ewald nowotny : real implications of the financial turmoil – strategies for growth and stability keynote speech for panel discussion by mr ewald nowotny, governor of the austrian national bank, at a conference, hosted by the representative office of the austrian national bank in belgium, brussels, 20 january 2009. * * * financial turmoil and its impact on the austrian banking sector • as you all know, global financial markets have been shaped by financial turmoil since the summer of 2007. in september 2008, the crisis intensified as uncertainty in international markets was raised considerably when fannie mae and freddie mac were placed under conservatorship, and when lehman brothers – which had been a major counterparty in the credit derivatives and swap market – went bankrupt. the uncertainty was further heightened by massive write - downs and liquidity problems of large international banks and insurance companies. stock prices plunged, credit risk premia rose substantially, and conditions on the interbank market tightened even further. • in this situation, central banks and governments responded with numerous measures to restore confidence and stability in the financial market. in the eu, the heads of state or government endorsed a joint action plan to fight the financial crisis by raising the savings guarantee for depositors, recapitalizing financial institutions and guaranteeing certain bank obligations. austrian policymakers also adopted comprehensive measures to fight the financial crisis. • although the direct effects of the financial crisis on austrian banks have been limited so far due to their relatively small exposures to the u. s. subprime market, austrian banks have been indirectly affected to a significant extent as refinancing costs rose, income declined, loan loss provisions had to be raised and risk aversion increased among investors especially towards exposures in central, eastern and southeastern europe ( cesee ). however, austrian banks expect net income to have been still clearly positive in 2008 – as of the 3rd quarter 2008 they expected a net income of eur 3. 6 billion for 2008, which is 25 % down compared to year - end 2007 ; additional write - downs expected in the 4th quarter will, however, have depressed income even further. • regarding foreign currency loans, which are very popular in austria, the share of foreign currency lending to customers decreased over the last years, although it is still high on an international comparison ( 18 % of total loans to domestic customers in q3 2008 ). in 2008, the developments on foreign currency markets ( e. g. appreciation of the swiss franc and the japanese

assumes limited - term liability for receivables and a guarantee for debt instruments issued by the clearingbank. measures under this law may not exceed eur 75 billion and they are temporary – the law expires on december 31, 2009. • under the financial market stability act, the minister of finance may take measures to recapitalize credit institutions and insurance undertakings by way of assumption of liabilities, guarantees for loans and provision of own capital, acquisition of company shares or convertible bonds, takeover of company assets, and – as last resort – takeover of property rights ( i. e. nationalization ). fees and interest for the instruments must be set at market rates. measures under this law may not exceed eur 15 billion. the law also provides for ( re ) privatization after the purpose has been achieved. • another measure taken by the austrian authorities concerns the safeguarding of bank deposits : • for bank deposits of retail customers, a 100 % state guarantee was put in place retroactively from october 1, 2008, limited until the end of 2009. • as of january 1, 2010, protection for retail customers will be raised to eur 100. 000 ( previously eur 20. 000 per account holder / per bank ). • the deposit protection for small and medium - sized enterprises will be raised to eur 50. 000. • a maximum of eur 10 billion is allotted to this measure. cesee banking market was 15. 2 % in mid - 2008 ( if russia is excluded : 21. 8 % ). at end - 2008 twelve austrian banks operated 73 fully consolidated subsidiaries in cesee. • in addition, the austrian financial market authority ( fma ) passed a decree prohibiting the short - selling of the stocks of insurance companies and banks listed on the austrian stock exchange, for a period of 3 months until the end of january 2009 ( which can be prolonged if deemed necessary ). • all these measures, adopted in a swift and comprehensive way, will contribute to reestablishing confidence in the austrian financial market and securing financial stability. development of the european supervisory framework • the current financial crisis has revealed certain weaknesses in the eu ’ s supervisory framework, which is still fragmented nationally despite increasing financial integration and cross - border activities of financial institutions. until now the supervisory development in the eu has followed an evolutionary approach, and the level 3 committees of the lamfalussy framework – cebs, cesr and ceiops 2 – have achieved considerable convergence regarding supervisory