## _cr04238 — 1. Main Components of the Financial Sector ## Source details **Canonical URL:** [_cr04238 — 1. Main Components of the Financial Sector](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04238.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04238.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04238.pdf.json) --- ### Banking sector structure, size and key statistics - System size and balance-sheet aggregates (as of end-2003): - Gross total assets (banking sector): 605.1 (Billions of Euro); 269.8 percent of GDP. - Domestic credit: 275.1 (Billions of Euro); 122.7 percent of GDP. - Stock market valuation: 43.2 (Billions of Euro); 19.3 percent of GDP. - Bonds outstanding: 186.3 (Billions of Euro); 83.1 percent of GDP. - Banking population and sectoral composition (December 2003): - Total number of banks: 896; total balance sheet: 605.1 (euro billions). - Joint stock and private banks: Number 47; Total Balance Sheet 94.4 (euro billions); Percent of total 15.6. - Savings banks: Number 63; Total Balance Sheet 215.4 (euro billions); Percent of total 35.6. - Rural credit cooperatives: Number 595; Total Balance Sheet 144.0 (euro billions); Percent of total 23.8. - Industrial credit cooperatives: Number 69; Total Balance Sheet 31.9 (euro billions); Percent of total 5.3. - State mortgage banks: Number 9; Total Balance Sheet 45.7 (euro billions); Percent of total 7.6. - Building societies: Number 5; Total Balance Sheet 19.2 (euro billions); Percent of total 3.1. - Special purpose banks: Number 108; Total Balance Sheet 54.5 (euro billions); Percent of total 9.0. - Concentration and multi‑pillar structure: - Seven banking “pillars” persist (joint stock/private, savings banks, rural cooperatives/raiffeisenbanks, industrial cooperatives/volksbanks, state mortgage banks, building societies, special purpose banks). - Tiered group structures with apex/lead banks and formal cross‑guarantee schemes produce de‑facto branch‑like operation for many smaller banks. ### Profitability, efficiency and geographic expansion - Domestic profitability and efficiency: - Low domestic profitability driven by small market size and high bank/branch density: about 900 banks in a population a little over 8 million and about one bank branch per 1,500 people. - Austria has one of the highest cost-to-income ratios in Europe; slight increase over the past decade with improvement since 2001. - Austria: Return on Assets 1992: 0.28; Cost to Income Ratio 1992: 0.64; Return on Assets 2001: 0.50; Cost to Income Ratio 2001: 0.67. - Expansion into CEECs and contribution to profitability: - Total assets of Austrian banks in the CEECs as of mid-2003: about €59 billion, equivalent to about 10 percent of consolidated total assets. - Geographic concentration: the Czech Republic accounts for around 40 percent of Austria’s expansion in the region, followed by the Slovak Republic, Croatia, Poland and Hungary. - CEEC banks ROA (2002): 1.1 percent average; domestic ROA (2002): 0.37 percent. - CEEC activities accounted for 26 percent of pre-tax operating income while representing only 10 percent of consolidated total assets. - Consolidation and restructuring: - Since 1990, about 23 banks have exited the market on average each year (largely through mergers); only four of the largest ten banks in existence in 1990 still remain. - Ongoing clustering of small banks around apex banks; consolidation outcomes have yet to show material reductions in cost-to-income ratios. - Basel II and SME lending: - Introduction of risk-based pricing via Basel II expected to allow better loan pricing; many SME loans could be classified under the “retail customer” category implying lower capital requirements for those exposures. ### Risk profile, foreign currency lending and stress tests - Capitalization and asset quality: - Risk‑adjusted capital ratios for the system as a whole have been “hovering around 14.4 percent.” - Tier I and II risk-weighted capital adequacy ratio for the banking system has consistently exceeded 13 percent in recent years. - Non-performing loan levels have been about 1.3 percent. - Foreign currency lending (domestic): - Share of loans in foreign currency to households and corporations exceeds 20 percent in Austria (versus typically less than 5 percent in other EMU countries). - Austria accounts for about 3 percent of total lending within the euro area, but its shares of loans in Swiss francs and Japanese yen in the euros area are 36 and 34 percent, respectively. - Drivers: low interest rates, Austria-specific factors, marketing by financial advisors; concentration in smaller banks and the western region. - Common lender protections: greater collateral, ability to service euro‑equivalent loan, unilateral switch to euros if exchange rate moves, option to redenominate loans on interest reset dates. - Stress test scenarios and quantitative impacts (end-December 2003): - Baseline average CAR: 14.4; Minimum CAR: 9.0; Maximum CAR: 18.8 (baseline). - Combined impact of three credit risk scenarios produced a 9.4 percent decline in banks' capital; CARs remained well above 8 percent for virtually all banks. - CEEC lending share estimated at 13 percent of consolidated lending; adverse CEEC cyclical/structural shocks produced limited average CAR declines (examples: cyclical shock Average CAR 14.2; Min. CAR -1.6 percent change). - Foreign currency lending shock (10 percent CHF appreciation and 20 percent JPY appreciation cumulatively) reduced banks’ CAR by 3 percent, two thirds of effect from CHF loans. - Subsample of banks largely exposed to foreign currency lending (15 percent of sector assets) showed an 8 percent decline in sample average CAR; scenarios translated into 8 small banks (0.3 percent of total sector assets) falling under the 8 percent CAR limit. - Market, liquidity and contagion risks: - Interest rate risk: most scenarios < 0.4 percent of regulatory capital; exception: 130 basis point Euro parallel upward shift → 4 percent decline in regulatory capital. - Equity price risk: 30 percent domestic and 35 percent international declines → cumulative impact 2.6 percent of regulatory capital. - Liquidity: baseline liquidity ratio (liquid assets (maturity < 3 months) to short-term liabilities) = 1.1 (baseline average); simulated shocks (decline in bond values 10%, equity declines, 20% deposit withdrawals) show limited system-wide liquidity impact. - Interbank contagion modelling indicates minimal contagion risk from single-bank insolvency. ### Deposit insurance, safety net and systemic liquidity - Deposit insurance and pillar arrangements: - Compulsory, organized by pillar with five separate schemes; each scheme meets minimum EU standards. - Funding is ex post; member banks in affected pillar contribute only when a guarantee event occurs. - Contribution assessment cap: annual ceiling of 0.83 percent of the risk-weighted assets of the contributing bank. - Payouts in excess spill over to other pillars; affected pillar may issue bonds to raise external funds; federal government has legal right, but not obligation, to guarantee such bonds. - Deposit insurance limit under law: "€20,000". - Medium‑term deposit insurance concern: - Sectoral system complicates swift handling of a large problem bank because “effectively every bank in Austria would have to be consulted,” raising probability of recourse to public funds; a move over the medium term to a single system-wide scheme is suggested. - Emergency liquidity and LOLR: - Liquidity management via the Eurosystem (OeNB membership). - National Bank Act requires OeNB to lend only against collateral, with flexibility on acceptable collateral; emergency LOLR can be provided to illiquid but solvent institutions consistent with Eurosystem principles. ### Insurance, pensions and payment system highlights - Insurance sector position and recent measures: - Insurance premiums per capita rank as the 12th highest in the world; life insurance penetration (premiums/GDP) was 2.75 percent in 2001. - Sector performed relatively well but “sector’s cushion for safety has nevertheless been significantly reduced.” - FMA reduced the minimum guaranteed crediting rate, effective January 2004, to "2.75 percent" for investment-type insurance policies. - Product‑related supervisory actions: - Zukunftsvorsorge (state‑sponsored product) carries guarantee and investment rules; FMA required insurers to establish additional reserves or hedge contingent liabilities through external capital guarantors. - Occupational pensions (Pensionskassen): recommended to improve smoothing of reserves and separate investment pools by lifecycle needs. - Payment system: - Nationwide ATM network successful; consideration could be given to greater centralization of domestic payment systems versus bilateral correspondent accounts. ### Supervisory framework, compliance with standards and recommended supervisory enhancements - Supervisory institutions and coordination: - Consolidation into Financial Market Authority (FMA) in 2002 was smooth; FMA building capacity and created an “Integrated Supervision” department (January 1, 2004) for conglomerates. - OeNB continues to perform on-site examinations on behalf of the FMA; Financial Market Committee and “Coordination Forum” provide high-level interagency communication. - Observance of internationally accepted standards in banking, insurance, securities, and AML/CFT is high overall. - Key recommendations (selected, preserved verbatim where numerical or specific): - Resolve the issue of public liability of supervisors. - Complete development of the process for supervision of conglomerates. - Increase the frequency of on-site inspections, especially for the largest institutions; permit examination of all systemically important banks on a one- to two-year cycle. - Review need for a broad provision in the banking law allowing FMA to issue regulations. - Strengthen contingency planning framework for