## EXECUTIVE SUMMARY

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---

### Introduction and scope
- This technical note includes a targeted review of banking regulation and supervision with particular focus on supervision of less significant institutions (LSIs).
- Review basis:
  - BCBS Core Principles for Effective Banking Supervision (BCP) (did not conduct a compliance assessment).
  - Follow-up on recommendations of the 2013 Austria FSAP and consideration of findings/recommendations of the 2018 euro area (EA) FSAP.
  - Review of implementation of BCBS standards and interim guidance.
  - Consideration of proposed draft legislation consolidating financial system supervision in the Financial Market Authority (FMA).
- Assessment was based on implemented legislation and regulation as of mid-2019; the mission also reviewed proposed institutional reforms that were officially abandoned following political developments in May 2019.
- Focus areas: independence; major acquisitions; supervisory approaches and tools; enforcement and sanctioning framework; banks’ governance; transactions with related parties; internal control and audit.

### Main findings — regulatory and supervisory framework
- EU transposition and implementation:
  - National transposition and implementation of EU directives and regulations has significantly closed some gaps identified in 2013.
  - Fit-and-proper requirements for supervisory board members have been strengthened.
  - Bank Recovery and Resolution Directive (BRRD) was transposed into the Austrian Banking Act (BWG) effective January 2015.
  - Integration of banking supervision into the Single Supervisory Mechanism (SSM) has been completed.
- Remaining deficiencies and concerns:
  - Deficiencies persist in significant acquisitions (CP 7) and related party transactions (CP 20).
  - Issues raised in 2013 regarding the FMA’s operational independence remain unchanged at the time of the mission:
    - Assessors identified findings where the operational independence of the FMA might be endangered, including: presence of industry representatives on the Supervisory Board, the BMF’s role in approving FMA regulations, and the BMF’s right to gather information from the FMA.
  - BWG and regulations do not establish an adequate framework for monitoring and addressing transactions with related parties; BWG does not require ex-ante approval for acquiring qualifying holdings in undertakings outside the financial sector.
  - Although BWG amendments strengthened duties/responsibilities of credit institutions’ supervisory boards, the operational role may be made more robust by increasing interaction between supervisory boards and banking supervisors.
  - The role of state commissioners (primarily BMF staff) in bank supervision should be reassessed given evolving supervisory board functions; commissioners attend all supervisory board meetings and report directly to the FMA, which may bring the BMF into close interaction with banking supervision.

### Supervisory tools, guidance, and practice
- FMA supervisory communications:
  - The FMA has issued circulars and minimum standards to communicate supervisory expectations (not legally binding).
  - In 2017, the FMA issued Minimum Standards for The Risk Management and Granting of Foreign Currency Loans emphasizing borrowers’ sufficient income in the currency of exposure to service debt.
  - Other circulars (internal audit and credit risk) issued in 2005; internal audit guidelines are being updated and the credit risk circular is under discussion for possible updating.
- NPL/forbearance guidance and provisioning:
  - Oversight of bank loan portfolios was strengthened by ECB and EBA guidance concerning nonperforming loans (NPLs) and forborne exposures, and by EU regulation.
  - Regulation (EU) 2019/630 established Pillar 1 minimum provision coverage for exposures originated on or after April 26, 2019 that become nonperforming.
  - ECB Pillar 2 supervisory expectations cover NPLs arising from the stock of loans originating before April 26, 2019; the Pillar 2 guidance applies the minimum provisioning backstop to the stock starting on January 1, 2021.
  - The FMA is not planning to extend the ECB Pillar 2 expectations to the LSI population.
  - The FMA is implementing the EBA guidelines addressing the development of strategies for managing NPLs.
- Supervisory powers and SREP:
  - Transposition of CRD IV and the BRRD provide the FMA broad powers to require banks to address deficiencies.
  - The FMA has adopted EBA guidelines on triggers for the use of early intervention and implemented internal procedures for decision-making, coordination, and action when triggers are breached; most triggers are based on quantitative factors.
  - The FMA needs to enhance guidance and training for supervisory staff on employing qualitative information and applying supervisory judgment in the Supervisory Review and Evaluation Process (SREP), particularly in the internal governance sub-module.
  - Complex ownership structures need to be adequately considered in group-wide risks in the SREP.
- SREP structure and data tools:
  - SREP is based on four elements: (1) business model and profitability assessment; (2) governance and risk management assessment; (3) risk-by-risk assessment of risks to capital; and (4) risk-by-risk assessment of risks to liquidity and funding.
  - Automated base-assessment performed quarterly for each LSI via the ABBA system based on FINREP and COREP data.
  - Data limitations: loan data lack granularity for segmentation of loan portfolio and monitoring delinquency rates, risk ratings (i.e., PD rates), and loan growth by segment; analysts supplement with credit registry and other sources.

