The Russian bank in the euro zone bears the same label as Banif and Popular: “at risk or in a situation of insolvency”. What’s at stake?

On December 19, 2015, the Banco de Portugal summit met. Carlos Costa led the meeting which considered Banif to be “at risk or in a situation of insolvency”. It was the classification that initiated the application of a resolution measure, which can be applied in several ways: in this case, it was the partial sale of its activity to Santander, the next day.

“At risk or in a situation of insolvency”: it is the classification assigned by the supervisory authorities that determines that the banks are not viable or heading there. In 2015, Banco de Portugal was the entity in charge of Banif’s direct supervision (due to its size, it was only indirectly supervised by the European Central Bank), as well as the one with resolution powers, c It is therefore she who bears the end of the bank.

This was also the ECB’s decision regarding Banco Popular which in 2017 led to its disappearance and sale to Santander.

Resolution is the design of a banking intervention that allows difficulties to be resolved by minimizing the use of public money and without causing economic distortions, such as flight of deposits or excessive loss of jobs. It is applied when the regulation is considered more negative for financial stability.

From now on, “in danger or in a situation of insolvency” and “in resolution” are expressions that were heard again this Monday, February 28, due to the Russian military invasion of Ukraine.

Step 1: the ECB’s decision

“The ECB has assessed Sberbank Europe AG and its subsidiaries within the banking union, Sberbank dd, in Croatia, and Sberbank banka dd, in Slovenia, to be at risk or in a situation of insolvency, due to the deterioration of their liquidity situation. In a statement dated MondayFebruary 28, 2022, Frankfurt leaves this consideration on three banks under its direct supervision.

Headquarters of the ECB in Frankfurt. Photo: Getty Images

With 185 branches and nearly 4,000 employees, Sberbank Europe AG is headquartered in Vienna, a unit wholly owned by Russian bank Sberbank. This Russian bank is one of those that have become the target of international sanctions imposed in response to the actions of the Vladimir Putin regime, prevented, for example, from accessing the international dollar market, and banned from the Swift financial transaction system. – the other bank with frozen assets is the VTB, minority shareholder of the Portuguese bank Finantia.

The majority of the capital of Sberbank is the Russian Federation itself, followed by the branch in Austria, which has two units in the banking union supervised by the ECB: one in Croatia, the other in Slovenia. Apart from these countries, Sberbank has other subsidiaries in Bosnia and Herzegovina, Serbia, the Czech Republic and Hungary, with an office in Germany (where it only has digital services).

Sberbank Europe AG has 13.6 billion euros in assets, the weight in the countries of the banking union (Austria, Croatia and Slovenia) being 6.8 billion euros. In other words, the bank is limited in size: smaller than Banco Montepio and Crédito Agrícola, for example, but it is subject to ECB supervision due to its “significant cross-border activities”.

The European branch of the Russian bank Sberbank threatened with bankruptcy

Despite its small size, it is now one of the protagonists of the banking market on Monday. “Sberbank Europe AG and its subsidiaries recorded significant outflows of deposits due to the reputational impact of geopolitical tensions. This led to a deterioration of its liquidity situation”, continues the press release of the body chaired by Christine Lagarde Returning to the Portuguese example, the outflow of deposits after a news report was the main reason that affected Banif’s liquidity position, and subsequently justified the resolution.

With this flight of deposits, the Austrian bank owned by the Russian group is most likely “unable to pay its debts or other liabilities”. And, for the moment, “there are no measures available, with a realistic chance of restoring the position of the group and of each of the subsidiaries in the banking union”.

Step 2: Confirmation of SBR

The ECB makes the classification “at risk or in a state of insolvency”, but then needs confirmation from the highest resolution authority, the Single Supervisory Board (SBR) – it was already in office at the time of the fall of Popular in Portugal. , but not yet when Banif fell. It is this body that decides on the measures actually implemented.

The Single Supervisory Board has confirmed the classification of the ECB, but not everything is decided yet. “The SBR is now considering the next steps for banks, taking into account the objective of preserving financial stability in the banking union, in accordance with its mandate, i.e. if resolution action concerning these entities within the banking union would be of public interest,” the statement said. It is in the public interest that the resolution be more advantageous than a normal liquidation.

As you explain in your to place, in such situations, the SBR assesses whether there are alternatives in the private sector to rescue banks “at risk or in a situation of insolvency”, which can go through capitalization via a new shareholder or a merger with another Bank. If there is a private solution or other successful action, the bank does not declare bankruptcy. However, the SBR is currently assessing whether the intervention in Sberbank is in the public interest, that is, whether it makes sense to enter a resolution mechanism or a logic of liquidation. However, if the latter option is chosen, there is a problem: the bank is present in several European countries, whose insolvency mechanisms are not harmonised.

If there is resolution, there are several hypotheses: sale (total or partial); creation of a transition bank (as happened in the case of BES); the imposition of losses on creditors (the so-called bail in).

Until a decision is made, for now, there is a step taken before that: a two-day moratorium. That is to say, the SBR has decided that it is as if everything is frozen in this bank this Monday 28 and Tuesday 1 March. Until the end of tomorrow, “all payments or obligations” are “suspended” – exceptions are reduced, but include payments to central banks. Contracts cannot be terminated. Lenders cannot claim ownership of assets used as collateral for loans.

Step 3: What about deposits?

Lines for withdrawing cash at Sberbank in Prague, Czech Republic Author: MICHAL CIZEK/AFP via Getty Images.

The ECB and the SBR recall in their press releases that whatever the action on the banks, there is a guarantee: eligible deposits up to 100 thousand euros are protected by the deposit guarantee, as required by the legislation. European. In the statement on its website, Sberbank Europe recalls that in “all markets” where it is located, there are deposit guarantee schemes.

However, there will be a withdrawal limit within these two days, decided by the national authorities. The Austrian Entity (FMA) decided that there could be no withdrawal of more than 100 euros per day, “to cover the most necessary daily needs until the end of the moratorium”. The long queues at branches have been felt in several bank branches – and it is the bank itself that admits it in its to place.

During these two days, customers see their transactions limited.

In Hungary, outside the banking union, the Austrian bank has a bank: Sberbank Magyarország Zrt. Right here, the central bank of Hungary has also decided on the moratorium (the press release mentions two public holidays), until the end of the 1st. “During this period, the Hungarian Central Bank will assess the operation and condition of the Hungarian subsidiary in the current situation and take the most appropriate decision in terms of the stability of the financial markets and in the interests of customers as soon as possible. “, he says.

Step 4: What does the bank do?

With the attention of supervisors, Sberbank Europe admits that it works closely together. “In order to protect its customers and the bank’s critical functions, Sberbank Europe has been in close contact with the relevant regulatory authorities. We are doing everything we can to support the authorities in the exercise of their powers, in order to resolve this unprecedented situation in the interest of our customers, ”says the message left by the executive president (CEO) of the bank, Sonja Sarkozi.

Concrete information from the bank is limited, but, as mentioned, the CEO claims that deposits in all markets in which it operates are protected up to 100,000 euros.

These measures are imposed on Sberbank Europe when a geographical reduction was already underway: in November, it reached an agreement to sell the subsidiaries in Bosnia and Herzegovina, Croatia, Hungary, Serbia and Slovenia, as part of an agreement which was to be concluded in 2022. understand the effects of this decision on this operation, and what procedures follow the two-day moratorium.

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