vienna Initiative, did not pose the risks originally feared. This paper specifies the key elements of the Vienna Initiative that contributed to its success, in particular in arresting downside dynamics and anchoring positive expectations. In addition, we point to the features of the Vienna Initiative that can be brought forward for the stabilizing management of banking and finance in Europe more broadly, including the Eurozone.

The main lessons from the Vienna Initiative are threefold. First, it brought relevant private and public actors into dialogue in the interest of providing accurate information about banks’ long-term interests and intentions, cultivating resources for crisis management and limiting economic nationalism. Such measures could be repeated today or in the future as part of a “Paris” or “Frankfurt” initiative, wherein major EU and Eurozone banks could be offered credible and coordinated stand-still agreements in exchange for temporary ECB/OMT support, in conjunction with an ESM stabilization and reform package—a structure similar to the original Vienna Initiative format. Second, we argue that the deep-equity-based cross-border integration in the CE/SEE banking markets was the most decisive factor for the success of the Vienna Initiative. While this interpretation goes against much of the received wisdom about why foreign banks maintained their exposure to CE/SEE markets, we provide evidence for the ways in which the Vienna Initiative’s success was largely a derivative of banks’ longer-term business strategies. Moreover, insights about the stabilizing effects of transnationalized bank ownership, especially against the backdrop of Eurozone dysfunction due to banking market fragmentation along national lines, lead us to urge more cross-border consolidation in the banking sector across all of Europe (inside the Eurozone and beyond). Third and finally, the Vienna Initiative and Eurozone crisis experience have clearly shown that large-scale banking sector risks cannot be insured at a national level.

Author

• Rachel Epstein, University of Denver