## 1autea2020001 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1autea2020001 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1autea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1autea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1autea2020001.pdf.json) --- ### Overarching findings and structural vulnerabilities - Authorities proactively addressed financial stability risks since previous FSAP: Financial Market Stability Board (FMSB) set up in 2014; activation of Systemic Risk Buffer (SyRB) and Other Systemically Important Institutions (O-SII) buffers. - National transposition and implementation of EU directives/regulations and FMA minimum standards addressed some prior FSAP recommendations. - A unified, ex ante-funded full-scale guarantee deposit scheme (DGS) launched in 2019, supplemented by the DGS of the savings sector. - AML/CFT framework aligned substantially with FATF standards; concerns remain about adequacy of AML controls on foreign branches and subsidiaries. - Structural vulnerabilities: - Large banking system with almost 600 banks at unconsolidated level. - Complex ownership structures and high financial interlinkages: banks with tiered corporate structures and layers of mutual cooperation arrangements account for half of the assets. - Focus on CESEE markets, which generate 42 percent of the profits. - Mutual cooperation arrangements (IPS, cross-guarantee schemes, liquidity associations) act as shock absorbers for idiosyncratic shocks but may amplify loss propagation in systemic events. - Insurance sector: high coverage ratio but faces low growth, low interest rates, future profitability risk, and increasing legal, reputational and conduct risks. ### Macrofinancial setting and real estate risks - Growth and outlook: - Strong growth in Austria and CESEE; outlook moderated; output gap positive; gradual convergence towards potential. - Austrian banks’ foreign business continues to focus on CESEE where activity softened in 2019. - Credit and cyclical risks: - Annual growth of lending to households: 4.2 percent in 2019Q1. - NFC loan growth strong, especially to real estate and construction services; expected to moderate. - Cyclical risks in CESEE and potential spillovers are high; economies in late stages of business cycle. - Real estate valuations and mitigating factors: - House prices estimated overvalued by around 10-15 percent nationally, and by over 20 percent in Vienna. - Real estate transaction volumes grew 13.3 percent in 2018. - Mitigants: large and regulated rental market in Vienna and other urban areas; moderate household leverage; low ownership ratios (55 percent); alternative housing finance arrangements (regional mortgage banks, contract savings banks, housing construction banks, housing subsidies). ### Financial sector structure and size (key statistics) - Banking sector: - Banking sector represents around 250 percent of GDP and about 75 percent of total financial system assets. - Almost 600 banks (total number fell by 32 in 2018). - Total assets grew by 3.9 percent in 2018. - Seven significant Austrian institutions (SIs) under the SSM represent 60 percent of total system assets. - Top 3 banks represent 50 percent of the market. - Other financial sectors: - Mutual funds: 14 percent of financial system assets. - Insurance firms: 10 percent of financial system assets. - Pension funds: 2 percent of financial system assets. - FinTech: 0.25 per mil of GDP with about 100 firms; out of scope of FSAP given lack of macrofinancial significance. ### Financial sector resilience — stress testing and liquidity - Solvency and capital: - Aggregate banking system is resilient to severe macrofinancial shocks; capital buffers sizeable relative to immediate threats. - Capital ratios after macro shocks and market risks remain comfortably above minimum requirements, although most banks would use capital conservation buffers. - In credit cooperative sector, ownership structure provides strength under baseline but amplifies shocks under stress; high interconnectedness generates contagion effects in network analysis. - Liquidity: - Banking system resilient to sizeable withdrawals given strong counterbalancing capacity and sizable deposit funding base. - Liquidity cooperation scheme ensures pooling of liquidity among members and contributes to financial stability. - Contagion: - High financial interlinkages mean contagion and spillovers from hypothetical bank defaults are material, especially within the cooperative/Raiffeisen segment. ### Key vulnerabilities and risks - Structural vulnerabilities: large banking system (almost 600 banks), complex ownership structures, concentrated mutual cooperation arrangements, and CESEE exposure (42 percent of profits). - AML/CFT risks: adequacy concerns for AML controls on foreign branches and subsidiaries; need for additional group-wide supervision and better integration between prudential and AML supervisors. - Insurance sector risks: low growth, low interest rates, future profitability risk, rising legal/reputational/conduct risks despite high coverage ratios. - Data and supervisory capacity gaps: need for more granular data on real estate, NFC sectors, and CESEE exposures; improved monitoring of intra-group transactions. ### Selected policy recommendations and reform priorities - Financial sector oversight and governance: - Review legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board (BMF; ¶39). — MT - Make the OeNB the chair of FMSB and increase its voting representation (BMF; ¶34). — NT - Strengthen related party risk framework and establish ex-ante approval for LSI significant investments in non-financial undertakings (FMA/BMF; ¶42). — NT - Phase-out the role of state commissioners in supervisory boards (BMF/FMA; ¶41). — MT - Enhance internal guidelines for supervisory action based on qualitative factors (FMA; ¶40). — I - Stress-test insurance segments/business lines with material future profitability and follow-up with appropriate actions, such as capital add-on (BMF/FMA; ¶44). — NT - Review resources for maintenance of Solvency II, insurance market conduct supervision, potential recovery and resolution framework, and AML supervision for all entities, including VASPs (FMA; ¶43, ¶45). — NT - Revise AML/CFT risk scoring reflecting cross-border risks, increase onsite inspections of low risk banks, branches and subsidiaries and improve non-EU/EEA information exchange (FMA; ¶46). — NT - Monitor effectiveness of FMSB’s sustainable lending guidance and prepare regulatory actions, such as binding macroprudential limits, if risk profile does not improve (FMSB; ¶37). — NT - Enhance oversight of inward spillover risks from the inverse ownership structure of the Raiffeisen sector (OeNB/FMA; ¶38). — NT - Financial stability analysis and stress testing: - Close data gaps, including in the real estate and NFC sectors, and improve coverage and granularity of CESEE data (OeNB; ¶35). — MT - Enhance stress testing framework to consider second round effects, dynamic balance sheets, and contagion/spillover effects (OeNB; ¶31). — MT - Ensure resources and organizational structure are adequate to meet stress testing framework objectives (OeNB; ¶31). — NT - Crisis management and safety nets: - Explicitly provide for purchase and assumption transactions in the bankruptcy regime (BMF; ¶52). — NT - Seek legislation for standing authority to implement stabilization measures, support funding in resolution, and explore mechanisms for prepositioning BMF to support borrowing by DGSs (BMF; ¶53, 54). — I - Consider cross-border spillovers in national crisis contingency plans (FMA/BMF; ¶51). — NT - Enhance insurance crisis preparedness, introducing pre-emptive recovery planning for eligible insurers (BMF/FMA; ¶56). — NT ### Implementation, data, and resource priorities - Collect better and more granular data regarding real estate, NFC sectors, and CESEE exposures; ensure efficient information sharing arrangements; pledge adequate resources given complexity of the Austrian financial system. - Supervisors should have capacity to take timely action, correct unsustainable risk taking and business models, strengthen the role of banks’ supervisory boards, and clearly communicate with insurance firms on strategic risks. - Continue efforts to close data gaps and improve CESEE data coverage and granularity; ensure adequate resources to advance stress testing and macroprudential frameworks. - For insurers, secure resources for continuous improvement of the Solvency II regime, market conduct supervision, and recovery and resolution frameworks. - Address AML vulnerabilities with additional group-wide supervision and better integration between prudential and AML supervisors; prepare for FATF modifications regarding VA/VASPs (training and resource needs). ### Ownership, control, and segment structure of the banking system - Three “decentralized segments” core to the system: Sparkassen, Raiffeisen, and Volksbanken (VB). - Sparkassen segment: - 49 Sparkassen created a banking group (Erste Group Bank AG (EGB)), an IPS (cross-guarantee scheme ex lege according to CRR), and a DGS. - Raiffeisen segment (three-tiered): - 386 primary banks (1st tier), eight regional Landesbanken (RLB) (2nd tier), and RBI (3rd tier) as the "central institution". - RBI majority owned 58 percent by the RLBs; RLBs owned by the 386 primary banks (“inverse ownership”). - IPS system two-level: a national IPS and six regional IPSs. - Volksbanken (VB) segment (two-tiered): - Eight regional banks including “central institution” VB Wien and a specialized bank; liability association with unlimited cross-guaranteed schemes. - “Inverse ownership” enables transfer of net revenues but amplifies inward spillovers in downturns. ### CESEE exposures and foreign business - CESEE accounted for 24 percent of exposures in 2018 and over 42 percent of consolidated banking net profits. - CESEE activities concentrated in EU countries; highest exposures in Czech Republic and Slovakia (half of total CESEE exposure). - Aggregate exposure to Russia: 7 percent of CESEE assets; significant for Raiffeisen segment. - Post-2012 guidance: intragroup liquidity transfers from Austrian parents declined from 15 percent of subsidiaries' assets in 2011 to below 9 percent in 2018. - Loan-to-local stable funding ratio stable at around 75 percent (below early-warning threshold of 110 percent). - Direct exposures to Italy: 1.3 percent of foreign claims. ### Capital positions, profitability, and credit quality (selected metrics) - CET1 ratio: 11.6 percent in 2013 to 15.4 percent in 2018. - Cost-to-income ratio (CTI): around 65 percent in 2018; Austrian SIs slightly below euro area (EA) average. - NPLs: 8.6 percent in 2013 to 2.6 percent in 2018 (system-wide). - CESEE subsidiaries NPLs: 14.0 percent in 2013 to 3.2 percent in 2018. - Customer deposits: around 40 percent of liabilities. - Life insurance: premiums in life segment decreased by -17 percent in 2014–18; SCR coverage ratio ~285 percent in 2018 vs European average 243 percent. - Insurance sector allocates about 8 percent of total assets to real estate—the highest in the EU. ### Stress testing approach, scenarios, and results - Coverage and data: - 440 banks included, accounting for over 95 percent of banking system’s total assets. - Tests used regulatory and supervisory data as of end-2018. - Exercises: - Top-down solvency exercise (OeNB’s ARNIE with IMF satellite models). - Top-down liquidity stress test (Basel III quasi-LCR over 30 