October 23, 2013 / 1:36 PM / 4 years ago

UPDATE 1-Western banks still in retreat from Central Europe -Vienna 2 group

LONDON, Oct 23 (Reuters) - Western European banks are still pulling back from central and southeastern Europe and non-performing loans remain a serious concern, a taskforce of multilateral organisations said.

Central Europe's banks are seen as vulnerable to an exodus of cash-strapped western banking parents from the region, though the flight has not been as rapid as feared two years ago.

"The reduction of cross-border funding by Western banks for central and southeastern Europe is continuing at a moderate pace," the Vienna 2 initiative said in a statement on Wednesday following a meeting in Brussels this week.

There was "an urgent need to tackle persistently high non-performing loans in several countries in the region," it added.

The Vienna 2 Initiative, spearheaded by the European Bank for Reconstruction and Development, the International Monetary Fund and the World Bank, aims to help prevent disorderly deleveraging by western banks from central Europe.

The original Vienna Initiative was formed in 2008/09 in response to the global financial crisis, and was relaunched as Vienna 2 in January 2012 following the euro zone crisis.

Credit growth remains slow in the region, the group said, adding that it would look at ways to encourage lending to small and medium-sized enterprises.

The European Central Bank promised on Wednesday to put top euro zone banks through rigorous tests next year, before supervision comes under its roof as part of a banking union designed to avoid a repeat of the euro debt crisis.

Wary of supervising a lopsided banking union without a common backstop in place, it has urged euro zone governments to agree on a strong single resolution mechanism to salvage or wind down banks in trouble.

The Vienna group said it was important to encourage supervisory ties between the euro zone members of the banking union and central European countries which were, or were aspiring to be, European Union members.

It said the combination of a single supervisory and resolution mechanism "holds the promise of more effective and better coordinated cross-border bank resolution".

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