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Hypo Group Alpe Adria: Fitch Recommends “Joint Bad Bank”

Published: February 5, 2014; 18:22 · (Vindobona)

According to the rating agency, the best alternative is a joint solution between the Austrian state and privately held banks. In return, the bank levy should be reduced, Fitch says.

Hypo Group Alpe Adria: Fitch Recommends “Joint Bad Bank” / Picture: © Hypo Alpe-Adria-Bank International AG

In the years between 2000 and 2008, the lender has pursued an aggressive growth strategy in the Balkan region. In order to prevent Hypo Group´s unorderly bankruptcy, the bank was nationalized in 2009 by the Republic of Austria. In the past four years, the Austrian state has injected € 4.8bn into the problem bank. Nevertheless, the Austrian government still has no sustainable concept yet. Until the end of February, the Austrian government wants to develop the strategy for the nationalized lender Hypo Group Alpe Adria. In essence, there are four options: the creation of a bad bank, the bankruptcy, the participation of privately held Austrian banks in a downsizing unit and the continuation of the status quo.

The U.S. rating agency Fitch recommends creating a joint downsizing unit. Also for the Austrian National Bank (OeNB) and the Austrian government, the creation of a „joint bad bank“ is the preferred option. Privately held Austrian banks should participate in a downsizing unit together with the Austrian state. In total, the downsizing unit would have a size of € 18bn. However, the Austrian state would be a minority shareholder. Fitch argues that the bank tax intake should be used to supply a bank resolution fund instead.

According to Fitch, the bankruptcy scenario is rather unrealistic. Every alternative which would burden creditors should be avoided, according to Fitch. In such a case the stability of the Austrian financial system may be damaged. From the standpoint of the Austrian banking sector, the “joint bad bank” would be the most reasonable option, Fitch stated.

In case of a rededication of the bank levy, the tax would help to support the stability of the Austrian banking sector. By and by, the dependence of the Austrian banking industry on the Austrian state would diminish, according to Fitch. Potential shocks may be absorbed more easily, Fitch added. Moreover, the Austrian banking sector may save costs in the amount of € 150m per year.

However, the Austrian government apparently is still far from reaching an agreement with the banks. According to bank representatives, the Austrian government did not even go beyond superficial talks yet. In fact, the talks between the leading Austrian banks and the Austrian government only have made little progress so far. It is only known that the Austrian major banks may participate in a joint ownership solution only under certain circumstances. For instance, the bank levy has to be lowered and the whole construction has to be made economically feasible. At the moment, the annual bank tax intake totals about € 600m. Moreover, banks do not want to become direct shareholders of the downsizing unit. For the Austrian government, both claims are barely acceptable.

Due to the limited prospects of success of the joint bad bank, the Austrian government does not rule out Hypo Group´s bankruptcy anymore. Before, Austrian economists stressed that this alternative should be taken into consideration. According to the Oliver Wyman report, the solution of insolvency “should in total be given the highest level of acceptance when considered objectively”. Liabilities, risks and burdens of the state would be highest with the establishing of a bad bank.