### Market and institutional structure — key statistics and characteristics
- Banking sector size and composition:
  - Total assets of the banking sector: EUR 986 billion.
  - Banking sector assets represent around 250 percent of GDP.
  - Banking sector assets represent about 75 percent of total financial system assets (EUR 1,314 billion).
  - Mutual funds: 14 percent of financial system assets.
  - Insurance firms: 10 percent of financial system assets.
  - Pension funds: 2 percent of financial system assets.
  - Number of banks: almost 600 banks.
  - Total assets growth: 3.9 percent in 2018.
  - Market concentration: top three banks account for 50 percent of market share.
- Ownership and segment structure:
  - Three decentralized banking segments: Sparkassen (lead bank Erste Group Bank AG — EGB), Raiffeisen cooperative segment (lead bank Raiffeisen Bank International AG — RBI), and Volksbanken (VB) cooperative segment.
  - EGB, RBI, and VB segments form liquidity associations and participate in joint cash-clearing systems; complex cross-guarantee and institutional protection schemes (IPS) exist across segments.
- Consolidation:
  - Consolidation through mergers reduced number of banks from 764 in 2014 to 597 in 2018.
  - Drivers of consolidation: pressures on profitability from heightened regulatory requirements, low interest rate environment, and high cost-to-income ratios.
- Capital and asset quality:
  - CET1 capital ratio: 11.6 percent in 2013 rising to 15.4 percent in 2018.
  - NPL ratio: 8.6 percent in 2013 falling to 2.6 percent in 2018.
  - CESEE subsidiaries NPL ratio: 14.0 percent in 2013 falling to 3.2 percent in 2018.
  - Improvements in profitability for CESEE subsidiaries have been driven by reductions in loan loss provisions; however, performance is likely to have peaked given late-cycle risks.

### Supervisory environment and institutional roles
- Dual supervisory system within SSM:
  - The ECB is responsible for the supervision of CIs established in the participating EU Member States, in cooperation with NCAs.
  - Significant credit institutions (SIs) or groups are under the direct supervision of the ECB.
  - There are seven Austrian SIs, representing 60 percent of total banking system assets.
  - The FMA continues to directly supervise LSIs in Austria, but subject to the oversight of the ECB.
  - LSIs classified as medium or high intrinsic risk with high or medium impact are designated as high priority LSIs and receive more regular and in-depth feedback from the FMA to the ECB.
- Division of roles between FMA and OeNB:
  - FMA: decision-making authority for banking supervision; issues rulings and considers legal questions.
  - OeNB: execution of onsite inspections (except AML/CFT), offsite analysis and risk assessments, prepares preliminary investigations, provides expert opinion on risk models and business model viability, and maintains the common supervisory database.
  - Single point of contact for day-to-day supervision exists at both the FMA and the OeNB for each CI.
- Governance arrangements for the FMA:
  - Supervisory Board currently consists of ten members: the chairperson; the deputy chairperson; six additional members; and two co-opted members (who do not have voting rights).
  - Appointment composition: BMF provides the chairperson and three additional members; OeNB provides the deputy chairperson and three additional members; the Supervisory Board co-opts two members named by the Austrian Federal Economic Chamber (non-voting).
  - Voting composition: 50 percent of voting members are from the BMF and 50 percent from the OeNB.
  - Executive Board consists of two persons appointed by the BMF after a tender process, with the Minister and the OeNB naming one person each from the tender results.
- Institutional reforms (proposed and not implemented):
  - November 2018 reforms announced to consolidate shared responsibilities within the FMA; draft legislation (April 2019) intended to take effect January 1, 2020 but was officially abandoned following political developments in May 2019.
  - Proposed (not implemented) key changes included consolidating banking supervision within the FMA, changing FMA governance composition and Executive Board size, and changes to FMA funding arrangements.

### Transactions with related parties, acquisitions, and corrective action
- Investment by LSIs in nonfinancial undertakings:
  - There is no requirement for ex-ante approval or notification of investment by LSIs in nonfinancial undertakings.
  - If the investment outside the financial sector does not exceed 15 percent of the CI’s capital or the total amount of such investments does not exceed 60 percent of the CI capital, there is no approval or pre-notification required.
  - If those limits are exceeded CI must apply a 1,250 percent risk weight, alternatively, the FMA may prohibit the CI from having such investments.
  - If supervisors determine that the investment is not prudential or presents obstacles for consolidated supervision, the FMA can take corrective action to restrict activities or require disposal of the investment.
  - Ex-ante review and approval or denial is more effective and would avoid costly and possibly complex unwinding of undertakings.
  - The BCP standards require that laws or regulation state the types and amounts (absolute or in relation to a bank’s capital) of acquisitions and investments needing prior supervisory approval.
- Transactions with related parties:
  - Transactions with related parties are defined in the BWG with a broad definition and require unanimous approval by the Executive Board and consent of the supervisory board for related party transactions.
  - The law does not establish the requirement that transactions with related parties not be undertaken on more favorable terms than those offered on transactions with nonrelated counterparties.
  - The FMA does not have the power to set limits for exposures to individual related parties, aggregate limits for exposures to all related parties or to require collateralization of such exposures.
  - Analysts monitor LSI exposure to related parties, but a uniform process for testing and monitoring related-party records, reviewing terms of transactions, and informing CIs on recordkeeping has not been implemented.
- Standards and monitoring of intra-group transactions:
  - Standards or regulations for intra-group transactions have not been adopted.
  - Recommended monitoring principles: required to accomplish normal operations; priced based on market values; performed in a safe and sound manner; avoid shifting of problem assets between CIs without documented purpose.
  - Risks from other entities in the wider group, foreign or domestic, and including nonfinancial entities, need to be considered (BCBS broader definition noted).
- Corrective action:
  - BWG grants FMA broad corrective action and sanctioning powers further enhanced by BaSAG.
  - EBA early intervention guidelines (GL/2015/03) incorporated; Article 44 of BaSAG addresses early intervention powers and Process No. 67 issued by FMA includes the EBA guideline triggers.
  - Article 70 of BWG covers FMA corrective action and sanctioning powers; triggers for measures are primarily quantitative based on SREP ratings or legal breaches.
  - OeNB maintains a financial deterioration dashboard that signals soft and hard triggers for reporting to the FMA.
  - Article 70 (4) of BWG establishes that FMA may impose supervisory measures when in the FMA’s view there is evidence for assuming that a CI will breach the CRR or the CRD provisions within twelve months.
  - Recommendation to review triggers and internal guidance to aid staff in scoring SREP internal governance modules 3 or 4 based on qualitative factors (examples: doubts about corporate culture; remuneration conflicts with risk strategy; inadequate wider-group AML/CFT oversight).

