RPT-Fitch: Austrian bad bank, levy reform may benefit banking sector

Wed Feb 5, 2014 7:55am EST

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Feb 5 (Reuters) - (The following statement was released by the rating agency)

Austrian banks may benefit from bank levy reforms and the creation of a "bad bank" for the wind-down of Hypo Alpe-Adria-Bank, to be negotiated this month with the government, Fitch Ratings says. Reallocation of the levy to part-capitalise the bad bank and create a new resolution fund could reduce regulatory cost inflation in the Austrian banking sector.

The government's preferred option for winding down Hypo Alpe, nationalised in 2009, is to create a bad bank majority owned by the large Austrian banks with a minority state holding. The government's aim is to keep the vehicle's liabilities off Austria's public debt calculation, similar to Ireland's NAMA and Spain's SAREB. The bad bank model's details have not yet been revealed and need to be finalised.

We believe reallocation of the bank levy to help facilitate the creation of a bad bank would be the least worst option and most likely outcome for the Austrian banks. The government is highly unlikely to impose insolvency or use more aggressive "bail-in" tools because this would threaten systemic stability. A restructuring of Hypo Alpe into a state-guaranteed public-law institution is also unlikely because the government wants the banks to participate in the solution.

Reform of the Austrian bank levy would benefit the banks. The existing levy places a high cost burden on them. At EUR640m in 2013, it exceeded 20% of the sector's net income and the one paid by the German banking sector, whose assets are nine times larger. The tax is largely used to fill Austria's recurring budget deficits, with only a small amount earmarked for financial stability, resulting in limited transparency.

Partially diverting the levy to support the creation of a bad bank for Hypo Alpe and build up a resolution fund would help gradually reduce the banking sector's reliance on the state to deal with future shocks. We believe it could also save banks around EUR150m costs per year, which they would otherwise have had to contribute to the new resolution fund starting in 2014 under the European Bank Recovery and Resolution Directive.

But banks will probably still have to put another EUR150m annually into a deposit protection fund from this year, so regulatory costs would stay high relative to foreign banks. Large Austrian banks also pay heavy levies in a number of their central and eastern European markets, especially Hungary. A gradual recovery of earnings would provide further relief from regulatory cost pressures.

There are still major uncertainties about the wind-down of Hypo Alpe. Large Austrian banks want to be compensated for contributing to a bad bank and protect themselves against its future deterioration. Protracted litigation between the government and Hypo Alpe's former owner could delay the implementation of a solution.

For further details on the potential wind-down of Hypo Alpe and implications for Austrian Banks, see "'Bad' Bank Proposal for Hypo Alpe", published today.

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