Law360, London (March 2, 2022, 9:17 AM GMT) -- The European subsidiary of Sberbank, Russia's biggest lender, has been shut down and will be wrapped up in insolvency proceedings after the European Central Bank found that heavy cash withdrawals triggered by the Russian invasion of Ukraine would cause it to fail.

Austria's Financial Market Authority said late on Tuesday that it has banned Vienna-based Sberbank Europe AG from continuing its business operations. The regulator has installed an administrator to determine whether the bank is still capable of carrying out an orderly insolvency.

Meanwhile, two Sberbank Europe subsidiaries in Croatia and Slovenia have been split off from the group and sold to local lenders.

The ECB said on Monday that Sberbank Europe was "failing or likely to fail" as a result of account-holders removing their cash from the Austrian lender and its subsidiaries in Croatia and Slovenia. The EU central bank traced the flow of money to "the reputational impact of geopolitical tensions."

Austria's FMA said on Tuesday that the ECB had instructed it to close Sberbank Europe, which operates 185 branches and posted assets of $14.4 billion at the end of 2020.The subsidiary is fully owned by Sberbank of Russia, whose majority shareholder is the Russian government.

The decision to shut the doors makes Sberbank Europe the first major Russian financial institution to fold under the backlash from the Russian invasion of Ukraine last week. The incursion into a European state unleashed a series of unprecedented financial sanctions by Western governments, including the freezing of foreign bank assets and international holdings of the Russian central bank.

The European Commission, the European Union's executive arm, has endorsed the decision to prevent a disruptive collapse of a lender supervised by the central bank of the eurozone.

"The banks were failing, there were no private sector solutions outside of resolution, there were no supervisory actions that would have prevented its failure and a resolution action was necessary in the public interest," the commission said in a statement on Wednesday.

Sberbank Europe customers are protected by Austria's deposit guarantee scheme, which covers them for up to €100,000 ($111,000).

The EU's Single Resolution Board, whose role is to wrap up failed banks, said late Tuesday that it has sold Sberbank's Croatian branches to Croatian Postal Bank, which is majority-owned by the country's government. And the authority has sold the Slovenian units to the country's biggest banking group, NLB.

"The banks will open on March 2 as normal with no disruption to depositors or clients," the Single Resolution Board said. "They are now part of well-established, robust and stable banking groups."

The board had declared a temporary moratorium on Monday on Sberbank Europe group's operations that had suspended payments until a decision about resolution could be reached.

The authority said on Tuesday that it decided that no resolution action was necessary for the Austrian parent company, Sberbank Europe, as it did not provide "critical functions to the economy, and that winding it up under normal insolvency proceedings would not have a negative impact on financial stability or the economy in Austria."

SRB Chairwoman Elke König said that "all of this has been done without having to use public funds, so not only are Sberbank's customers protected, the taxpayer is too."

Sberbank Europe said Wednesday morning that "the latest geopolitical developments" have caused a large flow of client deposits out of the institution within a short time, resulting in long lines at branches and some restrictions on how much cash can be withdrawn each day. 

"We are making every effort to support the authorities to apply their powers to resolve this unprecedented situation in the interest of our customers," Sonja Sarközi, chief executive of Sberbank Europe, said.

--Editing by Ed Harris.

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