Reinhard Schwaiger & Peter R. Haiss*http://ssrn.com/author=115752 peter.haiss@wu-wien.ac.at

WU Vienna University of Economics and Business

„History compared: Austrian banks‘ internationalization during the monarchy and after the fall of the Iron Curtain“

EABH & NBP 2013 Conference on

“Foreign Financial Institutions & National

Financial Systems “, Warsaw, 07-08/06/2013http://conference2013.eabh.info/conference/programme/Session 4 on “Reasons of Cross-border Activities of Financial Institutions and their Influence on National Banking Systems”

* The opinions expressed are the authors‘ personal views

Agenda

 

• Research Issue

• Motivation/Purpose

• Summary/Conclusion

• Method

• Theoretical Foundations

• Earlier Research

• Results

• Conclusion2

Research Issue

  “What drove Austrian bank internationalization during the Monarchy and after the fall of the Iron Curtain?”

3

Motivation/Purpose

 • Austrians banks’ commitment/exposure to the “East” - significant market position

• Historic importance of the region - banks expanded strongly

• Connection: Monarchy to present times

• Historic ties to Central, Eastern & Southeastern Europe?

4

Motivation/Purpose cont’d

 

• Examine the reasons for the banks’ internationalization then and now

• Comparison of strategies: Monarchy <-> after 1989

• Role and strategy of Austrian banks during the Austrian-Hungarian Dual Monarchy

• Elaborate on the development of the major Austrian banks and their dominant position

• Gain an overall picture within the time frame from the monarchy until now

• Role of cultural closeness and historic ties concerning internationalization of banks

5

Summary/Conclusion

 • Historically Austrian banks pursued a “follow the client” strategy, mainly driven by the establishment of industrial firms along the newly created railroad network

• Present strategies are more directed towards the retail market and therefore proactive - widespread retail network

• Factors like cultural/psychic closeness & geographical distance played an important role

6

Method/Data

 

• Literature review: Junction of historical studies and internationalization theories

• Times series analysis: Monarchy vs. 1989 – 2012 -> descriptive indicator: number of branches

1. Geographical analysis branch networks: cost-intensive means of entering markets and thus a certain proof for long-term intentions

2. Case-study design: Creditanstalt/Länderbank

• Data: Statistical yearbooks (branch locations)

7

Theoretical Foundations

 

•Haselmann (2006): Foreign banks specialize in financing enterprises which have the same country of origin

-> „Follow Your Customer Strategy“

-> Push/Pull conditions: economic environment foreign/home country

•Focarelli and Pozzolo (2005): Degree of integration, institutional characteristics and profit opportunities drive bank internationalization

•Williams (1997): Banks are responding to their client’s movement abroad --> want to defend their client-bank relationship

•Johanson and Vahlne (1993 & 2009): Internationalization frequently started in foreign markets that were close to the domestic market in terms of psychic distance

-> Psychic distance is defined in terms of factors such as closeness in language, culture, political systems

8

Historical Review

 

9

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Industrial production in Austria between 1830 and 1913

Index (1880=100), Source: Rudolph, ‘The Pattern of Industrial Growth’, 94.

10

Banking during the monarchy

 

• Crédit Mobilier: Émile and Isaac Péreire expaned upon the ideas of mobilization of credit and the marriage of banking and industry-> Accumulation of both small and big funds and the subsequent investment in undertakings like the extension of the railway track

• Schumpeter: Crédit Mobilier one of the most explosive inventions of the 19th century

• Austria: • Creditanstalt first of its kind with an enormous capital base;

other banks like Länderbank followed the model• sometimes the opening of a bank branch and the entering into

service of a newly built railway happened at the same time

11

Earlier Research

 

• März (1968): Austrian economic history was to a large part bank history - emphasizes the importance of banks as motor and supporter of economic growth. Shows economic conditions by looking at the annual increase of the railway network

• Gerschenkron (1962) tried to integrate the role of banks into an overall model of industrialization and assumes their key role especially in Austria or Germany

• Eigner (1997): Austrian banks had positive influences concerning the acceleration of industrialization and a powerful position towards the industry

• Rudolph (1976) emphasizes that the enlargement of the branch network took place largely in the Czech crown lands, the industrial heart of the monarchy12

Motivation II

 

Source: Bachinger & Matis, ‘Österreichs Industrielle Entwicklung’, supplement 230-231.

SEITE 13

Share of industry & craftmanship in

total employment of the aggregate

Austrian population

(1910)

 

Source: ‘Tramways’, (2012).

14

 

Source: www.tramways.at

Source: Nautz, ‘Zerfall und Integration’ ‘Economic Geography in Historic Perspective’ (2008), 4.. 15

Results - monarchy

 

16

Results - monarchy cont’d

 

• Stringent division of labor within the Habsburg monarchy: • Industrial core in the now Czech Republic• Hungary granary of the empire • Vienna as administrative center -> led to the emergence of a

strong banking machinery

•Kernbauer and Weber (1993) and Eigner (2008): see Vienna before 1914 as the sole financial center in Central Europe besides Berlin.

•Less developed countries like the Balkan states did not have the banking know-how. That pattern was predominant again after fall of the iron curtain.