systemic problems. - Provide banks with more detailed guidelines for managing risks; continue to closely monitor foreign currency lending to unhedged domestic customers. - Review deposit insurance in mortgage and commercial bank pillars with a view to possible consolidation over the medium term. - Consider substantial increase in maximum levels of administrative fines for securities regulation. - Accelerate FMA’s move to risk-based supervision of insurance and intensify monitoring of life insurer solvency; enhance actuarial and auditing roles for life and long-tail non-life liabilities. - Introduce formal fit and proper test for financial institutions’ supervisory board members and consider making the Austrian voluntary Code of Corporate Governance mandatory for financial institutions. - Consider changing the regulatory framework so internal audit functions report to the supervisory board. - Compliance with international standards (summary): - High overall compliance with Basel Core Principles (BCP), IAIS (Insurance), IOSCO (Securities); recommendations focus on improving enforcement, on-site inspection frequency, detailed prudential guidance, and legal clarifications (notably supervisory liability and sanctioning powers). - AML/CFT assessment and recommendations: - Austria achieved a “good level of compliance with the FATF 40+8 Recommendations” but areas for strengthening include: clarity on definition of suspicion and obligation to screen unusual transactions; further guidance on customer identification; intensified supervisory monitoring during phase-out of anonymous passbooks; increased resources for supervisors and the FIU. - FIU operational data and capacity: FIU has "13 staff" and receives an average of "300–350 suspicious transaction reports a year"; FIU has robust investigative access but limited analytical capability; FIU can order temporary blocking of transactions but has no freezing power. - Suggested legal/operational enhancements include revisiting Section 145a of the Code of Criminal Procedure to ease FIU access to bank information; introducing liability for legal persons; strengthening STR guidance and supervisory inspection manuals; improving statistics on confiscation and MLA. - Authorities’ responses and implementation steps: - MoF, FMA and OeNB concurred with IMF that the Austrian financial sector is “stable and sound” and overall supervised in compliance with the Core Principles. - FMA and MoF actions underway or planned: draft Banking Act amendment to require FMA involvement for certain investments, FMA minimum standards for foreign currency loans, guidelines for Internal Audit and Credit Business, AML/CFT guidelines (banking guideline issued April 2004), increased on-site inspection plans (2004), Integrated Supervision department operational from January 1, 2004, and transposition of EC Directive on Financial Conglomerates into Austrian law effective January 1, 2005. - Palermo Convention ratification parliamentary process completed; formal deposit of ratification instrument to follow in 2004. *Source: _cr04238 — 1. Main Components of the Financial Sector (IMF staff report content).* ### 1. Main Components of the Financial Sector.............................................................................8 ### 1. Main Components of the Financial Sector ### I. Executive Summary and Overall Stability Assessment - The banking sector has undergone steady restructuring and consolidation since 1990, with emergence of relatively large banking groups (e.g., Erste Bank and RZB) and increased tying of smaller banks through cross-guarantee schemes; Austria retains about 900 banks and one of the highest bank and branch densities in the world. - Domestic market profitability is low; combined with small domestic market size this has driven major expansion by Austrian financial institutions into Central and Eastern European Country (CEEC) markets, which "has been highly profitable to date." - The banking sector is generally sound and resilient despite a recent economic slowdown: - Risk-adjusted capital ratios for the system as a whole have been "hovering around 14.4 percent," well above Basel norms. - Stress tests performed as part of the FSAP confirmed robustness of the system. - The insurance sector performed relatively well compared with peers in many European countries, though its "cushion for safety has been significantly reduced." - Medium-term risks and challenges identified: - Foreign currency lending to domestic customers is unusually prevalent, especially for house mortgages; many borrowers are not hedged. - High bank and branch density and low domestic profitability leave room for further restructuring and consolidation. - Concentration of Austrian bank investments in CEECs implies exposures that require continued monitoring. - The sectoral deposit insurance system, while having worked well, is complex; consolidation over the medium term is argued to reduce the likelihood