days; cash flow-based test over three months). - Network exercise and exploratory NSFR proxy analysis. - Scenario design (three-year horizon, 2018 Q4–2021 Q4): - Baseline aligned with April/July 2019 WEO projections. - Adverse scenario with four systemic risk sources: global growth weakening; sharp rise in risk premia; balance sheet recession in CESEE with large FX moves; sharp correction in Austrian real estate prices. - Adverse scenario severity: - Deviation of Austrian real GDP growth from baseline of 6.9 percent by 2021, with a 2.3 standard deviation move in two-year cumulative real GDP growth. - 20 percent peak-to-trough decline in real estate prices. - CESEE output shocks range between 8.1 and 13.6 percent deviation from baseline by 2021 (alternate text cites 8.1 to 12.6 percent in some sections). - Under adverse scenario, GDP contracts by 2.5 percent over the first two years of stress (-0.4 and -2.1 percent in 2019, 2020, respectively). - Adverse scenario more severe than financial crisis (-2.0 percent GDP over 2009-10) and 2018 EA FSAP scenario for Austria (-2.0 percent over 2018-19). - Solvency stress test results: - Baseline: system aggregate CET1 ratio increases by 2.3 percentage points by 2021. - Adverse: aggregate CET1 ratio declines by 4.4 percentage points to 11.1 percent in 2021. - Bank breaches: five small banks (out of 440) breach capital requirements under adverse scenario. - Total shortfall under adverse: approximately EUR 5 million or 0.01 percent of system CET1 capital. - Key drivers: credit impairments and lower net interest income (NII); credit losses 4.9 percentage points of CET1 under adverse vs 1.0 percentage point decline in baseline; NII lower on average by almost 15 percent for the horizon; RWA increase contributes 0.7 percentage points. - Loss rates: 3-year cumulative mortgage loss rate in Austria reaches 1.4 percent; CESEE 3-year cumulative corporate PD reaches 17 percent in most countries, with Russia and Ukraine up to 30 percent PD. - Heterogeneity: - O-SII banks more exposed to market risk and interest-income shocks. - Non-O-SII (smaller banks): equity participation valuation swings contribution +1.8 and -1.9 percentage points between baseline and adverse. - “Inverse ownership” in Raiffeisen amplifies inward spillovers. ### Network, IPS role, and contagion sensitivity - IPS effectiveness: - IPS structure acts as shock absorber for idiosyncratic shocks, provides capital and liquidity buffers. - Two-layered IPS effective for smaller institutions but creates vulnerabilities when stress originates at a central institution due to strong equity linkages. - Network and concentration tests: - No bank defaults triggered from losses on the largest exposure; capital losses moderate (2 percent of RWAs) upon default of three largest on aggregate exposures. - On gross exposures, default of largest counterparty depletes 5 percent of aggregate capital; system CET1 ratio remains above regulatory minimum even after default of ten largest exposures (tests exclude IPS support and apply LGD 50 percent). - Contagion indices sensitive to inclusion of related-party exposures; maximum contagion index from O-SIIs rises from 1.2 percent to 41 percent capital depletion when gross related-party exposures included. - CoMap re-run: median contagion index from Austrian O-SII banks to the system estimated at 0.8 percent (distribution 0.5 to 2.1 percent at 10th and 90th percentiles). ### Liquidity resilience, LCR and NSFR findings - Asset-weighted average LCR: 164.7 percent under Basel-prescribed assumptions. - Additional funding outflows: average LCR remains above 100 percent. - Severe scenario with market price shock: average LCR declines to 104.3 percent. - By currency: - EUR LCR declines from 145.8 percent to 96.9 percent under severe scenario. - System-wide USD LCR average: 56.6 percent, decreasing to 44.1 percent in severe scenario. - USD outflows manageable at 6.1 billion. - Cash-flow tests (three months): small liquidity shortfalls for some small banks under severely adverse conditions; combined shortfall EUR 1.5 billion manageable given OeNB liquidity facilities. - Aggregate net liquidity position (counterbalancing capacity minus net outflows relative to system assets): declines from initial 21 percent of system assets to 8.8 percent in most adverse scenario. - Asset-weighted aggregate NSFR proxy: 122 percent, declines to 112 percent under stress. - Share of system assets with NSFR below 100 percent: 2.2 percent in baseline; over 28 percent under stress. - Role of IPS in liquidity: IPS enhances resilience; Raiffeisen counterfactual (no IPS support) increases combined shortfall to EUR 1.7 billion (from EUR 1.5 billion) but remains small relative to system. ### Governance, State Commissioners, and related-party risks - State Commissioners: - Full-time BMF employees, serve on more than one board, and can veto supervisory board decisions. - Legacy role not compatible with international standards; needs reconsideration. - Related-party risk and significant investments: - No requirement that related-party transactions be on market terms. - FMA lacks power to set aggregate limits or require collateralization for related-party exposures. - No standards/regulations for intra-group transactions adopted. - No ex-ante approval/notification requirement for LSI investments in nonfinancial undertakings. - Recommendation: monitor related-party transactions for market pricing and safety; disallow investments that impede consolidated supervision. ### Insurance sector governance and Solvency II concerns - Solvency II implemented; all insurers met capital requirements in 2017 without reliance on transitional and LTG Measures. - FMA established yearly stress testing; OeNB and FMA jointly validate internal models for market risk. - Risks: - Ongoing validation requires skilled resources; asset allocation shifting to less liquid assets complicates valuation. - Duration gap between assets and liabilities one of highest among European peers. - Solvency II allows recognition of expected profits in future premiums as own funds; average share ~12 percent of own funds; largest Austrian insurance group's reliance over 40 percent (not deemed systemic given small sector size). - Recommendations: - Targeted stress testing on segments/business lines with material future profitability risk. - Supervisors should communicate strategic concerns and require actions (e.g., capital add-ons). ### AML/CFT progress and remaining gaps - Progress since 2016 Mutual Evaluation: - FM AML Act amendments and sectoral laws strengthened framework. - Register of Beneficial Owner (BORA Act) created in 2017; amended July 2019 to transpose 5th AMLD. - FM AML Act assigns FMA responsibility over registration and monitoring of VA/VASPs; law defines VA/VASPs following FATF definition. - FATF technical compliance ratings upgraded in follow-up reports. - Supervisory approach: - FMA adopted risk-based approach and offsite risk rating tool. - Recommendation: revise onsite approach to include more regular inspections of lower risk banks, branches and subsidiaries. - Continue focus on cross-border risks and effective CDD implementation. - Review National Risk Assessment to develop measures mitigating ML/TF risks, including CESEE exposures. - Information-sharing constraints: - Cross-border cooperation with EU/EEA generally allowed; information sharing with some third countries hindered by professional secrecy equivalence requirements (EBA assessment). - Recommendation: ensure strong AML/CFT controls at group level; analyze confidentiality/professional secrecy/data protection rules case-by-case. ### Crisis management, resolution, and deposit protection - Supervisory and resolution functions operationally separated within FMA but decision making unified; recommendation to consider separating decision making to avoid conflicts. - Recovery and resolution: - Eleven Austrian banking groups under Single Resolution Board (SRB); others under FMA. - FMA categorized banks for resolution planning: - Category 1: 16 banks with “fully-fledged” resolution plans. - Category 2: “deposit-focused” banks with “proportionate” plans. - Category 3: 404 “harmonized” banks where bankruptcy is credible. - MPE bail-in approach envisaged for two Austrian groups; implementation underway; constraints from less-developed local capital markets and small bank sizes. - Recommendation: consider transitional arrangements allowing MREL to be held by a group entity in Austria with phase-out. - Recommendation: amend bankruptcy regime to explicitly provide for transfer of covered deposits and sound assets to an acquirer. - Recommendation: OeNB ELA policy and BMF support for funding in resolution should be clarified/enhanced. - Deposit protection: - Two DGSs: Einlagensicherung Austria GmbH (uniform DGS) and Sparkassen-Haftungs GmbH. - DGSs can access each other's funds (including contingent contributions); schemes may borrow and BMF may guarantee such borrowing but no ex ante guarantee exists; BMF would need legislation to provide it. - DGSs lack power to finance transfer of assets and liabilities in bankruptcy. - Recommendation: BMF should secure ex ante standing authority to guarantee DGS borrowing or power to lend directly to schemes. - Insurance resolution: - Ongoing discussions positive; FMA powers should be substantially reinforced. - Recommend adoption of principle that losses borne first by shareholders and other creditors before policyholders/beneficiaries. - Extend FMA restructuring powers to all kinds of insurance and creditors; include power to mandate portfolio transfer. - Short-term: request pre-emptive and proportional recovery plans from selected insurers. ### Real estate correction scenario (Domestic stress event) - Risk description: - Real estate prices increased rapidly over last 5–6 years; estimated overvalued by around 10-15 percent. - Share of foreign currency housing loans high relative to peers. - Signs of easing lending standards: increase in high risk mortgages (high LTV and DTI). - Risk assessment: Medium. - Direct banking impact: - Price drop → higher impairment charges from defaults/delays by leveraged households and construction firms; lower house prices depress consumption and banks’ profits. - Mitigant: low exposure of Austrian banks to housing loans in Austria at 16 percent of assets. - Stress-test and system resilience indicators: - CET1 ratio 2013–2018: 11.6 to 15.4. - Leverage ratio: 6.5 percent (above SSM 5.2 percent). - NPLs: 8.6 percent (end 2013) to 2.6 percent (2018). - Aggregate CET1 increases by 2.3 ppt in baseline; decreases by 4.4 ppt in adverse. - Participation channel contribution: 0.8 percentage points. - Credit losses additional impact: -3.9 percentage points; RWA change in adverse: -0.7 percentage point. - Macroprudential measures referenced: - FMSB 2018 guidance on “sustainable lending in real estate financing”: minimum down payment 20 percent; maturity limit 35 years; DSTI limit 30 percent to 40 percent; prudent borrower creditworthiness assessment. - FMA minimum standards for FX and RPV loans (2013, revised 2017) mitigated default risk. ### Institutional perimeter, methodology and testing infrastructure - Institutional perimeter: - All Austrian credit institutions: six or seven SIs (text alternates six and seven SIs) and 433 LSIs; total sample of 440 entities including 7 SIs. - For the 7 SIs: about 60 percent of banking sector assets. - For all 440 entities: above 95 percent of total