17

Timeline of Austrian Banks’ subsidiaries in CESEE countries 1985-2006 and Status in 2011

 

Source: OeNB (2009), 101; CESEE = Central, Eastern & Southeastern Europe18

By 2011: • 8.250 branches • in 20 CESEE countries

Market shares:UA 10%, SI 17%

HU/BG/RS ~ 25%

CZ, RO ~ 35%

SK, BH ~ 45%

HR >70%

Comparison loans to households and to private enterprises in selected countries

 

Source: RZB, CEE Banking Sector Reports, var. issues 10/2004, 10/2007, 06/2012.19

CZ 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Loans priv. ent. % GDP 33,5 29,8 19,5 17,6 16,6 16,3 17,6 19,7 20,3 22,1 20,9 20,7 21,3Loans households % GDP 4,0 4,7 5,3 6,4 8,2 10,1 12,7 15,4 18,3 21,0 24,0 25,4 26,0HRLoans priv. ent. % GDP - 14,9 18,0 25,9 24,9 24,8 26,8 31,2 24,6 25,6 27,0 29,9 32,0Loans households % GDP - 15,3 18,5 23,8 27,7 30,4 34,0 38,2 35,4 36,5 36,5 37,8 37,4SKLoans priv. ent. % GDP 36,1 32,0 21,2 18,8 17,8 14,7 23,6 25,1 17,3 25,0 24,8 23,8 24,1Loans households % GDP 4,3 4,7 5,1 5,5 7,0 8,6 11,3 13,5 11,8 18,3 20,9 22,4 23,7HULoans priv. ent. % GDP 20,5 23,8 24,5 21,5 23,3 24,1 26,0 27,3 28,4 28,6 30,1 27,8 27,4Loans households % GDP 4,1 4,5 6,1 8,5 12,4 14,5 17,2 19,9 23,1 27,5 30,8 31,4 30,2

Results - post 1989

 

• Directly after the fall of the Iron Curtain some “first mover” banks followed their corporate clients into the neighboring CESEE countries.

• Banks soon changed their strategy to setting up (or acquiring) retail networks across CESEE, and going further South/East as well.

• Banks were attracted by the favorable economic conditions (pull condition). Operations were aimed at long-term growth.

• Different framework and strategies

• Todays branch network 50 times larger

• Widespread retail banking networks, proactive

20

Cultural & geographical closeness

•Historic ties serve as base for the subjective closeness and rather low psychic distance. In daily business same mentality is striking.

Nowotny (2009), Wurm (2006) and Haiss (1992) state that the cultural closeness between Austria and CESEE countries is one of the reasons for the success.

•Austrian expertise regarding market operations in the East is an asset. Market knowledge and contacts were an advantage for Austrian firms at an early stage.

•Important hub and gateway to the East with Vienna as its centre of regional financial expertise.

CESEE = Central, Eastern & South-Eastern Europe

21

Summary/Conclusion

 • Historically Austrian banks pursued a “follow the client” strategy,

mainly driven by the establishment of industrial firms along the newly created railroad network

• Recent strategies are more directed towards the retail market and therefore proactive - widespread retail network

=> Factors like common history, cultural/psychic closeness and geographical distance played a major role

22

Reinhard Schwaiger & Peter R. Haiss*http://ssrn.com/author=115752 peter.haiss@wu-wien.ac.at

WU Vienna University of Economics and Business

„History compared: Austrian banks‘ internationalization during the monarchy and after the fall of the Iron Curtain“

EABH & NBP 2013 Conference on

“Foreign Financial Institutions & National

Financial Systems “, Warsaw, 07-08/06/2013http://conference2013.eabh.info/conference/programme/Session 4 on “Reasons of Cross-border Activities of Financial Institutions and their Influence on National Banking Systems”

* The opinions expressed are the authors‘ personal views

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SEITE 24

Austrian banks’ market share by host country (%)

 

Source: OeNB,’Financial Stability Report’, Austrian National Bank, various issues (Nr. 2/2001; Nr.5/2003; Nr. 9/2005; Nr. 11/2006; Nr. 13/2007; Nr. 21/2011) * PL: if UCBA included ~ 15%; further rose with RBI acquisition 2012

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011AL               35,4 ~30 ~30 ~30 27,0  

BG             19,4 29,0 24,6 24,8 24,4 22,0 22,1BH       27,0 41,0 45,0 52,6 52,6  ~50 ~50 ~50 47,0 44,5CZ 5,0 21,0 25,0 27,0 31,0 32,0 34,9 37,0 37,1 34,8 34,1 34,0 32,8HR 9,0 9,0 18,0 36,0     45,2 63,0 64,3 65,8 66,6 66,0 67,0HU 14,0 18,0 15,0 16,0 15,7 20,5 20,7 20,4 22,2 23,0 22,3 23,0 22,6

ME             8,0 8,3 14,4 15,3 16,9 15,0  PL 5,0 7,0 7,0 10,1 10,5 11,2 11,0 11,0 2,2 2,3 2,0 2,0 2,1RO       9,5 10,5 14,5 17,5 41,6 40,3 37,3 36,2 35,0 36,0RS             37,1 30,0 29,2 27,9 28,1 25,0 26,3SI 3,0 5,0 5,0 8,5 10,0 11,0 14,2 16,0 17,0 18,9 17,9 17,0 16,8

SK 11,0 16,0 40,0 46,0 43,0 44,0 44,1 52,0 50,0 50,0 50,2 36,0 45,7UA             12,9 8,2 8,5 13,6 12,4 11,0 10,2

Branch Network 10 largest stock banks in 1914

 

Source: Compass Finanzielles Jahrbuch für Österreich (1915).

Foreign bank presence and growth in cross-border lending

Source: Mihaljek, 2009

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