of recourse to public funds. - Development of new and riskier insurance products (e.g., third pillar pension provision) requires supervisors to ensure insurance companies' technical reserving methodologies evolve accordingly. - Supervision and institutional framework: - Austria enjoys a high standard of supervision; consolidation into the Financial Market Authority (FMA) in 2002 was smooth. - Cooperation among FMA, OeNB, and MoF is good; FMA’s capacity is being built quickly. - Observance of internationally accepted standards in banking, insurance, securities, and anti-money laundering is high. - Recommended supervisory enhancements: - Increase on-site inspections and focus supervisory resources on systemically important banks. - Further improve governance in financial institutions. - Resolve legal issues, notably the public liability of supervisors, to enable effective mandate execution. ### Key Findings (Executive Summary Items 1–6) - Banking sector structure: - Emergence of large banking groups and tiered structures with apex banks providing centralized services. - Many smaller banks operate, in effect, like branches due to centralization and cross-guarantee arrangements. - Profitability drivers: - Low domestic profitability and small market size motivated eastward expansion into CEECs. - Resilience and capital: - System risk-absorptive capacity remained high; system risk-adjusted capital ratios ~14.4 percent. - Insurance sector: - Performed relatively well; cushion for safety reduced. - Supervisory framework: - High observance of standards; FMA consolidation successful; cooperation among authorities good. - Policy guidance: - Ongoing and planned EU directives will address many gaps; supervisory authorities should increase on-site inspections, enhance conglomerate supervision, improve governance, and resolve public liability of supervisors. ### Box 1 — Summary of Key Recommendations (Regulatory and Supervisory) - Regulatory and supervisory framework for banking: - Resolve the issue of public liability of supervisors. - Complete development of the process for supervision of conglomerates. - Increase the frequency of on-site inspections, especially for the largest institutions. - Review possible need for a broad provision in the banking law allowing FMA to issue regulations. - Strengthen the contingency planning framework to deal with systemic problems. - Provide banks with more detailed guidelines for managing risks. - Continue to closely monitor foreign currency lending to unhedged domestic customers, especially by small banks, and ensure appropriate risk management. - Deposit insurance: - Review issues of deposit insurance in mortgage and commercial bank pillars, with a view to possible consolidation of some or all deposit insurance schemes over the medium term. - Securities market regulation: - Consider substantial increase in the sizes of maximum levels of administrative fines. - Insurance and pension issues: - Accelerate FMA’s move to risk-based supervision and intensify monitoring of life insurance company solvency. - Enhance actuarial and auditing role in insurance companies for assessing life insurers and long-tail liabilities for non-life insurers. - Address special challenges from new pension products, including issuing guidelines to banks to ensure appropriate risk management. - Corporate governance: - Introduce formal fit and proper test for financial institutions’ supervisory board members. - Consider making the Austrian voluntary code of corporate governance mandatory for financial institutions. - Consider changing the regulatory framework so that internal audit functions report to the supervisory board. ### II. Financial Sector and Regulatory Context — Structure and Size - Financial system composition and relative size (as of end-2003): - Banks' total assets represent 270 percent of GDP. - Securities markets have a limited role: stock market capitalization ~20 percent of GDP and outstanding bonds ~80 percent of GDP (end-2003). - Prominent role of SMEs contributes to limited reliance on securities markets. - Multi-pillar banking structure with seven categories ("pillars"): - Joint stock and private banks; savings banks; rural credit cooperatives/raiffeisenbanks; industrial credit cooperatives/volksbanks; state mortgage banks; building societies; special purpose banks. - Differences across pillars in organization and ownership persist despite universal bank operations. - Government guarantees for some liabilities remain but are being phased out. - Tiered group structure and cross-guarantee schemes (Box 2): - Lead/apex banks provide centralized services and economies of scale (payments, settlements, liquidity, funding). - Formal cross-guarantee arrangements have reinforced smaller banks' de facto branch-like operation. - Sectoral support arrangements described for Raiffeisen, Savings Bank, and Volksbank pillars (mutual assistance, cross guarantee systems, community funds, contingent