European Central Bank Urges Capital Buffers for Raiffeisen and UniCredit

By Alexandra Schwarz-Goerlich, John O'Donnell and Valentina Za
VIENNA/FRANKFURT/MILAN (Reuters) – The European Central Bank (ECB) is pushing Raiffeisen and UniCredit to hold some capital as a buffer against potential risks stemming from their operations in Russia, according to two sources familiar with the matter.

The ECB aims to mitigate the dangers these banks face by operating in a country where they no longer have effective control over their activities. It could adjust the banks' individual capital requirements to reflect specific risks that are not covered by broader industry-wide capital thresholds.

The precise size of a potential capital adjustment for the banks remains unclear. Additionally, Raiffeisen faces ECB demands for a capital cushion to reflect its exposure to risky commercial real estate loans.

Spokespeople for the ECB and UniCredit have declined to comment. However, Raiffeisen indicated recently that its capital requirements would increase starting next year, without directly addressing the Reuters report.

Tensions with Regulators

Nearly three years after Russia's invasion of Ukraine, Raiffeisen Bank International and UniCredit, the largest foreign banks in Russia, have been slow to reduce their operations, creating tension with the regulator. Both banks need approval from Russian authorities to divest their local operations. They are able to process cross-border payments while Russia's domestic banks have been excluded from the international payments network.

Earlier this year, the ECB instructed both banks to reduce their activities in Russia, including international payments, or face potential penalties. Raiffeisen has been working to fulfill ECB demands by minimizing its connections to Moscow, including reducing euro payment processing related to Russia.

In May, the U.S. threatened to cut Raiffeisen off from dollar access over a deal linked to a Russian oligarch. UniCredit has sued the ECB, stating that the order to withdraw from Russia conflicts with Russian and international sanctions. In the meantime, UniCredit has reduced payments, loans, and deposits in Russia during the third quarter, aiming to meet its reduction targets by 2025.

A Litmus Test for Banking Supervision

According to Andrea Resti, a finance professor at Bocconi University advising the European Parliament on banking supervision, this situation serves as a "litmus test" for the extent of European banking supervisors' powers and the ECB's ability to support its decisions with an adequate legal basis.

The ECB's request for the banks to maintain cushions against potential losses could also prepare them for the possibility of having to fully write off their Russian operations. ECB supervisors stated last year that they continuously evaluate when additional capital is necessary for European banks involved in Russia.

Bart Joosen, a professor of financial law at Leiden University, noted that the ECB engages in discussions with banks to assess severity when risks on their balance sheets are identified. Eventually, the ECB may determine that a given risk is unacceptable, prompting legal action to make its demands binding and escalate the situation.

The ECB also sets annual capital demands, known as Pillar 2 requirements, based on evaluations of individual banks' risks. A final binding decision is expected in December after discussions with banks follow a draft decision sent in the preceding weeks.