assets of deposit-taking institutions. - Data and baseline date: regulatory/supervisory returns (FINREP/COREP), OeNB statistical warehouse, CCR, external sources (KSV), Moody’s CreditEdge; data as of December 2018. - Modelling approach: - Balance sheet approach; static balance sheet assumption; three-year horizon (2018 Q4–2021 Q4). - Scenarios: baseline and macro adverse; calibration via Global Macrofinancial Model (GFM); satellite models for PDs/LGDs; Bayesian Model Averaging (BMA) for corporate sector; Monte Carlo for mortgage PDs/LGDs where needed. - Income projections: NII sensitivity to macro conditions; net trading/fee income stressed via historical volatility and EBA haircuts; operational expenses held at starting point. - Behavioral assumptions: static balance sheets; maturing assets/liabilities replaced at current rates; banks assumed to pay 30 percent of profits in taxes and 30 percent as dividends. - Liquidity testing: - LCR (30 days), cash-flow analysis (three months), NSFR proxy (exploratory); LCR hurdle 100 percent; NSFR target 100 percent assumed post-introduction. - LCR scenarios: 12 scenarios combining liquid asset shocks and liability outflow scenarios. - Network analysis: - Furfine algorithm and Espinosa-Sole tool; CoMap methodology for idiosyncratic calibrations; outputs include failed capital percent, contagion index, vulnerability index. ### Key stress testing recommendations - Strengthen stress testing function given system footprint and complexity. - Ensure adequate specialized staff, systems and IT infrastructure. - Enhance integration of sensitivity, contagion, and interconnectedness tools. - Develop framework capturing second round effects, behavioral elements, dynamic balance sheet stress tests, and separation of prudential and accounting layers. - Increase modelling granularity (e.g., geographical breakdown). ### Authorities’ statement (summary points) - Authorities welcome IMF positive assessment and note proactive measures on financial stability and macroprudential policy. - Authorities concur banks are, in aggregate, well capitalized and could withstand severe macrofinancial shocks. - Key challenges noted: large and interconnected banking sector; high CESEE exposures; low domestic structural profitability; developments in parts of real estate sector. - Actions and views: - Risks assessed as contained given higher capital and better credit quality; stress tests confirm resilience. - Data gaps should be closed; AnaCredit implementation a first step. - New government program contains measures to increase supply and affordability of residential real estate; authorities ready to activate macroprudential measures if needed. - Clarification that prior proposals on FMA/OeNB supervisory responsibilities were not pursued by new government. - Deposit guarantees, recovery and resolution: - Since January 1, 2019, investor compensation and depositor protection performed by Einlagensicherung AUSTRIA Ges.m.b.H (DGS AUSTRIA) with exceptions for some IPS members. - System assessed as sound and sufficiently funded. - Recovery and resolution planning well advanced; recommend closer host authority collaboration in contingency planning. - Insurance: - Solvency II implementation smooth; support for principle that losses first borne by shareholders and creditors. - Future FMA modernization should consider EU standards, safeguards, and clear responsibilities. - AML/CFT: - Authorities committed to strengthening AML/CFT effectiveness; progress includes increased supervisory resources, beneficial ownership register, transposition of 5th AMLD including oversight of VASPs. - Further measures include more intensive AML/CFT training in criminal justice per new government program. *Source: 1autea2020001 - EXECUTIVE SUMMARY and selected chapters from the supplied PDF extract.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### 1autea2020001 - EXECUTIVE SUMMARY ### Executive summary — overarching findings - Austrian authorities have proactively addressed financial stability risks since the previous FSAP, including the setup of the Financial Market Stability Board (FMSB) in 2014 and activation of Systemic Risk Buffer (SyRB) and Other Systemically Important Institutions (O-SII) buffers. - National transposition and implementation of EU directives and regulations and FMA minimum standards have addressed some prior FSAP recommendations. - A unified, ex ante-funded full-scale guarantee deposit scheme (DGS) was launched in 2019, supplemented by the DGS of the savings sector. - Significant progress has been made in aligning Austria’s AML/CFT framework with FATF standards, but concerns remain regarding adequacy of AML controls on foreign branches and subsidiaries. - Structural vulnerabilities remain: - Large banking system with almost 600 banks at unconsolidated level. - Complex ownership structures and high financial interlinkages: banks with tiered corporate structures and layers of mutual cooperation arrangements account for half of the assets. - Focus on CESEE markets, which generate 42 percent of the profits. - Mutual cooperation arrangements (IPS, cross-guarantee schemes, liquidity associations) act as shock absorbers for idiosyncratic shocks but may amplify loss propagation in systemic events. - Insurance sector: coverage ratio is high, but sector faces low growth, low interest rates, future profitability risk, and increasing legal, reputational and conduct risks. ### Macrofinancial setting and real estate risks - Growth and medium-term outlook: - Growth in Austria and CESEE has been strong, but the outlook has moderated; output gap is positive and medium-term outlook indicates gradual growth convergence towards potential. - Austrian banks’ foreign business continues to focus on CESEE countries, where activity softened in 2019. - Credit and cyclical risks: - Annual growth of lending to households was 4.2 percent in 2019Q1. - NFC loan growth, especially to real estate and construction services, has been strong but is expected to moderate. - Cyclical risks in CESEE and potential spillover risks are high; economies are in late stages of their business cycle. - Real estate valuations and mitigating factors: - House prices are estimated to be overvalued by around 10-15 percent nationally, and by over 20 percent in Vienna. - Real estate transaction volumes grew 13.3 percent in 2018. - Mitigating factors: large and regulated rental market in Vienna and other urban areas; moderate household leverage; low ownership ratios (55 percent); alternative arrangements for housing finance (regional mortgage banks, contract savings banks, housing construction banks, housing subsidies). ### Financial sector structure and size (key statistics) - Banking sector: - Banking sector represents around 250 percent of GDP and about 75 percent of total financial system assets. - Almost 600 banks (total number fell by 32 in 2018). - Total assets grew by 3.9 percent in 2018. - Seven significant Austrian institutions (SIs) under the SSM represent 60 percent of total system assets. - Top 3 banks represent 50 percent of the market. - Other financial sectors: - Mutual funds account for 14 percent of financial system assets. - Insurance firms account for 10 percent of financial system assets. - Pension funds account for 2 percent of financial system assets. - FinTech business represents 0.25 per mil of GDP with about 100 firms; FinTech was out of scope of the FSAP given lack of macrofinancial significance. ### Financial sector resilience — stress testing and liquidity - Solvency and capital: - Aggregate banking system is resilient to severe macrofinancial shocks; capital buffers are sizeable relative to immediate threats. - Capital ratios after macroeconomic shocks and market risks would remain comfortably above minimum requirements, although most banks would make use of capital conservation buffers. - In the credit cooperative sector, ownership structure provides strength under baseline conditions but amplifies shocks under stress; high interconnectedness generates contagion effects in network analysis. - Liquidity: - Banking system is resilient to sizeable withdrawals of funding given strong counterbalancing capacity and sizable deposit funding base. - The liquidity cooperation scheme ensures pooling of liquidity among members and contributes to financial stability. - Contagion: - High financial interlinkages mean contagion and spillovers from hypothetical bank defaults are material, especially within the cooperative/Raiffeisen segment. ### Key vulnerabilities and risks - Structural vulnerabilities: large banking system (almost 600 banks), complex ownership structures, mutual cooperation arrangements concentrated in segments, and CESEE exposure (42 percent of profits). - AML/CFT risks: concerns over adequacy of AML controls on foreign branches and subsidiaries, and vulnerability to money laundering risks requiring additional group-wide supervision and better integration between prudential and AML supervisors. - Insurance sector risks: low growth, low interest rates, future profitability risk, rising legal/reputational/conduct risks despite high coverage ratios. - Data and supervisory capacity gaps: need for more granular data on real estate, NFC sectors, and CESEE exposures; improved monitoring of intra-group transactions. ### Policy recommendations (selected and reform priorities from Table 1) - Financial sector oversight and governance: - Review legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board (BMF; ¶39). — MT - Make the OeNB the chair of FMSB and increase its voting representation (BMF; ¶34). — NT - Strengthen related party risk framework and establish ex-ante approval for LSI significant investments in non-financial undertakings (FMA/BMF; ¶42). — NT - Phase-out the role of state commissioners in supervisory boards (BMF/FMA; ¶41). — MT - Enhance internal guidelines for supervisory action based on qualitative factors (FMA; ¶40). — I - Stress-test insurance segments/business lines with material future profitability and follow-up with appropriate actions, such as capital add-on (BMF/FMA; ¶44). — NT - Review resources for maintenance of Solvency II, insurance market conduct supervision, potential recovery and resolution framework, and AML supervision for all entities, including VASPs (FMA; ¶43, ¶45). — NT - Revise AML/CFT risk scoring reflecting cross-border risks, increase onsite inspections of low risk banks, branches and subsidiaries and improve non-EU/EEA information exchange (FMA; ¶46). — NT - Monitor effectiveness of FMSB’s sustainable lending guidance and prepare regulatory actions, such as binding macroprudential limits, if risk profile does not improve (FMSB; ¶37). — NT - Enhance oversight of inward spillover risks from the inverse ownership structure of the Raiffeisen sector (OeNB/FMA; ¶38). — NT - Financial stability analysis and stress testing: - Close data gaps, including in the real estate and NFC sectors, and improve coverage and granularity of CESEE data (OeNB; ¶35). — MT - Enhance stress testing framework to consider second round effects, dynamic balance sheets, and contagion/spillover effects (OeNB; ¶31). — MT - Ensure resources and organizational structure are adequate to meet stress testing framework objectives (OeNB; ¶31). — NT - Crisis management and safety nets: - Explicitly provide for purchase and assumption transactions in the bankruptcy regime (BMF; ¶52). — NT - Seek legislation for standing authority to implement stabilization measures, support