Thanks in advance,
Jami

The current situation has elements of a prisoners’ dilemma where the banks as a collective want to stay involved, but in the short-term an individual bank has incentives to be the first to withdraw. We want to mitigate this collective action problem. By making our investments in the banks contingent on lending to, for example, SMEs or simply on greater capitalisation in their subsidiaries in Central and Eastern Europe we provide the banks with a way to credibly signal that they want to stay involved in the region. If they do not live up to these commitments they will not receive our funding.

Of course, if banks decide to drastically and disorderly withdraw funds it is fully understandable if the countries that are hosts to these subsidiaries try to find ways to restrict or slow down these transfers. In the extreme they may even decide to nationalise a subsidiary. Such actions could easily trigger withdrawals and runs on banks in other countries. It is these kinds of scenarios that we are trying to discourage through the Vienna Initiative.

The Unicredito project that you mention is a perfect example of what we are trying to achieve. Through an investment of EUR 432mn in 11 subsidiaries in eight countries we are working with the Italian bank to ensure that funding to the real economy is continued. Unicredito has also signed a memorandum of understanding with us that spell out its extensive commitment to Central and Eastern Europe. This agreement is not enforceable in court but it represents a joint undertaking from Unicredito and the EBRD to continue working together in the region. We are in the process of establishing similar arrangements with the other large banks active in Central and Eastern Europe.

You write “Eastern European governments can … damage the international bank groups by preventing them from transferring profits or adjusting their exposures. The public pressures to interfere are great.” But it is also true that international bank groups can damage Eastern European governments by the abrupt withdrawal of funds in a crisis.
I know that you do not think this a likely threat, as you say “Over the past six months important bank bailout programmes in Western Europe have helped stabilise the international banks operating in Eastern Europe.” And you assume “continued external engagement, particularly from the western parents of banks in the region.” (EBRD Press release, 7 May).

The EC Spring forecasts 2009 tell a different story: “The repatriation of capital by foreign banks has been particularly abrupt in some cases. “…the presence of EU banks in the region creates further potential negative spill-overs via the financial channel” (p.22). And “If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing“ (The Economist, 26 February). Not unnaturally, when capital becomes scarcer in the country of origin, foreign capital tends to go back home.

Here the EBRD has a most important role to play, as shown by its recent investment of €432.4 million in UniCredit subsidiaries across eight eastern European countries. This is the best case for raising the EBRD relatively modest resources of €20bn by as much as 50-100 per cent (for a fuller discussion of the issues raised here, see the latest post on my blog “Transition”, http://www.dmarionuti.blogspot.com/) .