### Corporate governance, state commissioners, and supervisory interaction
- Corporate governance enhancements:
  - BWG amendments expanded supervisory board responsibilities (Article 28a) and managerial information requirements (Article 39).
  - Internal auditor required to report quarterly to the chairperson of the supervisory board.
  - Risk and audit committees must be established within the supervisory board for CIs required to have them.
- State commissioners:
  - Appointed to CIs with total assets exceeding € one billion.
  - Participate in the general assembly, attend supervisory board meetings and other supervisory board committee meetings, and report to FMA on profitability, change in risk profile, and high-level staff changes.
  - Must report immediately if they become aware of facts that may threaten the ability of the CI to meet its creditor obligations.
  - Although not voting members, may object to supervisory board actions that breach regulations.
  - Are BMF staff, appointed by the BMF to serve five-year terms, and are salaried by the BMF; in their commissioner function, report to the FMA.
  - Currently FMA places significant reliance on input from state commissioners concerning supervisory board performance and review of board meeting minutes.
  - Recommendation: substitute state commissioner function with enhanced FMA and OeNB engagement with supervisory boards given evolving supervisory board responsibilities.

### Areas for improvement (selected)
- Clarify and narrow the BMF’s role in oversight of the FMA; remove industry participation in FMA Supervisory Board.
- Establish ex-ante approval or notification requirements for significant investments outside the financial sector.
- Increase frequency and substance of interaction between the FMA and the OeNB and credit institutions’ supervisory boards.
- Strengthen framework for identifying and monitoring related-party transactions and extend requirements to sister companies.
- Enhance guidelines and training to support staff in risk-scoring internal governance in the SREP based on qualitative factors when quantitative triggers have not been met.
- Ensure complex ownership structures are adequately considered in group-wide risk assessment in the SREP.
- Substitute state commissioner function with enhanced FMA and OeNB engagement with supervisory boards.
- Implement ECB Pillar 2 NPL Guidance on provisioning for LSIs.

### Summary of key recommendations (Table 1)
- Recommendation 1: Review existing legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board. — Authority: BMF — Time: MT
- Recommendation 2: Establish an ex-ante approval or notification requirement for significant investments outside the financial sector. — Authority: BMF — Time: MT
- Recommendation 3: Increase frequency and substance of interaction between the FMA and the Austrian National Bank (OeNB) and credit institutions’ supervisory boards. — Authority: FMA/OeNB — Time: I
- Recommendation 4: Strengthen the framework for identifying and monitoring related-party transactions and extend requirements to sister companies. — Authority: BMF/FMA — Time: NT
- Recommendation 5: Enhance guidelines and training to aid staff in developing support for risk scoring internal governance in the SREP based on qualitative factors when the quantitative triggers have not been met and the bank is operating profitably. — Authority: FMA — Time: NT
- Recommendation 6: Ensure that complex ownership structures are adequately considered in group-wide risks in the SREP. — Authority: FMA/ECB — Time: NT
- Recommendation 7: Substitute state commissioner function with an enhanced FMA and OeNB engagement with supervisory boards. — Authority: BMF/FMA — Time: MT
- Recommendation 8: Implement ECB Pillar 2 NPL Guidance on provisioning for LSIs. — Authority: FMA — Time: I

*Source: EXECUTIVE SUMMARY, Technical note prepared for the 2019 Austria FSAP (file 1autea2020007).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction and scope
- This technical note includes a targeted review of banking regulation and supervision with particular focus on supervision of less significant institutions (LSIs).
- Review basis:
  - BCBS Core Principles for Effective Banking Supervision (BCP) (did not conduct a compliance assessment).
  - Follow-up on recommendations of the 2013 Austria FSAP and consideration of findings/recommendations of the 2018 euro area (EA) FSAP.
  - Review of implementation of BCBS standards and interim guidance.
  - Consideration of proposed draft legislation consolidating financial system supervision in the Financial Market Authority (FMA).
- Assessment was based on implemented legislation and regulation as of mid-2019; the mission also reviewed proposed institutional reforms that were officially abandoned following political developments in May 2019.
- Focus areas: independence; major acquisitions; supervisory approaches and tools; enforcement and sanctioning framework; banks’ governance; transactions with related parties; internal control and audit.