funding in resolution, and explore mechanisms for prepositioning BMF to support borrowing by DGSs (BMF; ¶53, 54). — I - Consider cross-border spillovers in national crisis contingency plans (FMA/BMF; ¶51). — NT - Enhance insurance crisis preparedness, introducing pre-emptive recovery planning for eligible insurers (BMF/FMA; ¶56). — NT ### Implementation, data, and resource priorities - Authorities should collect better and more granular data regarding real estate, NFC sectors, and CESEE exposures; ensure efficient information sharing arrangements; and pledge adequate resources given the complexity of the Austrian financial system. - Supervisors should have capacity to take timely action and correct unsustainable risk taking and business models, strengthen the role of banks’ supervisory boards, and clearly communicate with insurance firms on strategic risks. - Continue efforts to close data gaps and improve CESEE data coverage and granularity; ensure adequate resources to advance stress testing and macroprudential frameworks. - For insurers, secure resources for continuous improvement of the Solvency II regime, market conduct supervision, and recovery and resolution frameworks. - Address AML vulnerabilities with additional group-wide supervision and better integration between prudential and AML supervisors; prepare for implementation challenges from FATF modifications regarding VA/VASPs (training and resource needs). *Source: 1autea2020001 - EXECUTIVE SUMMARY __________________________________________________________________________ 7* ### 5. The structure of ownership, control, and financial linkages in the banking system is ### 5. The structure of ownership, control, and financial linkages in the banking system is complex ### Ownership, control, and segment structure - Three “decentralized segments” form the Austrian banking system’s core structure. - Sparkassen segment: - 49 Sparkassen have created a banking group (Erste Group Bank AG (EGB)), an IPS (cross-guarantee scheme ex lege according to CRR), and a DGS. - Raiffeisen segment (three-tiered): - 386 primary banks (1st tier), eight regional Landesbanken (RLB) (2nd tier), and RBI (3rd tier) as the "central institution". - RBI is a listed bank, majority owned (58 percent) by the RLBs; RLBs are owned by the 386 primary banks (“inverse ownership”). - IPS system is two-level: a national IPS and six regional IPSs. - Volksbanken (VB) segment (two-tiered): - Eight regional banks including “central institution” VB Wien and a specialized bank. - Formed a liability association with unlimited cross-guaranteed schemes. - All central institutions provide services to lower-tier members, such as liquidity management. - Note on “inverse ownership”: smaller lower-tier entities own larger higher-tier entities, enabling transfer of net revenues but amplifying inward spillovers in downturns. ### Foreign business and CESEE exposures - CESEE region accounted for 24 percent of exposures in 2018 and over 42 percent of consolidated banking net profits. - CESEE activities concentrated in EU countries; highest exposures in Czech Republic and Slovakia, accounting for half of total CESEE exposure. - Aggregate exposure to Russia represents 7 percent of CESEE assets; it is significant for the Raiffeisen segment. - After 2012 sustainability guidance: - Intragroup liquidity transfers from Austrian parent banks declined from 15 percent of subsidiaries' assets in 2011 to below 9 percent in 2018. - Loan-to-local stable funding ratio has remained stable at around 75 percent, well below the early-warning threshold of 110 percent. - Direct exposures to Italy are 1.3 percent of foreign claims. ### Capital positions, profitability, and credit quality - CET1 ratio evolution: - 11.6 percent common equity Tier 1 (CET1) in 2013 to 15.4 percent in 2018. - Cost-to-income ratio (CTI): - Around 65 percent in 2018 for Austrian banks; Austrian SIs posting CTIs slightly below the euro area (EA) average. - Nonperforming loans (NPLs): - 8.6 percent in 2013 to 2.6 percent in 2018 (system-wide). - CESEE subsidiaries: NPLs declined from 14.0 percent in 2013 to 3.2 percent in 2018. - Customer deposits at around 40 percent of liabilities. - Austrian subsidiaries in CESEE: - CTI ratios lower than consolidated level (51 percent) but rising. - Net interest margin (NIM) declining but remains considerably higher than in Austria. - Reliance on local funding improved following 2012 guidance. - Life insurance sector: - Premiums in the life segment decreased by -17 percent in 2014–18. - SCR coverage ratio around 285 percent in 2018 compared to the European average of 243 percent. - Insurance sector allocates about 8 percent of total assets to real estate—the highest in the EU. ### Key vulnerabilities and risks - Structural vulnerabilities: - Large and interconnected banking sector. - High level of CESEE exposures across banks and insurers. - Low domestic structural profitability. - Concerns over AML controls expose Austrian banks to operational and reputational risks. - Transmission channels and specific risks: - Stress in individual institutions or Austrian foreign subsidiaries can spread domestically due to equity participation and collaboration arrangements. - CESEE vulnerabilities: financial market volatility, capital outflows, and FX swings; stock of foreign currency loans remains high and susceptible to home currency depreciation. - Subsidiaries’ real estate exposures—especially in Czech Republic and Slovakia—have increased. - Potential funding pressures from: (i) a downgrade in the rating of the Austrian SI with an Italian parent; (ii) market contagion through funding markets from common exposures to the CESEE; (iii) a rise in cross-border intra-group banking flows. - Real estate and credit trends: - Household debt at 87 percent of disposable income. - Share of variable-rate mortgages in new loans fell from 83 percent to 44 percent over the last four years. - Housing loans in total assets of banks increased from 8 percent in 2008 to 16 percent in 2018. - Corporate loans growth driven by construction and real estate-related activities, which accounted for half of corporate loans in 2019Q1. - Number of real estate investment funds doubled in recent years. - AML-related market impact example: - An anonymous complaint filed in March 2019 about potential AML activity by RBI led to a 13 percent share price fall; equity prices recovered and no subsequent action took place given lack of evidence. ### Stress testing approach - Coverage and data: - 440 banks included, accounting for over 95 percent of banking system’s total assets. - Tests used regulatory and supervisory data as of end-2018. - Exercises performed: - Top-down solvency exercise (using OeNB’s ARNIE with FSAP satellite models). - Top-down liquidity stress test exercise (Basel III quasi-LCR over 30 days and cash flow-based test over three months). - Network exercise and exploratory NSFR proxy analysis. - Scenario design: - Two scenarios over a three-year horizon: baseline aligned with April 2019 WEO projections; adverse scenario with four key systemic risk sources: - (i) sharp weakening in global outlook → prolonged growth slowdown in Austria; - (ii) sharp rise in risk premia → increase in lending rates and asset repricing; - (iii) balance sheet recession in CESEE amplified by large FX moves; - (iv) sharp correction in real estate prices in Austria → higher impairment charges. - Adverse scenario severity: - Deviation of Austrian real GDP growth from baseline of 6.9 percent by 2021, with a 2.3 standard deviation move in two-year cumulative real GDP growth. - 20 percent peak-to-trough decline in real estate prices. - CESEE output shocks range between 8.1 and 13.6 percent deviation from baseline by 2021. - Under the adverse scenario, GDP contracts by 2.5 percent over the first two years of stress (-0.4 and -2.1 percent in 2019, 2020, respectively). - The adverse scenario is more severe than the financial crisis (-2.0 percent GDP over 2009-10) and the 2018 EA FSAP scenario for Austria (-2.0 percent over 2018-19). - Scenario includes Austrian, global, and CESEE macroeconomic variables across 18 jurisdictions. ### Solvency stress test results and sensitivities - Aggregate CET1 outcomes: - Baseline: system’s aggregate CET1 ratio would increase by 2.3 percentage points by 2021. - Adverse scenario: aggregate CET1 ratio would decline by 4.4 percentage points to 11.1 percent in 2021. - Bank breaches and shortfalls: - Five small banks (out of 440) would breach capital requirements under the adverse scenario. - Total shortfall under the adverse scenario is approximately EUR 5 million or 0.01 percent of the system CET1 capital. - Key drivers of capital depletion: - Credit impairments and lower net interest income (NII). - Credit losses stand at 4.9 percentage points of CET1 under the adverse scenario compared to a 1.0 percentage point decline in the baseline. - NII in the adverse scenario is lower on average by almost 15 percent for the horizon. - Deteriorating credit quality increases risk-weighted assets (RWA) contributing an additional charge of 0.7 percentage points. - Stressed non-interest income, net trading income, and market risk losses have a small impact on CET1 depletion. - Reduced dividend distributions and lower tax expenses partially mitigate negative impacts. - Loss rates and regional impacts: - 3-year cumulative mortgage loss rate in Austria reaches 1.4 percent. - In CESEE, the 3-year cumulative corporate PD reaches 17 percent in most countries, with Russia and Ukraine reaching values up to 30 percent PD. - Heterogeneity across bank groups: - O-SII banks relatively more exposed to market risk (larger fair-value portfolios) and to interest-income shocks (wider footprint, higher starting NIM). - Non-O-SII (smaller banks): equity participation valuation drives capital generation in baseline and capital depletion in adverse scenario (contribution swings of +1.8 and -1.9 percentage points respectively). - “Inverse ownership” in the Raiffeisen sector amplifies inward spillovers from central to lower-tier banks. ### IPS role, network and concentration sensitivity - IPS effectiveness: - IPS structure acts as shock absorber for idiosyncratic shocks and provides additional capital and liquidity buffers. - Two-layered IPS (regional and federal) is effective in containing risks from smaller institutions but creates vulnerabilities when stress originates at a central institution because of strong equity linkages. - Network and concentration tests: - Sensitivity to largest exposures suggests concentration risk is contained: - No bank defaults triggered from losses on the largest exposure; capital losses moderate (2 percent of RWAs) upon default of three largest on aggregate exposures. - On gross exposures, default of the largest counterparty depletes 5 percent of aggregate capital; system CET1 ratio would remain above regulatory minimum even after default of the ten largest exposures. - Tests are conservative as they exclude support from IPSs and used large exposure dataset before credit risk mitigations; exposures to central bank, central government, regional governments, and within IPSs are excluded; LGD of 50 percent applied. ### Liquidity assessment - Liquidity tests conducted: - Basel III quasi-LCR test over 30 days by aggregate currency position and by significant currency. - Cash flow-based liquidity test over three months. - Exploratory NSFR proxy analysis (NSFR compliance to come into force in 2021). - Scenarios considered systemic liquidity stress episodes and simulated liquidity conditions for all banks, calculating relevant liquidity metrics. - System-wide coverage enabled evaluation of additional liquidity protection from contractual liquidity support commitments of the two-layered IPS scheme in the Raiffeisen sector. *Source: IMF staff report content provided in the supplied PDF extract.