Austrian banks and the central European model: what a foreign lender changes

Between the late 1990s and 2008, Austrian banking groups built the most extensive foreign banking network in central and eastern Europe. Their footprint reached from Prague and Bratislava to Bucharest, Kyiv and beyond, and for a period they were the most important channel through which western capital reached the region's economies.

Ukraine was one of the more difficult destinations on that map, and the experience there is a good case study in what foreign banking presence actually does to a market.

What the presence brought

Credit products that did not previously exist. Mortgage lending, consumer credit, working capital facilities for mid-sized companies, and leasing — all of these arrived with foreign banks and were only marginally present before.

Underwriting standards. A foreign parent applying group-wide risk policy imposes documentation and credit assessment requirements that domestic banks with related-party lending books did not use. The effect spread beyond the foreign banks themselves, because it changed what borrowers expected to be asked for.

And a funding channel. Foreign parents lent to their subsidiaries at group cost of funds, which was far below what a Ukrainian bank could raise domestically, and that difference passed through to borrowing costs.

What went wrong

Much of the lending was denominated in foreign currency, because that was where the cheap funding was and because borrowers preferred the lower nominal rate.

Households and companies earning hryvnia took dollar and euro loans. When the currency corrected sharply, the local-currency value of those debts rose by a multiple, and a large share became unserviceable. The resulting losses hit both the borrowers and the banks, and the withdrawal that followed was substantial.

This was not a Ukrainian mistake specifically — the same pattern appeared across the region, most severely in Hungary. It is a general lesson about foreign-currency lending to unhedged borrowers, and it is now restricted by regulation in most of the countries where it happened.

What remained

Several foreign banking groups reduced their exposure or exited after 2008 and again after 2014. Others stayed, and those that stayed occupy a distinctive position: they are the institutions a foreign company entering Ukraine can bank with under a relationship its head office already understands.

That has practical value. A company with a group banking relationship in Vienna, Paris or Warsaw can often extend it to a Ukrainian subsidiary with far less friction than opening a relationship with a purely domestic bank, and the documentation, reporting and compliance standards will be familiar.

The current picture

The sector today is smaller, better capitalised and much more conservatively regulated than the pre-2008 version. Foreign-currency lending to households is restricted. Related-party lending limits are enforced. Capital requirements are meaningful.

The result is a banking system that performed remarkably well through 2022 — no deposit run of any significance, no payment system failure, no bank collapse of note. That outcome is a direct consequence of the clean-up done in 2015, and it is the strongest single piece of evidence that Ukrainian financial regulation now works.

For a company assessing where to hold funds and how to finance operations in Ukraine, the practical answer is straightforward: use a bank with a foreign parent if group relationships allow, use a large domestic bank with a clean post-2015 record otherwise, and do not take currency risk you are not compensated for.

Related in this archive

• Ukraine and Switzerland: commodity trading, arbitration and quiet capital
• Germany as Ukraine's principal European economic partner
• Ukraine and Italy: machinery, migration and an unusually durable pattern
• Ukraine Annual Review 2011: a recovery that did not become a foundation

A foreign bank arriving changes accounting discipline more than it changes the interest rate: a lender who wants audited statements also tidies up the company itself. I watched this in my customers — a firm that took on a banking relationship became a better-run firm within two years. Even those that withdrew in the crisis left that habit behind them.