### Main findings — regulatory and supervisory framework
- EU transposition and implementation:
  - National transposition and implementation of EU directives and regulations has significantly closed some gaps identified in 2013.
  - Fit-and-proper requirements for supervisory board members have been strengthened.
  - Bank Recovery and Resolution Directive (BRRD) was transposed into the Austrian Banking Act (BWG) effective January 2015.
  - Integration of banking supervision into the Single Supervisory Mechanism (SSM) has been completed.
- Remaining deficiencies and concerns:
  - Deficiencies persist in significant acquisitions (CP 7) and related party transactions (CP 20).
  - Issues raised in 2013 regarding the FMA’s operational independence remain unchanged at the time of the mission.
    - Assessors identified findings where the operational independence of the FMA might be endangered, including: presence of industry representatives on the Supervisory Board, the BMF’s role in approving FMA regulations, and the BMF’s right to gather information from the FMA.
  - BWG and regulations do not establish an adequate framework for monitoring and addressing transactions with related parties; BWG does not require ex-ante approval for acquiring qualifying holdings in undertakings outside the financial sector.
  - Although BWG amendments strengthened duties/responsibilities of credit institutions’ supervisory boards, the operational role may be made more robust by increasing interaction between supervisory boards and banking supervisors.
  - The role of state commissioners (primarily BMF staff) in bank supervision should be reassessed given evolving supervisory board functions; commissioners attend all supervisory board meetings and report directly to the FMA, which may bring the BMF into close interaction with banking supervision.

### Supervisory tools, guidance, and practice
- FMA supervisory communications:
  - The FMA has issued circulars and minimum standards to communicate supervisory expectations (not legally binding).
  - In 2017, the FMA issued Minimum Standards for The Risk Management and Granting of Foreign Currency Loans emphasizing borrowers’ sufficient income in the currency of exposure to service debt.
  - Other circulars (internal audit and credit risk) issued in 2005; internal audit guidelines are being updated and the credit risk circular is under discussion for possible updating.
- NPL/forbearance guidance and provisioning:
  - Oversight of bank loan portfolios was strengthened by ECB and EBA guidance concerning nonperforming loans (NPLs) and forborne exposures, and by EU regulation.
  - Regulation (EU) 2019/630 established Pillar 1 minimum provision coverage for exposures originated on or after April 26, 2019 that become nonperforming.
  - ECB Pillar 2 supervisory expectations cover NPLs arising from the stock of loans originating before April 26, 2019; the Pillar 2 guidance applies the minimum provisioning backstop to the stock starting on January 1, 2021.
  - The FMA is not planning to extend the ECB Pillar 2 expectations to the LSI population.
  - The FMA is implementing the EBA guidelines addressing the development of strategies for managing NPLs.
- Supervisory powers and SREP:
  - Transposition of CRD IV and the BRRD provide the FMA broad powers to require banks to address deficiencies.
  - The FMA has adopted EBA guidelines on triggers for the use of early intervention and implemented internal procedures for decision-making, coordination, and action when triggers are breached; most triggers are based on quantitative factors.
  - The FMA needs to enhance guidance and training for supervisory staff on employing qualitative information and applying supervisory judgment in the Supervisory Review and Evaluation Process (SREP), particularly in the internal governance sub-module.
  - Complex ownership structures need to be adequately considered in group-wide risks in the SREP.

### Market and institutional structure — key statistics and characteristics
- Banking sector size and composition:
  - Total assets of the banking sector: EUR 986 billion.
  - Banking sector assets represent around 250 percent of GDP.
  - Banking sector assets represent about 75 percent of total financial system assets (EUR 1,314 billion).
  - Mutual funds: 14 percent of financial system assets.
  - Insurance firms: 10 percent of financial system assets.
  - Pension funds: 2 percent of financial system assets.
  - Number of banks: almost 600 banks.
  - Total assets growth: 3.9 percent in 2018.
  - Market concentration: top three banks account for 50 percent of market share.
- Ownership and segment structure:
  - Three decentralized banking segments comprise most banks: Sparkassen (lead bank Erste Group Bank AG — EGB), Raiffeisen cooperative segment (lead bank Raiffeisen Bank International AG — RBI), and Volksbanken (VB) cooperative segment.
  - EGB, RBI, and VB segments also form liquidity associations and participate in joint cash-clearing systems; complex cross-guarantee and institutional protection schemes (IPS) exist across segments.
- Consolidation:
  - Consolidation through mergers reduced number of banks from 764 in 2014 to 597 in 2018.
  - Drivers of consolidation: pressures on profitability from heightened regulatory requirements, low interest rate environment, and high cost-to-income ratios.
- Capital and asset quality:
  - CET1 capital ratio: 11.6 percent in 2013 rising to 15.4 percent in 2018.
  - NPL ratio: 8.6 percent in 2013 falling to 2.6 percent in 2018.
  - CESEE subsidiaries NPL ratio: 14.0 percent in 2013 falling to 3.2 percent in 2018.
  - Improvements in profitability for CESEE subsidiaries have been driven by reductions in loan loss provisions; however, performance is likely to have peaked given late-cycle risks.