* ### 22. The banking system is resilient to sizeable withdrawals of funding (Figure 15). The ### 22. The banking system is resilient to sizeable withdrawals of funding (Figure 15). The ### Liquidity resilience and LCR results - The asset-weighted average LCR stands at 164.7 percent under Basel-prescribed assumptions. - When additional funding outflows are considered, the average LCR continues above the 100 percent threshold. - Under the severe scenario which includes a market price shock, the average LCR declines to 104.3 percent. - By significant currency: - EUR LCR declines from 145.8 percent to 96.9 percent under the severe scenario. - System-wide USD LCR average, at 56.6 percent, decreases to 44.1 percent in the severe scenario. - USD is not a significant currency for the overall Austrian banking system and the overall size of USD outflows remains manageable at 6.1 billion. - Drivers of resilience: stable deposit-based funding structure, solid buffers in security holdings, and significant short-term inflows. ### Longer-horizon cash-flow tests and NSFR - Cash-flow-based tests over a three-month horizon identified small liquidity shortfalls for some small banks under severely adverse conditions. - Even in the extreme case, the combined shortfall of EUR 1.5 billion is manageable given OeNB’s ability to provide liquidity through standard facilities or extraordinary measures. - Aggregate net liquidity position (counterbalancing capacity minus net outflows relative to system assets) remains positive across scenarios: - Declines from the initial 21 percent of system assets to 8.8 percent in the most adverse scenario. - Asset-weighted aggregate NSFR proxy stands at 122 percent and declines to 112 percent under stress. - Only 2.2 percent of system assets have an NSFR below 100 percent in baseline; this share increases to over 28 percent of system assets under stress. ### Role of the IPS structure in liquidity resilience - The IPS structure enhances the system's resilience to liquidity risks. - Cash flow-based tests show that, in the severely adverse scenario, some regional IPSs have a net liquidity shortfall, but additional buffers at the federal IPS layer support regional IPS liquidity needs. - Raiffeisen IPS counterfactual (no additional IPS liquidity protection) assumptions: - Individual Raiffeisen banks withdraw contributions from the IPS and all contractual obligations to support other institutions in the Raiffeisen system are assumed terminated. - Banks can only rely on their own liquidity buffers. - Combined liquidity shortfall increases to EUR 1.7 billion (compared to EUR 1.5 billion with support arrangements) but remains small relative to the size of the system. ### Contagion analysis and network structure - Banking system concentrated in clusters of many small banks around a few important nodes. - Network analysis included: - Credit shock simulation: counterparty default erodes lender’s capital buffers. - Funding shock simulation: default of a funding counterparty induces a liquidity shortfall and triggers losses through fire sales. - Results are very sensitive to treatment of exposures in the cooperative sector: - When network uses gross exposures (including related-party exposures), both contagion and vulnerability indices strongly increase. - Maximum contagion index from O-SIIs rises from 1.2 percent to 41 percent capital depletion; median impact increases from 0.5 percent to 1.1 percent. - CoMap re-run using large exposure data and bank-specific calibrated parameters: - Median contagion index from Austrian O-SII banks to the system estimated at 0.8 percent with distribution ranging between 0.5 and 2.1 percent at the 10th and 90th percentile, respectively. - Effects are highly skewed, reflecting central role of central institutions in tiered structures. ### Cross-border spillovers - Median contagion from Austrian O-SIIs to the EA is low at 0.12 percent capital depletion. - Outward spillovers to the CESEE are limited to a few Austrian banks. - Inward spillovers to Austrian banks from defaulting banks in the EA and CESEE are negligible. ### Corporate sector risk (debt servicing and sectoral vulnerabilities) - Austrian corporates' debt-to-equity ratio has remained higher than the EA average; debt-to-income ratio stands below the EA average. - Low interest rates, high share of NFC variable-rate loans, and robust operating profits improved debt servicing capacity. - FX loans stand at only 2 percent. - High share of variable-rate loans exposes the sector to interest rate shocks. - ICR-based test across 57 listed Austrian NFCs shows dispersion in ICRs; certain leveraged sectors are more vulnerable. - Under adverse scenario, real estate and construction sectors appear more vulnerable: - Much lower post-shocked weighted ICR for real estate and construction compared to other sectors. - Almost half of banks’ loans to NFCs in 20119Q1 went to real estate and construction. ### Exploratory solvency analysis and macroprudential policy impact - Semi-structural model projected losses on banks' mortgage portfolios using Austria-specific characteristics. - Drivers of borrowers' debt servicing capacity: changes in house prices, income, unemployment rate, and mortgage interest rates. - Results: losses on mortgage portfolios would remain relatively moderate in the adverse stress scenario but would increase more than threefold compared to the baseline. - Macroprudential borrower-based limits simulation: - Portfolios simulated for eight quarters before adverse stress scenario, assuming LTV, DTI, and DSTIs of new mortgages pushed toward safer levels and some outstanding loans mature. - Combination of LTV-DSTI limits of 80 and 40 percent, respectively, with a speed-limit of 10 percent reduces banks' losses on mortgage portfolios by 35 percent. - Losses are around 25 percent smaller if the speed-limit is increased to 20 percent. - Conclusion: credit quality of recent loan vintages is key driver of total mortgage portfolio losses. ### Key findings and stress testing recommendations - Given substantial footprint and complexity of the banking system, the stress testing function should be further strengthened. - Stress testing is fundamental and resource-intensive; authorities should ensure adequate specialized staff, systems and IT infrastructure. - Stress testing enhancements recommended: - Fully integrate sensitivity, contagion, and interconnectedness analysis tools. - Develop framework to capture second round effects, behavioral elements, dynamic balance sheet stress tests, and separation of prudential and accounting layers. - Increase modelling granularity to capture diversity of risks (for example, by geographical breakdown). ### Financial system oversight and macroprudential framework - Shared responsibility for oversight within SSM and among FMA, OeNB and BMF. - FMA and OeNB share banking sector oversight; ECB directly supervises seven SIs under SSM. - FMSB established in 2014 to strengthen macroprudential cooperation; meets four times a year with members OeNB, FMA, Fiscal Advisory Council and BMF. - FMA designated as competent authority for applying macroprudential instruments; implements FMSB recommendations on a comply-or-explain basis. - OeNB tasked with systemic risk analysis, preliminary recommendations to FMSB, and secretariat functions. ### Macroprudential policy recommendations and tools - Institutional improvements: - Consider chairing FMSB by the OeNB and increasing OeNB representation in FMSB to leverage operational independence and analytical role. - Ensure adequate resources for European policy coordination responsibilities. - Data and monitoring enhancements: - Close data gaps: collect CRE data, gather detailed residential real estate exposure data, enhance granularity of CESEE exposures, and broaden NFC indicators (credit quality, profitability, debt, firm characteristics). - Capital buffers: - Current CCyB of 0 percent justified by expected weakening of credit demand and still negative credit-to-GDP gap. - If strong NFC credit growth continues and real estate credit picks up, increasing CCyB should be considered. - Planned introduction of sectoral macroprudential capital buffers at EU level may help address sector-specific risks. - Borrower-based limits: - Given build-up of risks in residential real estate, be prepared to introduce binding borrower-based limits. - September 2018 guidance on sustainable lending standards implemented, but considerable share of new mortgages still non-compliant with recommended DSTI or minimum down-payment. - Recommendation: combination of limits on maximum LTV and DSTI ratios, along with speed limits, to better control volume of high indebtedness loans while preserving bank flexibility. - O-SII and SyRB framework: - Framework uses complementarities between O-SII and SyRB buffers; could be expanded to reflect inward contagion. - As of January 2019: - Seven banks subject to an O-SII buffer at consolidated level (ranging from 0.5 to 2 percent of RWA) and seven at unconsolidated level. - SyRB consists of systemic vulnerability buffer up to 1 percent of RWA and systemic cluster risk buffer up to 1 percent of RWA. - As of January 2019, 13 banks subject to SyRB at consolidated level and 7 at unconsolidated level. - Inward contagion risks warrant enhanced monitoring and oversight capacity. ### Banking supervision and early intervention - Implementation of EU-level regulations and guidance has enhanced regulatory and supervisory framework, but some areas require attention. - BWG amended to incorporate EBA Guidelines on internal governance and suitability. - FMA regulation on credit risk management issued in 2013 reflects key EU Directives. - New BaSAG and ESAEG improved FMA early intervention powers. - Concerns remain about FMA’s operational independence due to: - Presence of industry representatives on the Supervisory Board. - BMF’s role in approving FMA regulations (including macroprudential oversight). - BMF’s broad right to gather information from the FMA. - Inadequate legal protection for supervisors. - Early intervention framework is detailed but triggers are mostly quantitative and based on risks and violations that have already materialized. - BWG allows FMA to impose supervisory measures when there is evidence a bank will breach CRR or CRD within 12 months. - Recommendation: develop more structured internal guidance to aid supervisory staff in making decisions based on qualitative factors before impacts on bank performance materialize. *Source: 1autea2020001 - 22. The banking system is resilient to sizeable withdrawals of funding (Figure 15).