capital funds). ### III. Main Components — Tabled Statistics (as of end-2003) - Table 1: Main Components of the Financial Sector (as of end-2003) - Banking sector: - Gross total assets: 605.1 (Billions of Euro) - Percent of GDP: 269.8 - Domestic credit: 275.1 (Billions of Euro); 122.7 percent of GDP - Insurance sector: - Total financial assets: 60.4 (Billions of Euro); 27.7 percent of GDP - Premium income: 12.7 (Billions of Euro); 5.8 percent of GDP - Pension funds: - Total financial assets: 9.1 (Billions of Euro); 4.1 percent of GDP - Mutual funds: - Total financial assets: 111.0 (Billions of Euro); 49.5 percent of GDP - Stock market valuation: 43.2 (Billions of Euro); 19.3 percent of GDP - Bonds outstanding: 186.3 (Billions of Euro); 83.1 percent of GDP - Memorandum (bank domestic credit, selected countries): - Belgium bank domestic credit: 300.1 (Billions of Euro); 112.8 percent of GDP - Germany bank domestic credit: 3043.3 (Billions of Euro); 142.4 percent of GDP - Sweden bank domestic credit: ... (data for 1999); 109.9 percent of GDP - Switzerland bank domestic credit: ... (data for 2002); 174.2 percent of GDP - United States bank domestic credit: ... (data for 2002); 90.8 percent of GDP - Table 2: Size of the Banking Sector (December 2003) - All banks: - Number: 896 - Total Balance Sheet: 605.1 (euro billions) - Total Balance Sheet (percent of total): 100.0 - Joint stock and private banks: - Number: 47 - Total Balance Sheet: 94.4 (euro billions) - Percent of total: 15.6 - Savings banks: - Number: 63 - Total Balance Sheet: 215.4 (euro billions) - Percent of total: 35.6 - Rural credit cooperatives: - Number: 595 - Total Balance Sheet: 144.0 (euro billions) - Percent of total: 23.8 - Industrial credit cooperatives: - Number: 69 - Total Balance Sheet: 31.9 (euro billions) - Percent of total: 5.3 - State mortgage banks: - Number: 9 - Total Balance Sheet: 45.7 (euro billions) - Percent of total: 7.6 - Building societies: - Number: 5 - Total Balance Sheet: 19.2 (euro billions) - Percent of total: 3.1 - Special purpose banks: - Number: 108 - Total Balance Sheet: 54.5 (euro billions) - Percent of total: 9.0 ### IV. Insurance Sector Characteristics - Insurance market indicators: - Insurance premiums per capita rank as the 12th highest in the world. - Life insurance penetration (total premiums divided by GDP) was 2.75 percent in 2001, about half of peer Western European countries’ potential. - Recent performance drivers: - Strong initial reserves, conservative equity investment, heavy reliance on reinsurers for non-life natural disaster risk, and a timely reduction in minimum guarantee rate helped the sector weather international asset market falls, economic slowdown, and 2002 floods. ### V. Profitability and Efficiency of Banks - Key efficiency and profitability observations: - Domestic profitability and efficiency are low relative to major European countries. - Contributing factors include: - One of the highest bank and branch densities globally: about 900 banks in a population a little over 8 million and about one bank branch per 1,500 people. - High cost-to-income ratios; Austria has one of the highest in Europe. - Slight increase in cost-to-income ratios over the past decade, though ratios improved since 2001. - Ongoing absorption of costs from domestic consolidation, foreign expansion, and major IT and risk management investments. - Cooperative banking focus on service provision rather than profitability may have contributed. - Table 3: Selected Banking Sector Performance Indicators, 1992–2001 - Austria: - Return on Assets 1992: 0.28 - Cost to Income Ratio 1992: 0.64 - Return on Assets 2001: 0.50 - Cost to Income Ratio 2001: 0.67 - Comparative indicators for 1992 and 2001 (selected countries; values preserved as reported): - Belgium: 1992 Return on Assets 0.15; 1992 Cost to Income Ratio 0.68; 2001 Return on Assets 0.47; 2001 Cost to Income Ratio 0.63 - Finland: 1992 Return on Assets -2.67; 1992 Cost to Income Ratio 1.90; 2001 Return on Assets 2.83; 2001 Cost to Income Ratio 0.38 - France: 1992 Return on Assets 0.17; 1992 Cost to Income Ratio 0.67; 2001 Return on Assets 0.58; 2001 Cost to Income Ratio 0.62 - Germany: 1992 Return on Assets 0.22; 1992 Cost to Income Ratio 0.65; 2001 Return on Assets 0.15; 2001 Cost to Income Ratio 0.70 - Italy: 1992 Return on Assets 0.37; 1992 Cost to Income Ratio 0.66; 2001 Return on Assets 0.60; 2001 Cost to Income Ratio 0.55 - Netherlands: 1992 Return on Assets 0.41; 1992 Cost to Income Ratio 0.67; 2001 Return on Assets 0.47; 2001 Cost to Income Ratio 0.69 - Norway: 1992 Return on Assets -0.28; 1992 Cost to Income Ratio 0.60; 2001 Return on Assets 0.78; 2001 Cost to Income Ratio 0.61 - Spain: 1992 Return on Assets 0.82; 1992 Cost to Income Ratio 0.60; 2001 Return on Assets 0.76; 2001 Cost to Income Ratio 0.55 - Sweden: 1992 Return on Assets 0.21; 1992 Cost to Income Ratio 1.46; 2001 Return on Assets 0.88; 2001 Cost to Income Ratio 0.64 - Switzerland: 