### Supervisory environment and institutional roles
- Dual supervisory system within SSM:
  - Responsibilities shared between FMA and OeNB; FMA is the National Competent Authority (NCA) for banking supervision.
  - For convenience the note refers to FMA and OeNB jointly as “supervisors.”
  - FMA is solely responsible for supervision of insurance and securities markets sectors and all other significant providers of financial services and functions.
  - OeNB is solely responsible for oversight of payment systems in Austria.
  - BMF is responsible for development and implementation of the legislative framework as adopted by Parliament.
- Legal framework and supervisory instruments:
  - Supervisory tasks governed by multiple laws: Financial Market Authority Act, National Bank Act, Banking Act, Insurance Supervision Act, Pension Funds Act, Stock Exchange Act, Investment Fund Act, Provision of Payment Act, Capital Market Act.
  - In 2014 the FMA issued the Regulation on Credit Institution Risk Management (KI-RMV).
  - FMA circulars and standards on fit-and-proper, internal auditing, guidance on foreign currency credits, and credit risk are key in communicating supervisory expectations despite not being legally enforceable.

### Areas for improvement (selected)
- Clarify and narrow the BMF’s role in oversight of the FMA; remove industry participation in FMA Supervisory Board.
- Establish ex-ante approval or notification requirements for significant investments outside the financial sector.
- Increase frequency and substance of interaction between the FMA and the OeNB and credit institutions’ supervisory boards.
- Strengthen framework for identifying and monitoring related-party transactions and extend requirements to sister companies.
- Enhance guidelines and training to support staff in risk-scoring internal governance in the SREP based on qualitative factors when quantitative triggers have not been met.
- Ensure complex ownership structures are adequately considered in group-wide risk assessment in the SREP.
- Substitute state commissioner function with enhanced FMA and OeNB engagement with supervisory boards.
- Implement ECB Pillar 2 NPL Guidance on provisioning for LSIs.

### Summary of key recommendations (Table 1)
- Recommendation 1: Review existing legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board. — Authority: BMF — Time: MT
- Recommendation 2: Establish an ex-ante approval or notification requirement for significant investments outside the financial sector. — Authority: BMF — Time: MT
- Recommendation 3: Increase frequency and substance of interaction between the FMA and the Austrian National Bank (OeNB) and credit institutions’ supervisory boards. — Authority: FMA/OeNB — Time: I
- Recommendation 4: Strengthen the framework for identifying and monitoring related-party transactions and extend requirements to sister companies. — Authority: BMF/FMA — Time: NT
- Recommendation 5: Enhance guidelines and training to aid staff in developing support for risk scoring internal governance in the SREP based on qualitative factors when the quantitative triggers have not been met and the bank is operating profitably. — Authority: FMA — Time: NT
- Recommendation 6: Ensure that complex ownership structures are adequately considered in group-wide risks in the SREP. — Authority: FMA/ECB — Time: NT
- Recommendation 7: Substitute state commissioner function with an enhanced FMA and OeNB engagement with supervisory boards. — Authority: BMF/FMA — Time: MT
- Recommendation 8: Implement ECB Pillar 2 NPL Guidance on provisioning for LSIs. — Authority: FMA — Time: I

*Source: EXECUTIVE SUMMARY, Technical note prepared for the 2019 Austria FSAP.*

### 11.      Within the SSM, the ECB is responsible for the supervision of CIs established in the

### 11. Within the SSM, the ECB is responsible for the supervision of CIs established in the participating EU Member States

### Supervisory responsibilities and scope
- The ECB is responsible for the supervision of CIs established in the participating EU Member States, in cooperation with NCAs.
- Significant credit institutions (SIs) or groups are under the direct supervision of the ECB.
- The ECB has full responsibility with respect to all CIs for certain common procedures related to:
  - the granting and withdrawal of CI licenses; and
  - the acquisition of qualifying holdings in a CI.
- There are seven Austrian SIs, representing 60 percent of total banking system assets.
- The FMA continues to directly supervise LSIs in Austria, but subject to the oversight of the ECB.
- LSIs classified as medium or high intrinsic risk with high or medium impact are designated as high priority LSIs and receive more regular and in-depth feedback from the FMA to the ECB.

### Dual supervisory system: roles and information sharing
- The dual supervisory system is based on collaboration between the FMA (NCA) and the OeNB to achieve an integrated supervisory process.
- The FMA:
  - is the decision-making authority for banking supervision;
  - issues all necessary rulings and considers all legal questions in the field of banking supervision.
- The OeNB:
  - is responsible for execution of all onsite inspections based on inspection mandates issued by the FMA (except for anti-money laundering and combating the financing of terrorism);
  - has the right to request audits or the expansion of inspection orders;
  - is responsible for all offsite analysis and risk assessments based on data reported by credit institutions;
  - prepares preliminary investigations by the FMA;
  - provides expert opinion on risk management models and assesses the viability of business models;
  - maintains the common database that contains all supervisory-related data held by both institutions.
- There is a single point of contact for day-to-day supervision for each CI at both the FMA and the OeNB.

### Governance arrangements for the FMA
- The Supervisory Board of the FMA currently consists of ten members:
  - the chairperson;
  - the deputy chairperson;
  - six additional members; and
  - two co-opted members (who do not have voting rights).
- Appointment composition:
  - Except for the co-opted members, members are appointed by the BMF.
  - The BMF provides the chairperson and three additional members.
  - The OeNB provides the deputy chairperson and three additional members.
  - The Supervisory Board co-opts two members named by the Austrian Federal Economic Chamber (non-voting).
- Voting composition: 50 percent of voting members are from the BMF and 50 percent from the OeNB.
- The Supervisory Board focuses on business organization and operations of the FMA and does not execute supervision.
- The Executive Board consists of two persons appointed by the BMF after a tender process, with the Minister and the OeNB naming one person each from the tender results.
- Appointments immediately below the Executive Board need confirmation by the Supervisory Board.