* ### 41. The legacy role of State Commissioners is not compatible with international standards ### 41. The legacy role of State Commissioners is not compatible with international standards ### Governance of State Commissioners and Supervisory Boards - State Commissioners are full-time employees of the BMF, serve in more than one board, and can veto supervisory board decisions. - International corporate governance standards imply the supervisory board role has become more intrusive and technical and requires greater interaction between supervisors and the board. - Finding: The legacy role of State Commissioners is not compatible with international standards and needs to be reconsidered. ### Related-party risk and significant investments - Regulatory gaps identified: - No requirement that transactions with related parties should be undertaken on market terms. - The FMA does not have the power to set aggregate limits or require collateralization for related-party exposures. - Standards or regulations for intra-group transactions have not been adopted. - No requirement for ex-ante approval or notification of investment by LSIs in nonfinancial undertakings. - Risks and supervisory priorities: - Transactions with sister banks, affiliated nonfinancial companies and group members should be monitored to ensure they are priced on market values, performed in a safe and sound manner, and to avoid shifting of problem assets between entities. - Risks from entities in the wider group, foreign or domestic, and including nonfinancial entities, need to be considered. - Investments which present obstacles for consolidated supervision should not be allowed. ### Insurance — Solvency II implementation and sector vulnerabilities - Implementation and capacities: - FMA implemented Solvency II with enhanced data quality and analytical capacity. - All insurers met capital requirements without relying on transitional and Long-Term Guarantees (LTG) Measures in 2017. - FMA established stress testing as a yearly practice. - The FMA and the OeNB jointly validate internal models for market risk. - Resource and validation needs: - Ongoing validation and scrutiny by supervisors require resources with skills and expertise. - Without proper and ongoing monitoring, there is a significant risk of manipulation and delay of regulatory actions. - Asset allocation is shifting to less liquid assets, making reliable valuation more difficult. - Business-model and capital concerns: - The duration gap between assets and liabilities is one of the highest among the European peers. - The average guaranteed rates remain high, while investment returns continue to be declining. - Solvency II allows insurers to recognize expected profits in future premiums as part of their own funds; these make up a substantial part of the own funds of the two largest insurance groups. - Recommendation: FMA should conduct more targeted stress testing on the segments/business lines for which future profitability is material. - Recommendation: Supervisors should clearly communicate to higher risk insurers their concerns regarding major strategic issues such as business model shifts and require objective actions (e.g., capital add-ons). - Quantified point: - The average share of expected profits in future premiums relative to own funds is about 12 percent. - The largest Austrian insurance group's reliance on future profits reaches over 40 percent (not deemed systemic given the small size of the insurance sector). ### AML/CFT progress and remaining gaps - Progress since 2016 Mutual Evaluation: - Several initiatives including amendments to the Financial Markets Anti-Money Laundering (FM AML Act) and sectoral laws have enhanced the framework. - A Register of Beneficial Owner of Companies, other Legal entities and Trusts was created in 2017 (BORA Act); in July 2019 the BORA was amended to transpose the 5th AMLD. - Upgrades of technical compliance ratings by the FATF in two follow-up reports. - FM AML Act amended to assign the FMA responsibility over registration and monitoring of VA/VASPs; the law defines VA/VASPs following the FATF definition. - Supervisory approach and recommendations: - The FMA has adopted a risk-based approach and developed an offsite risk rating tool to classify institutions by ML/TF risk. - Authorities should consider revising the approach to onsite activities to ensure even lower risk banks are subject to onsite inspections more regularly. - Authorities should continue to focus on monitoring cross-border risks and effectively implementing Customer Due Diligence (CDD) obligations. - A review of the National Risk Assessment should help develop additional measures to mitigate ML/TF risks, including from exposures to CESEE countries. - Information-sharing constraints: - Cross-border cooperation with EU/EEA countries is generally allowed, but information sharing with some third countries is hindered: it is only allowed if they are subject to or have agreed to an equivalent level of professional secrecy to the respective European legal acts (EBA assessment of equivalence). - Recommendation: Authorities should ensure and closely monitor strong AML/CFT controls at group level and apply remedial actions where concerns arise; analyze confidentiality, professional secrecy, data protection and information exchange rules on a case-by-case basis. ### Crisis management and financial safety nets — institutional arrangements - Institutional framework findings and recommendations: - Supervisory and resolution functions are operationally separated within the FMA, but decision making is unified. - Recommendation: Consider separating decision making to avoid potential or perceived conflicts of interest and provide an effective backstop for timely action. - Recommendation: Mandate an interagency body to ensure each authority has contingency plans, regular testing programs, dovetailed national plans, and regular interagency tests. ### Recovery, resolution, and financial stability - Resolution coverage and categorization: - Eleven Austrian banking groups are under the remit of the Single Resolution Board (SRB); others are under the FMA. - FMA, supported by the OeNB, grouped banks into three categories for resolution planning: - Category 1: 16 banks with “fully-fledged” resolution plans. - Category 2: “deposit-focused” banks with “proportionate” resolution plans where bankruptcy may be credible for idiosyncratic problems but not for system-wide events. - Category 3: 404 “harmonized” banks for which bankruptcy proceedings are deemed credible and feasible; resolution strategy is use of bankruptcy proceedings. - MPE bail-in approach: - Envisioned MPE approach to bail-in for two Austrian groups would mitigate inward spillovers from risks in the CESE region, but implementation is underway. - The MPE approach depends on subsidiaries being able to issue Minimum Requirement for own funds and Eligible Liabilities (MREL) into the local market. - Constraint: Less-developed capital markets in some jurisdictions limit capacity to issue MREL-eligible debt; small size of some banks makes issuing into international markets not feasible. - Consideration: FMA and SRB are considering a transitional period during which required MREL could be held by a group entity in Austria, with an agreed phase-out. - Systemic planning and liquidity in resolution: - For institutions under SPE, close collaboration with home supervisors and European authorities is needed to contain system-wide risks. - Recommendation: Financial crisis contingency plans should explicitly consider scenarios where capital or liquidity is directed to a parent bank and address interactions with European authorities. - Recovery and resolution planning are well advanced, but additional flexibility could be provided in the bankruptcy regime. - Recommendation: Amend the bankruptcy regime to explicitly provide the ability to transfer a non-systemic bank’s covered deposits and its sound assets to an acquirer. - Ensuring liquidity in resolution is a key challenge: - Recommendation: OeNB ELA provision could be enhanced by formulating a policy on lending to a bank prior to and within resolution, and by expanding types of assets eligible as collateral. - Recommendation: BMF should take steps to be able to support funding in resolution without requiring additional legislation at the time of need. ### Deposit protection - Structure and powers: - Two DGSs: Einlagensicherung Austria GmbH (uniform DGS) and Sparkassen-Haftungs GmbH. - DGSs can access funds of the other DGS (including contingent contributions) if own resources are insufficient. - As a last resort both schemes can borrow, and the BMF may guarantee such borrowing, though no ex ante guarantee is in place and the BMF would need to table legislation to provide for it. - The DGSs do not have the power to finance the transfer of assets and liabilities in the context of bankruptcy proceedings. - Recommendation: - BMF should secure ex ante standing authority to provide a guarantee for the borrowing of either DGS in case of last resort. - Alternative: BMF could be provided the power to lend directly to the schemes. ### Insurance resolution - Framework and powers: - Austria’s ongoing discussions on an insurance resolution framework are positive; FMA powers should be substantially reinforced. - Support for formal adoption of the principle that losses must be first borne by shareholders and other creditors before affecting policyholders’ and beneficiaries’ claims. - FMA restructuring powers should be extended to all kinds of insurance and all types of creditors and include the power to mandate a portfolio transfer. - Funding and short-term measures: - A strong resolution framework should build on the existing Deckungsstock and be supported by a combination of different funding arrangements providing adequate private ex-ante resources and credible public funding provisions. - Recommendation (short-term): Request pre-emptive and proportional recovery plans from selected insurers based on microprudential and macroprudential considerations, with proportional requirements regarding content, preparation timeframe, and periodicity of updates. ### Selected risk assessments (from Table 2) - Contagion from CESEE countries (Regional) - Overall Level of Concern: Medium - Risk Assessment: High - Key facts: - Austrian banks’ exposure to the CESEE region reached 24 percent in 2018. - Foreign currency loans represent 25 percent of exposures (80 percent EUR, 10 percent in CHF, 9 percent in USD). - Austrian banks source 42 percent of profits from CESEE. - Supervisory assessment: Neutral - Banking sector oversight: Weak requirements on transactions with related parties, major acquisition, and financial integrity add risks from CESEE exposures. (A) - Macroprudential: SyRB for CESEE cluster risk increases capital resilience. (M) - Crisis management: MPE for two large international banks reduces potential contagion. (M) - Sharp rise in risk premia (Global) - Overall Level of Concern: High - Risk Assessment: Medium - Key facts: - 80 percent (44 percent) of new loans for corporates (households) are variable-rate loans. - Supervisory assessment: Neutral - Banking sector oversight: Oversight of NPLs and forborne exposures has strengthened but a look-back approach to default risk could hinder timely supervisory action. (A) - Macroprudential: Timely activation of the CCyB would help increase bank resilience through the cycle. (M) - Crisis management: Banks’ recovery plans are mature and tested. (M) *Source: 1autea2020001 - 41. The legacy role of State Commissioners is not compatible with international standards* ### 3. A sudden ### 3. A sudden correction in the Austrian real estate market (Domestic) ### Risk description - Real estate prices have increased rapidly in Austria over the last 5–6 years and are estimated to be overvalued by around 10-15 percent. - The share of foreign currency housing loans is high compared to Austria’s