1992 Return on Assets 0.38; 1992 Cost to Income Ratio 0.52; 2001 Return on Assets 0.53; 2001 Cost to Income Ratio 0.60 - United Kingdom: 1992 Return on Assets 0.14; 1992 Cost to Income Ratio 0.66; 2001 Return on Assets 0.75; 2001 Cost to Income Ratio 0.57 _Italic: Source: _cr04238 - 1. Main Components of the Financial Sector (IMF staff report content)._ ### 15. Overall profitability has, however, been reasonable due to the successful ### _cr04238 - 15. Overall profitability has, however, been reasonable due to the successful ### Profitability and expansion into CEECs - Total assets of Austrian banks in the CEECs as of mid-2003: about €59 billion, equivalent to about 10 percent of consolidated total assets. - Geographic concentration of expansion: the Czech Republic accounts for around 40 percent of Austria’s expansion in the region, followed by the Slovak Republic, Croatia, Poland and Hungary. - Profitability contribution: - CEEC banks generated a 1.1 percent return on assets on average in 2002. - Domestic ROA in 2002: 0.37 percent. - CEEC activities accounted for 26 percent of pre-tax operating income, despite representing only 10 percent of consolidated total assets. - Pillar performance note: the savings bank pillar performs slightly worse than other pillars due to rigid cost structure and lower spreads; joint stock banks are the most profitable on average. ### Consolidation, restructuring, and cost efficiency - Ongoing consolidation and restructuring are expected to help address high cost structures. - Since 1990: - About 23 banks have exited the market on average each year, largely through mergers. - Only four of the largest ten banks in existence in 1990 still remain. - Government ownership has been reduced drastically. - Consolidation has also proceeded via clustering of small banks around apex banks in tiered structures. - Outcome caveat: results have yet to be seen in terms of reduced cost-to-income ratios. ### Basel II and SME lending - Introduction of risk-based pricing through Basel II may enable better loan pricing and improved margins. - Relevance for SMEs: - Loans to most SMEs could be classified under the “retail customer” category, which requires lower capital requirements than currently. - Some SMEs may benefit from lower interest rates; others could face an increase in loan costs. ### Foreign currency lending (domestic) - Austria exhibits a notably high level of foreign currency loans by local banks to domestic customers: - In other EMU countries typically less than 5 percent of loans to households and corporations are in foreign currency; in Austria the share exceeds 20 percent. - Austria accounts for about 3 percent of total lending within the euro area, but its shares of loans in Swiss francs and Japanese yen in the region are 36 and 34 percent, respectively. - Drivers of demand: - Low interest rates and Austria-specific factors (natural hedges in the west of the country, publicity about early savings, financial advisors’ marketing). - Concentration: particularly common in smaller banks and in the western region. - Lender risk mitigation features typically required by banks: - Greater degree of collateral than on euro loans. - Ability of borrower to service a loan of the same amount in euros. - Option to unilaterally switch the loan to euros if exchange rate moves sufficiently. - Borrowers often have an option to redenominate loans in euros on interest rate reset dates. - Authorities’ actions: - Issued guidelines to banks on lending in foreign currency and on loans involving repayment vehicles. - Mounted a publicity campaign to raise borrowers’ awareness of risks. - Introducing a legal amendment to strengthen consumer protection provisions. - Noted recent significant switch from yen-denominated loans to Swiss franc loans. ### Safety net and systemic liquidity - Deposit insurance: - Compulsory, organized by pillar with five separate schemes, each meeting minimum EU standards. - Each scheme administered by the respective trade association and operates shared early warning systems. - Funding is ex post; member banks in affected pillar contribute only when a guarantee event occurs. - Contributions based on proportion of covered deposits in each pillar, subject to an annual ceiling of 0.83 percent of the risk-weighted assets of the contributing bank. - Payouts in excess spill over to other pillars; if shortfall persists, affected pillar can issue bonds to raise external funds. The federal government has the legal right, but not the obligation, to guarantee such bonds. - To date, no occasion where second or third layers have been accessed. - Systemic liquidity arrangements: - Liquidity management is carried out through the Eurosystem, to which the OeNB belongs. - Emergency lender-of-last-resort (LOLR) assistance can be provided to an illiquid but solvent institution if necessary. - Eurosystem principles for LOLR: provision is primarily a national responsibility; liquidity impact