### Regulatory reporting and data sources
- The EBA’s Implementing Technical Standards (ITS) provide regulatory reporting standards for CIs; the ITS on supervisory reporting monitors compliance with the Capital Requirements Regulation (CRR).
- ITS is described as a “maximum harmonization” instrument: competent authorities cannot add or delete data to be reported or require reporting in a different format or breakdown, other than in accordance with the CRR and with [CRD].
- In Austria, ITS information is supplemented by:
  - credit registry data; and
  - information generated through ongoing supervision and macroprudential analysis.
- OeNB analysts supplement FINREP and COREP regulatory reports with credit information drawn from the credit registry.
- On a bilateral basis, analysts collect bank-specific information required for ongoing monitoring of CIs.
- Ad hoc collected information may not be suitable for inclusion in the automated banking analysis tool (ABBA) for standard reports or peer comparisons.

### Institutional reforms in banking oversight (Box 1)
- November 2018 reforms announced to consolidate shared responsibilities within the FMA; aims: improve efficiency, reduce duplication, speed decision making, establish clear points of contact, and strengthen “service orientation”.
- Draft legislation (April 2019) varied some elements but not the main thrust; reforms intended to come into effect from January 1, 2020.
- Political developments in May 2019 resulted in the reforms being officially abandoned; no draft legal texts were presented to the Council of Ministers and Parliament.
- Key proposed changes (not implemented):
  - Powers and responsibilities:
    - Banking supervision consolidated within the FMA; FMA to assume responsibility for onsite inspections and offsite analysis from the OeNB.
    - FMA would be the sole point of contact on day-to-day supervision and normally the sole representative in supervisory colleges.
    - For regular supervisory reporting, FMA would have sole “ownership” of content while OeNB would retain responsibility for data collection, processing and quality assurance.
    - OeNB would lose operational roles in banking supervision but retain involvement via the OeNB governor’s role in the ECB Governing Council and a non-voting OeNB representative on the ECB’s Supervisory Board.
    - OeNB responsibilities for financial market stability would be unchanged; OeNB would retain tasks analyzing macroprudential risks and providing the FMSB secretariat.
  - FMA governance:
    - Supervisory Board reduced from ten members to six; removal of two industry co-opted members.
    - Executive Board reduced from two persons to one member; termination of the OeNB appointee.
    - OeNB would be able to nominate two of six members; BMF would appoint the other four, two of whom are to be independent experts.
    - OeNB’s right to nominate the Deputy Chairman would disappear.
    - Creation of a Financial Market Advisory Board to advise on matters related to financial markets and supervisory topics.
  - FMA funding:
    - Increased dependence of the FMA on Federal budget funding anticipated due to absorption of OeNB staff and no intention to increase supervisory levies.
    - Authorities proposed cost-efficiency programs and an increase in the OeNB’s profit distribution to the Austrian Federation from 90 to 95 percent to capture staffing reductions.
- The ECB requested that any intended amendment to the profit distribution rules of the OeNB be taken only in cooperation with the OeNB.
- The IMF view: agnostic about supervisory structures; emphasizes principles required for effective supervision: a high degree of independence, strong accountability, a clear mandate, adequate resourcing, and strong regulatory capacity. Major reorganizations have potential significant costs and can divert senior management attention.

### Strengthening supervision: SREP, tools, and risk monitoring
- SREP is based on four elements:
  1. business model and profitability assessment;
  2. governance and risk management assessment;
  3. risk-by-risk assessment of risks to capital; and
  4. risk-by-risk assessment of risks to liquidity and funding.
- Division of responsibilities:
  - The FMA assesses governance and risk management strategies/policies.
  - The OeNB assesses the business model and profitability, and risks to capital and liquidity.
- SREP output:
  - Provides a comprehensive assessment and an overall score to determine level of supervisory engagement.
  - The SSM prioritization methodology classifies the LSI population in High, Medium, and Low categories; classification informs frequency, scope, and granularity of SREP assessment.
  - An overall SREP score of ‘3’ with ‘4’ for individual elements or an overall score of ‘4’ are considered triggers for possible corrective supervisory measures.
- Automated base-assessment:
  - Performed quarterly for each LSI via the ABBA system based on reported quantitative data; a risk score is assigned to the LSI.
  - Based on FINREP and COREP data, financial ratios are computed, peer analysis is performed, and outliers are identified.
- Data limitations:
  - Loan data provides detailed information on NPLs and forborne debt but lacks granularity for segmentation of loan portfolio and monitoring delinquency rates, risk ratings (i.e., PD rates), and loan growth by segment.
  - Analysts supplement reported information through the credit registry, public information, external audit reports, and bilateral discussions with LSIs.
- Problem asset and credit risk monitoring:
  - In focus due to IFRS 9 and new NPL guidelines.
  - NPL levels have declined since the global financial crisis and provisioning expenses have declined.
  - Onsite inspections may select loan samples to ensure proper risk grading and adequate provisioning.
  - The credit registry enables supervisors to monitor system-wide exposure via bank risk-grading of individual and connected borrowers.