peers. - There have been signs of easing in banks’ lending standards in household loans with an increase in high risk mortgages (high LTV and DTI ratios). ### Risk assessment and channels of impact - Risk Assessment: Medium - Direct banking impact: - A drop in real estate prices would result in higher impairment charges for banks, caused by defaults or delayed loan repayments by highly leveraged households and construction firms. - Lower house prices could depress domestic demand through reduced consumption, hitting banks’ profits further. - The impact is lessened by the low exposure of Austrian banks to housing loans in Austria at 16 percent of assets. - Crisis management: A synchronized decline in regional real estate prices could spread contagion through the DGS system. (A) ### Supervisory and macroprudential context - Supervisory assessment: Mitigating - Banking sector oversight: FMA minimum standards of the granting of FX and RPV loans (2013), revised in 2017, helped decrease default risk in mortgage loans. (M) - Macroprudential: 2018 FMSB’s guidance on sustainable lending standards in real estate financing has strengthened bank supervisory dialogue to prevent a deterioration in underwriting standards. (M) - Supervisory assessment: Amplifying (relevant cross-refs) - Insurance sector oversight: Implementation of risk rating and stress testing methodologies need clear steer. (A) - Macroprudential: SyRB for systemic vulnerability and O-SII buffer increase capital resilience. (M) - Crisis management: A unified, single resolution process for a major Austrian bank with an Italian parent (SPE) could lead to a downgrade in its credit profile. (A) - Banking sector oversight: A weak framework for country risk and transfer risk could add losses from events in foreign countries. (A) ### Stress-test and system resilience indicators (selected metrics and results) - Systemic and capital metrics: - In 2013–2018, the CET1 ratio increased from 11.6 to 15.4. - Leverage ratio stands at 6.5 percent, well above the SSM 5.2 percent. - NPLs have declined from 8.6 percent at end 2013 to 2.6 percent in 2018. - Solvency stress-test results (system-wide averages): - The aggregate CET1 ratio increases by 2.3 ppt in the baseline but decreases by 4.4 ppt in the adverse scenario. - Credit impairments and lower NII are the major drivers of capital depletion in the adverse scenario. - The system has a moderate capital generation capacity, with the participation channel contributing 0.8 percentage points. - Credit losses account for an additional -3.9 percentage points compared to the baseline and RWA increase of -0.7 percentage point. - OSIIs and non-OSIIs: - OSIIs: In the adverse scenario, the ending capital ratio is lower than the starting point by 4.5 ppt; credit losses are the main drivers of capital depletion. - Non-OSIIs: In the adverse scenario, the ending capital ratio is lower than the starting point by 4.1 ppt; Non-OSIIs are hit by lower NII and non-interest income compared to the system. - Market risk and NII: - System-wide market risk impact is not material. NII is lower than the 2018 starting point in the adverse scenario. - Most of the impact can be attributed to O-SIIs due to their larger portfolios and interest rate exposure to the CESEE countries. - Concentration and liquidity: - System capital is severely depleted, particularly in small banking institutions, though on aggregate system-wide capital remains above the regulatory minimum in the scenarios presented. - Liquidity stress tests suggest the banking system is resilient to sizable liquidity shocks. USD LCR is below the 100 percent threshold, but dollar outflows are small relative to system's liquidity buffers. - Cash-flow stress tests point to ample liquidity buffers with non-retail funding the key driver of total outflows in the scenarios considered. - The NSFR remains high under stressed conditions, thanks to the stable funding structure of the banking system. ### Key interlinkages and macroeconomic context (selected figures) - Austria is a very open economy, with exports comprising more than 50 percent of GDP. - Corporate debt at 94 percent of GDP is below the EA average of 105 percent. - The system’s exposures to Italy are limited: Austrian banks’ exposure to Italy is 1.3 percent of total foreign claims. - Other system-wide indicators highlighted in the assessment include: - Participation channel contribution: 0.8 percentage points. - Credit losses additional impact: -3.9 percentage points. - RWA change in adverse: -0.7 percentage point. ### Policy and supervisory measures referenced - FMSB’s 2018 quantitative guidance on “sustainable lending in real estate financing” included: - Minimum down payment (20 percent). - Maturity limit (35 years). - DSTI limit (30 percent to 40 percent). - Prudent approach to borrower’s creditworthiness assessment. - FMA minimum standards for the granting of FX and RPV loans (2013, revised 2017) had a mitigating effect on default risk in mortgage loans. *International Monetary Fund staff summary of chapter: 3. A sudden correction in the Austrian real estate market (Domestic).* ### 1. Institutional perimeter Institutions included • All Austrian credit institutions, both directly supervised by the ECB ### 1autea2020001 - 1. Institutional perimeter Institutions included • All Austrian credit institutions, both directly supervised by the ECB ### Institutional perimeter and market share - Institutions included: - All Austrian credit institutions, both directly supervised by the ECB: six significant institutions (SIs) plus one subsidiary of a foreign SI; and, directly supervised by the Austrian authorities: 433 Less Significant Institutions (LSIs). - Elsewhere repeated: Seven SIs, and 433 Austrian LSIs (total sample of 440 entities including the 7 SIs). - Market share: - For the 7 SIs, about 60 percent of banking sector assets. - For the entire 440 institutions, above 95 percent of total assets of deposit-taking institutions in Austria. - For seven SIs, about 60 percent of banking sector assets (repeated). - For all 440 entities (including the 7 SIs), above 95 percent of total assets of deposit-taking institutions (repeated). - Data and baseline date: - European and Austrian regulatory returns and supervisory data (e.g., FINREP and COREP). - OeNB’s statistical data warehouse. - Austrian Central Credit Register (CCR) and external data sources (Kreditschutzverband, KSV). - Moody’s Analytics: CreditEdge data on corporate default probabilities. - Data as of December 2018. - Scope of financial consolidation: group-wide. ### Channels of risk propagation — methodology and models - Overall approach: - Balance sheet approach. - Projections of key balance sheet, income statement and capital account items. - Static balance sheet assumption. - No separate accounting projection layers for impairments; only 19 entities report under IFRS 9 with remaining reporting under nGAAP. - Credit risk, market risk, NII and non-interest income projections produced for all banks for two scenarios: baseline and macro adverse. - Indirect credit risk from foreign currency loans and repayment vehicles stressed for CHF, JPY, USD, and EUR (including countries where the EUR is a foreign currency and domestic RV loans). - Participation risk accounted for using OeNB’s internal entity equity participation matrix. - Granular projections of credit risk parameters: exposures at default (EADs), probabilities of default (PDs), losses given default (LGDs) for each asset class and geography. - Segmentation and satellite models: - Different asset class segmentation for SIs and LSIs: SIs used COREP segmentation; LSI segments mapped to a CCR-relevant segmentation including granular corporate breakdown by NACE classification. - Satellite models mapped in accordance with dual segmentation (generic corporate satellite model can drive PD paths for multiple NACE segments with different starting points). - Where historical default data are unreliable, structural model approach used, partially relying on DSR/LTV exposure joint distributions and Monte Carlo simulations for house price developments to estimate PDs and LGDs for mortgage exposures across geographies. - Bayesian Model Averaging (BMA) techniques used to produce satellite projections for the corporate sector across geographies. - Cross-sector or cross-country proxies used where direct calibration is not feasible. - Income and market risk projections: - NII projected based on sensitivity to macrofinancial conditions for reference rates and effective spread margins across all interest rate sensitive asset and liability segments and material exposure geographies. Approach similar to EBA exercise; considered conservative for the interest rate scenario but requires assumptions on repricing profiles due to absence of bottom-up data. - Net trading income, net fee and commission income stressed based on historical volatility combined with haircuts based on the EBA methodology. - Operational expenses kept at the starting point (an exponentially smoothed historical average, validated by line supervisors). - Impact on P&L and OCI due to FVTPL and FVOCI positions estimated as part of market risk impact; debt securities at Amortized Cost portfolios are not stressed. - Mark-to-market approach used to assess impact of equity prices and commodity prices on net open positions. - Risk-weighted assets adjusted to reflect changes in credit exposure quality. ### Tail shocks, scenarios, and stress horizons - Stress test horizon: - Three years (2018 Q4 – 2021 Q4). - Scenario analysis: - Two common macrofinancial and financial scenarios: baseline and macro adverse. - Scenarios specify key macrofinancial variables for Austria and important geographies, and global variables. - Baseline scenario based on July 2019 World Economic Outlook (WEO) projections. - Macro adverse scenario calibrated using the Global Macrofinancial Model (GFM) and assumes realization of systemic risks from the RAM: contagion from CESEE; sudden sharp tightening in global financial conditions; correction in Austrian real estate prices; slump in global growth. Scenario features financial cycle downturn with FX market disruptions and sovereign stress generating a balance-sheet recession in Austria and CESEE. - Severity details in macro adverse: implies a deviation of Austria real GDP from its baseline of 6.9 percent by 2021, with a 2.3 Standard Deviation move in two-year cumulative real GDP growth rate, and a 20 percent peak-to-trough decline in real estate prices. Output shocks in the CESEE region range between 8.1 and 12.6 percent deviation from baseline. - Sensitivity analysis: - A Low—for-Long interest rate scenario used as adverse interest sensitivity focusing on low structural profitability concerns. - Reverse stress tests performed to evaluate resiliency of IPSs and to identify tipping points. - Complementary simulation analysis of the Raiffeisen bank inverse ownership structure to measure participation risk and identify stress levels that could cause severe inward spillovers. ### Risks and buffers; behavioral assumptions - Risks/factors assessed: - Credit risk captures all on-balance/off-balance sheet exposures at amortized cost by regulatory exposure sector and geography; different paths produced for different sector/geography combinations. - Starting point of credit parameters used to project scenario-dependent forward paths. - Market risk reflected in valuation effects of FVTPL and FVOCI positions, and net open