Bloomberg News

Austria Said to Nix Volksbanken Bad Bank, Demands Fresh Plan

February 27, 2012

Feb. 27 (Bloomberg) -- Oesterreichische Volksbanken AG’s plan to create a so-called bad bank was dismissed by Austrian officials, who told the lender to come up with a new model to restructure itself, four people familiar with the matter said.

The plan proposed by the 62 regional cooperative lenders that own a majority stake in Volksbanken would have left other shareholders and the state exposed to unprofitable businesses, said the people, who declined to be identified because the meeting with Finance Ministry officials was private.

The regional lenders also wouldn’t have shared enough past and future losses, the people said. Bad banks, created in various European nations in the wake of the financial crisis, are aimed at taking on a troubled lender’s worst-performing and hardest-to-sell assets, leaving a more viable entity behind.

The regional owners are due to discuss the ministry’s demands at a meeting today. Austria, which has said it doesn’t want to exercise its right to nationalize Volksbanken, was warned by Standard & Poor’s and Moody’s Investors Service this year that its financial-services industry is the main threat to the national credit rating.

Volksbanken and the regional lenders were told to keep developing their plan to create a cross-guarantee pact, said the people. That means the institution would keep doing support business such as liquidity management for the regional owners, and wind down all activity that isn’t part of that function, corresponding to about half of its assets, they said.

Bad Assets

Volksbanken spokesman Walter Groeblinger confirmed the owners are meeting today and declined to elaborate. The Finance Ministry’s overturning of the bank’s plan to split was first reported by daily newspaper Der Standard.

Austria is already saddled with bad assets Volksbanken ran up through 2008 in its municipal-lending unit, Kommunalkredit. Volksbanken, which relied on wholesale funding to boost its balance sheet fivefold from 2000 to 2007, also received 1 billion euros ($1.3 billion) in government capital in 2009 after real-estate loans soured. The lender has also posted writedowns on Greek government debt and bad loans in Romania.

The state has the right to take over Volksbanken after it failed to repay part of that aid. Finance Minister Maria Fekter has said her desire to exercise that right is “limited.”

The regional banks own 61 percent of Volksbanken, while DZ Bank owns 23 percent, Raiffeisen Zentralbank Oesterreich AG holds 6 percent and Munich Re 9 percent.

--With assistance from Zoe Schneeweiss in Vienna. Editors: Keith Campbell, Stephen Taylor.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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