### Developments in banking regulation and supervisory expectations
- Regulatory enhancements from EU regulations, EBA guidelines, and transposition of directives increasingly converging with BCBS standards.
- The Banking Act (BWG) amended to incorporate:
  - EBA Guidelines on Internal Governance (EBA/GL/2017/11); and
  - Guidelines on assessment of suitability of management body and key function holders (EBA/GL/2017/12).
- The FMA issued a regulation on credit risk management (KI-RMV) in 2013 and amended it in 2014; KI-RMV transposes Directives 2013/36/EU (CRD IV) and 2002/87/EC (FICOD).
- Passage of the Bank Recovery and Resolution Act (BaSAG) and the Deposit Guarantee Schemes and Investor Compensation Act (ESAEG) enhanced enforcement powers of the FMA.
- EBA Guidelines on triggers for use of corrective and preventive measures (EBA/GL/2015/03) incorporated into supervision.
- FMA issues circulars and minimum standards (not legally binding) to communicate supervisory expectations (e.g., updated minimum standards for risk management and granting of foreign currency loans in 2017).
- NPL oversight:
  - Regulation (EU) 2019/630 established Pillar 1 minimum provision coverage for exposures originating on or after April 26, 2019 that become nonperforming.
  - ECB Pillar 2 supervisory expectations cover NPLs arising from loans originating before April 26, 2019 by requiring application of the minimum provisioning backstop starting on January 1, 2021.
  - The FMA has not applied the ECB Pillar 2 provisioning expectations to the LSI population.
  - The FMA is applying EBA guidelines requiring development of strategies for managing the stock of NPLs in CIs with gross NPL levels exceeding five percent.
- Corporate governance enhancements:
  - Amendments to the BWG expanded supervisory board responsibilities (Article 28a) and managerial information requirements (Article 39).
  - Internal auditor required to report quarterly to the chairperson of the supervisory board.
  - Risk and audit committees must be established within the supervisory board for CIs required to have them.

### Areas for improvement: independence, accountability, legal protection
- FMA operational independence enshrined in legislation but 2013 FSAP raised concerns:
  - Under the FMA Act, the FMA is not to be bound by any instructions in performance of duties.
  - The Federal Minister of Finance may commission the FMA to undertake onsite inspections (right used once).
  - Activities of the FMA are subject to oversight by the Minister of Finance (through the BMF); BMF entitled to gather information from the FMA on all matters relating to financial market supervision.
- 2013 FSAP findings and recommendations:
  - Identified potential endangerment of operational independence due to industry representatives on the Supervisory Board, BMF role in approving FMA regulations, and BMF’s right to gather information from the FMA.
  - Recommended amendments to the FMA Act to clarify and narrow the BMF’s role; these recommendations have not been implemented.
  - Found legal protections for FMA and its staff acting in good faith were adequate but suggested revisiting if FMA granted resolution powers; specific weaknesses in protections identified.
- Subsequent developments:
  - Regulations extended legal protections to cover actions taken by the FMA, its staff, and the resolution authority within the framework of the single resolution mechanism.
  - Specific weaknesses identified in the 2013 FSAP have not been addressed (reform proposals included changes in FMA governance, as detailed in Box 1).

*Source: IMF staff report excerpt (file 1autea2020007).*

### 25.      There is no requirement for ex-ante approval or notification of investment by LSIs in

### 1autea2020007 - 25.      There is no requirement for ex-ante approval or notification of investment by LSIs in

### Investment by LSIs in nonfinancial undertakings
- There is no requirement for ex-ante approval or notification of investment by LSIs in nonfinancial undertakings.
- If the investment outside the financial sector does not exceed 15 percent of the CI’s capital or the total amount of such investments does not exceed 60 percent of the CI capital, there is no approval or pre-notification required.
- If those limits are exceeded CI must apply a 1,250 percent risk weight, alternatively, the FMA may prohibit the CI from having such investments.
- If supervisors determine that the investment is not prudential or presents obstacles for consolidated supervision, the FMA can take corrective action to restrict activities or require disposal of the investment.
- Ex-ante review and approval or denial is more effective and would avoid costly and possibly complex unwinding of undertakings.
- The BCP standards require that laws or regulation state the types and amounts (absolute or in relation to a bank’s capital) of acquisitions and investments needing prior supervisory approval.

### Transactions with Related Parties
- Transactions with related parties are defined in the BWG.
- The law has a broad definition of related parties and requires unanimous approval by the Executive Board and consent of the supervisory board for related party transactions.
- The law does not establish the requirement that transactions with related parties not be undertaken on more favorable terms than those offered on transactions with nonrelated counterparties.
- The FMA does not have the power to set on a general or case-by-case basis limits for exposures to individual related parties, aggregate limits for exposures to all related parties or to require collateralization of such exposures, including intragroup transactions.
- Analysts monitor LSI exposure to related parties, but a uniform process for:
  - testing and monitoring the accuracy of information maintained by LSIs on related parties,
  - reviewing terms of transactions, and
  - informing CIs on the detail of recordkeeping to maintain for monitoring and informing supervisors on the extent of related party transactions
  has not been implemented.

### Standards and monitoring of intra-group transactions
- Standards or regulations for intra-group transactions have not been adopted.
- Transactions with sister banks, affiliated nonfinancial companies, and group members should be monitored to ensure they:
  - are required to accomplish normal operations,
  - are priced based on market values,
  - are performed in a safe and sound manner, and
  - avoid shifting of problem assets between CIs without documented purpose.
- As required by the international standards, risks from other entities in the wider group, foreign or domestic, and including nonfinancial entities, need to be considered.
- Footnote: The BCBS definition of related parties is broader than existing laws and can include subsidiaries, affiliates, any party the bank exerts control over or that exerts control over the bank, the bank’s major shareholders, Board members, senior management and key staff, their direct and related interests, close family members and corresponding persons in affiliated companies.