financial positions (equities, commodities). Interest rate curves from scenarios used to infer country-level interest rate changes. Adverse macro scenario augmented with financial variables needed to project fair value positions. - NII affected by projecting effective interest rates by asset/liability class and geography; time-to-repricing approach informs velocity of passthrough rates. - Shocks to non-interest income simulated to capture varying degrees of market-sensitive components. - Credit exposure concentration risk assessed considering market structure specificities. - Behavioral adjustments and constraints: - Static balance sheet: exposures remain constant and do not evolve in line with scenario credit growth assumptions. - For NII, maturing assets/liabilities assumed replaced by instruments of same type and maturity but at current rates. - If banks’ capital falls below regulatory requirements, no prompt corrective action is assumed. - Banks assumed to pay 30 percent of profits, if positive, in taxes and another 30 percent as dividends to shareholders. - One-off adjustments made by OeNB line supervisors as part of OeNB’s annual stress testing exercise accepted to warrant a common starting point at T0. ### Calibration, regulatory parameters, and hurdle rates - Calibration of risk parameters: - Scenario-dependent forward paths for PiT PDs and LGDs estimated for each asset class and geography. - It is assumed that prudential expected losses will coincide with accounting impairments; therefore, the accounting layer is ignored. - Given limited availability of PiT LGD data, some basic proxies are used. - For IRB exposures, RWA projected based on updated regulatory TTC PDs and downturn LGDs, using appropriate scaling multipliers from PiT parameters. - For standardized approach (STA) exposures, RWA assumed to remain constant. - Regulatory/accounting and market-based standards: - In both baseline and adverse scenarios, hurdle rates include the regulatory minimum and the OSII buffer. - Hurdle rates are based on CET1 ratios. ### Reporting format and outputs - Results presented as: - System-wide evolution of CET1 capital ratios. - Distribution of banks’ capital positions. - Contribution of key drivers to system-wide net income and capital position, including differences between baseline and adverse scenarios. - Share of institutions with capital below the hurdle rates. - Infrastructure and implementation: - OeNB’s ARNIE infrastructure used to account for extended bank sample and cross-entity equity participations (“inverse ownership”). - IMF team’s satellite model projections imported as external overlay into ARNIE. - Banks’ credit and interest rate starting point parameters validated using IMF staff estimates; scaling factors applied to satellite model where needed. - Starting point translation into scenario-dependent forward paths for banks and segments follows IMF guidelines (absolute shift, distance to defaults or similar translation). ### Bank liquidity stress testing — domain assumptions and scenarios - Institutional perimeter and data: - Seven SIs, and 433 Austrian LSIs. - For seven SIs, about 60 percent of banking sector assets. - For all 440 entities (including the 7 SIs), above 95 percent of total assets of deposit-taking institutions. - Data as of December 2018. - ECB/SSM and OeNB regulatory returns based on LCR and NSFR and Additional Liquidity Metrics from FINREP/COREP. - Scope of financial consolidation: group-wide. - Methodology: - Three types of tests: LCR test, cash-flow analysis and NSFR test. - LCR test aligned with Basel monitoring tool; features total liquidity and liquidity in significant currencies (Euro, Swiss Franc, US dollar and CESEE currencies). - Cash-flow analysis examines net cash balance, available unencumbered assets, contractual inflows/outflows, and behavioral flows; may consider second-round effects (margin calls, central bank liquidity provision, haircuts from fire sales, repo haircuts, wholesale funding freezes). - NSFR reporting used for monitoring (non-binding); introduces standard parameters for stressed NSFR calculation. - IPS structure considered when assessing liquidity under stress; regulatory liquidity waivers considered; mandatory interbank deposits of Article 27(a) of the Banking Act reallocated to depositing entities, increasing counterbalancing capacity. - Satellite models and haircuts: - Asset haircuts in cash-flow analysis reflect shocks to interest rates and asset prices from macrofinancial scenarios and additional haircuts required by counterparties to accept assets as collateral. - Stress horizons: - LCR test horizon: 30 days. - Cash-flow analysis horizon: normally three months; longer periods (up to one year) may be considered as sensitivity analysis. - LCR and other scenarios: - LCR: 12 scenarios combining 3 liquid asset shock scenarios (regulatory, mild and severe) and 4 liability outflow scenarios (regulatory; retail outflows; higher wholesale outflows; combined retail and wholesale outflows). - Cash-flow analysis: series of scenarios from mild to severely adverse liquidity conditions covering funding and market liquidity risks. - NSFR analysis: one stress scenario featuring inability to roll over longer-term funding positions for a period of a year (exploratory). - Risks and buffers: - Funding liquidity risk reflected in funding run-off rates and asset roll-over rates. - Market liquidity risk reflected in asset haircuts influenced by market movements, potential fire sales and collateral supply. - Liquidity from central bank ELA not considered. - Cash-flow analysis may consider behavioral assumptions about counterparties’ willingness to transact based on banks’ solvency and liquidity. - Standards and pass criteria: - LCR per Basel III; hurdle at 100 percent (aggregate currency level). - Net cash balance pass condition: non-negative net cash balance. - NSFR: targeted post-introduction limit of 100 percent assumed (not yet applicable). - Reporting outputs: - Changes in system-wide liquidity position, drivers for cash outflows/inflows and counterbalancing capacity. - Distribution of banks’ liquidity positions. - Number of institutions with LCR/NSFR below 100 percent and/or negative net cash balance. - Amount of liquidity shortfalls, including by currencies. - Infrastructure: - Fully comprehensive infrastructure developed by IMF staff with a FINREP/COREP data repository integrated backbone. ### Network analysis — domain assumptions and outputs - Institutional perimeter and data: - Seven SIs, and 433 Austrian LSIs. - For seven SIs, about 60 percent of banking sector assets. - For all 440 entities (including the 7 SIs), above 95 percent of total assets of deposit-taking institutions. - Austrian central credit registry data; data as of December 2018. - Scope of financial consolidation: group-wide w.r.t. Austrian subsidiaries. - Methodology: - Network analysis using Furfine algorithm and Espinosa-Sole tool. - Includes contagion channels from funding concentration and foreign counterparties. - Cascading effects from individual defaults through credit and funding counterparties. - Linkages and buffers: - Transmission of funding shocks linked to liquidity stress test results by allowing banks to draw down liquid buffers to replace funding from defaulting counterparties. - Buffers: Tier 1 capital and counterbalancing capacity. - Tail shocks and sensitivity: - Size of shock: outright defaults. - Sensitivity factors: performance of collateral (secured exposures); LGD (unsecured exposures); role of netting arrangements; elimination of exposures within decentralized Raiffeisen sector. - Use of CoMap methodology of Covi et al (2019) to account for Austrian banks’ idiosyncratic calibrations and spillover risks to/from foreign counterparties using the Large Exposure database, gross exposure net of exemptions. - Reporting outputs: - Failed capital in percent of total capital. - Contagion index. - Vulnerability index. - Grouping of banks by OSII (for contagion index), and SyRB (for vulnerability index). ### Authorities’ statement — summary points from Mr. Just, Executive Director for Austria (January 24, 2020) - Authorities welcome IMF’s positive assessment of Austria's financial system and supervisory framework and acknowledge progress in proactively addressing financial stability risks and enhancing macroprudential policy. - Authorities concur that banks are, in aggregate, well capitalized and could withstand severe macrofinancial shocks per stress tests. - Key challenges and risks noted by authorities (as highlighted in the FSSA): - Large and interconnected banking sector. - High levels of CESEE exposures across banks and insurers. - Low domestic structural profitability. - Recent developments in parts of the real estate sector. - Authorities’ actions and views: - Risks assessed to be contained given higher capital levels and better credit quality; stress test results confirm resilience. - Data gaps should be closed; implementation of AnaCredit is a first step to strengthen monitoring of contagion and common exposures. - New government program contains measures to increase supply and affordability of residential real estate expected to reduce price pressure; authorities ready to activate further macroprudential measures if needed. - Clarification on FMA and OeNB supervisory responsibilities: depiction in FSSA referred to a former government's proposal from April 2019 that was not presented to Council of Ministers nor Parliament; new government program does not mention a reform. - Deposit guarantees, recovery and resolution planning: - Since January 1, 2019, investor compensation and depositor protection performed by Einlagensicherung AUSTRIA Ges.m.b.H (DGS AUSTRIA), with exceptions: members of institutional protection scheme of ERSTE Bank and savings banks are protected by S-Haftungs GmbH. - System assessed as sound and sufficiently funded. - Recovery and resolution planning well advanced; areas for enhancement include closer collaboration with host authorities in contingency planning. - Further development of crisis management framework should be consistent with EU legislation and ECB policies, especially regarding state aid and emergency liquidity. - Insurance sector: - Solvency II implementation smooth; progress in analytical framework for insurance oversight documented. - Authorities welcome principle that losses must be first borne by shareholders and other creditors before affecting policyholders/beneficiaries as a building-block for recovery/resolution framework. - Future modernization of FMA’s supervisory toolkit should consider standards and principles forming basis for future EU legislation, introduce new powers with safeguards, and clearly delineate responsibilities. - AML/CFT: - Authorities strongly committed to strengthening AML/CFT effectiveness; welcome FSSA recognition of significant progress. - Recent measures: increased supervisory resources, establishment of register of beneficial ownership, transposition of EU 5th AML directive into national law including oversight of virtual asset service providers (VASP). - Further measures include more intensive AML/CFT related training in criminal justice per new government program; efforts align with zero-tolerance policy on AML/CFT. *Source: 1autea2020001 - 1. Institutional perimeter Institutions included • All Austrian credit institutions, both directly supervised by the ECB* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1autea2020001.pdf_