### Corrective Action
- The BWG grants FMA broad corrective action and sanctioning powers that have been further enhanced by BaSAG.
- EBA issued early intervention guidelines (GL/2015/03) establishing intervention triggers.
- Article 44 of BaSAG addresses early intervention powers and Process No. 67 issued by FMA includes the EBA guideline triggers.
- Article 70 of BWG covers FMA corrective action and sanctioning powers.
- Corrective and preventive measures may be initiated when a bank infringes legal requirements or when in the view of the supervisor the bank is likely to infringe, in the near future, legal requirements.
- Triggers for initiating supervisory measures are primarily quantitative based on SREP ratings, or breaches of legal requirements.
- A detailed framework for early intervention and application of supervisory measures has been established, including:
  - standards for identifying problem banks,
  - well-defined processes with a crisis management tool that considers the source of the problem (business model, governance, capital, etc.) and indicates what supervisory measures may be appropriate.
- The OeNB maintains a financial deterioration dashboard that signals soft and hard triggers of deterioration for reporting to the FMA for possible action.
- Most triggers are quantitative and based on observed financial deterioration or legal breaches.
- Article 70 (4) of BWG establishes that FMA may impose supervisory measures when in the FMA’s view there is evidence for assuming that a CI will breach the CRR or the CRD provisions within twelve months.
- To facilitate determination of future breaches, a review of available triggers or internal guidance to aid supervisory staff in making decisions to score SREP internal governance modules 3 or 4 based on qualitative factors may be appropriate. Example qualitative factors include:
  - “doubts about the appropriateness of the corporate culture”,
  - “the remuneration policy conflicts with the institution’s risk strategy and long-term interests”, or
  - “wider-group oversight of anti-money laundering and combating the financing of terrorism risk is inadequate”.

### Corporate Governance
- The BWG has expanded the responsibilities of the supervisory board and the role of the board has evolved significantly since the last FSAP; increasing interaction with the supervisors would contribute to the continued evolution.
- Communications between the FMA/OeNB and the supervisory board following and during the SREP and after onsite inspections should increase and become broader and substantive at times of SREP and after onsite inspections to enhance evaluation of the board’s effectiveness and knowledge of banking operations.
- Currently, the FMA places significant reliance on input from state commissioners concerning supervisory board performance and review of board meeting minutes.
- State commissioners:
  - are appointed to CIs with total assets exceeding € one billion,
  - participate in the general assembly, attend supervisory board meetings and other supervisory board committee meetings, and report to FMA on relevant activities of the CIs (profitability, change in risk profile, and high-level staff changes),
  - must report immediately if they become aware of facts that may threaten the ability of the CI to meet its creditor obligations,
  - although not voting members, may object to supervisory board actions that breach regulations,
  - are BMF staff, appointed by the BMF to serve five-year terms, and are salaried by the BMF,
  - in their commissioner function, report to the FMA.

### Recommendations
- Review existing legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board, as recommended in the 2013 FSAP.
- Consider legislation granting FMA power to review ex-ante major acquisitions outside the financial sector. Although the FMA has authority to ex-post limit the activities or require disposal of a major acquisition, if it considers it detrimental to the bank, having ex-ante review authority would minimize the disruption of reversing the acquisition or imposing corrective action measures.
- Enhance the related party transaction regulatory and supervisory approach. Consider amending the BWG or issuing guidance addressing:
  - content and format in which banks must document their organizational structure, including related parties and beneficial owners and monitoring transactions with related parties,
  - tracking intra-group transactions between the CI and its affiliates,
  - establishing onsite and offsite processes for regular reviews of related party exposures,
  - requiring that transactions be at arms’ length, and
  - consider establishing aggregate limits for related party transactions.
- Enhance the framework for implementation and escalation of preventive and corrective action with additional guidance for use of qualitative factors. Notes:
  - In 2015 EBA issued guidelines for triggers of early intervention measures and in 2018 the Basel Committee published Frameworks for early supervisory intervention.
  - Pre-emptive and proactive supervisory measures are largely based on supervisory judgment.
  - A supervisor must assess the quality of risk management or governance to identify areas that may be profitable in the short-term but have risks the CI may not be able to properly manage.
  - To aid in decisions based on supervisory judgment and the analysis of qualitative factors, the FMA should review and determine the needs to enhance additional internal guidelines or provide training.
- Review the state commissioner function. Observations:
  - State commissioners have added significant value to the FMA in their contributions to the monitoring of the supervisory board performance.
  - The role of the supervisory board has evolved, and requirements placed on the members have become more technical and related to monitoring the safety and soundness of the CI and internal controls and closer engagement with the executive board over operating policies and risk appetite statements.
  - Although the FMA is providing some training to commissioners to help them with the changing roles and technical issues, the new BCBS standards require more direct interaction between the supervisor and the supervisory board.
  - Therefore, the state commissioner function should be supplanted by increased interaction between the supervisors and the supervisory board.

*Source: 1autea2020007 - 25.      There is no requirement for ex-ante approval or notification of investment by LSIs in*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1autea2020007.pdf_