must be managed consistently with unified monetary policy. - National Bank Act requires OeNB to lend to banks only against collateral, even in emergencies; OeNB has flexibility on acceptable collateral. - Authorities consider it inappropriate to predetermine and publicly announce detailed rules for temporary liquidity provision in a systemic crisis. ### Stability issues — macroeconomic risks - Main macroeconomic risk exposures: a possible recession in Austria, major banks’ exposures to the CEECs, and high levels of unhedged foreign currency borrowing by households and enterprises. - Outlook and resilience: - Growth expected to average 1.6 percent this year and 2½ percent in 2005. - Financial soundness indicators are in a comfortable range. - Tier I and II risk-weighted capital adequacy ratio for the banking system has consistently exceeded 13 percent in recent years. - Non-performing loan levels have been about 1.3 percent. - Specific risk factors and mitigants: - A protracted recession would increase non-performing loans; mitigating factors include traditionally low household leverage and that many SME borrowings are from owners rather than banks. - Adverse CEEC developments would raise non-performing loans; EU accession is expected to support growth and stability. Many investments are via subsidiaries (insulating parents somewhat), but parent balance sheets and group profitability could be affected. - Foreign currency borrower solvency is sensitive to exchange rate movements; banks generally monitor and control these risks and require protective loan features. Many foreign-currency mortgages are long-term and could be restructured. ### Risk management by banks - Large systemically important banks have made major strides in implementing evolving best practices. - Three large banks have adopted internal value-at-risk models for market risk exposures with FMA approval and ongoing validation requirements. - All banks are well advanced in preparations for Basel II; the process needs ongoing monitoring. - Tiered pillars advantages: - Self-supervision systems combining internal audit, external audit, early warning systems, and statutory deposit insurance. - Centralized provision of risk management and IT services by apex banks aligns smaller banks with international standards. - Financial and reputational risk exposure within a pillar encourages prompt action when an individual bank fails. ### Stress tests and resilience - Stress test coverage: - Scenarios assessed: (a) protracted recession in Austria; (b) adverse developments in CEEC economies; (c) high levels of foreign currency lending domestically. - Tests covered the banking sector as a whole, major pillars (joint-stock banks, savings banks, Raiffeisen banks, and others), and targeted groupings (systemically important banks, regionally active banks, banks with high foreign currency exposure). - Key stress test findings: - Banking system remained resilient to large but plausible shocks. - High level of capitalization: system CAR stood at 14.4 percent as at end-December 2003. - Credit risk was the most important risk; market and liquidity risks were modest. - Combined impact of the three credit risk scenarios resulted in a 9.4 percent decline in banks' capital; CARs remained well above 8 percent for virtually all banks. - Exceptions: a limited number of small banks with significant exposure to the CEECs or to foreign currency lending—CARs in these cases did not fall far below 8 percent. *Source: IMF staff report (content unit: _cr04238).* ### 31. Austria enjoys a high standard of supervision based on strong institutions and a ### _cr04238 - 31. Austria enjoys a high standard of supervision based on strong institutions and a ### Supervisory framework and institutions - Austria has a comprehensive and modern legal framework and strong institutions supporting a high standard of supervision (Box 5 and Annex). - The consolidation of supervision in the new Financial Market Authority (FMA) in 2002 has taken place smoothly.6 - The FMA is a young organization building institutional capacity and implementing processes to coordinate banking and insurance supervision in oversight of financial conglomerates. - The OeNB continues to undertake some aspects of on-site supervision on behalf of the FMA; the FMA is gradually building on-site supervisory capacity. - The Financial Market Committee (representatives of the FMA, the OeNB and the MoF) provides a formal basis for high level interagency communication; the “Coordination Forum” has been effective in coordinating on-site supervision. - The FMA cooperates effectively with supervisors in other countries (both European Community and third countries) in supervising licensing and activities of Austrian banks in those countries and of foreign banks in Austria. ### Stress tests — summary of methodology and key quantitative impacts (Box 4 and Table 5, end-December 2003) - Baseline average CAR: 14.4; Minimum CAR: 9.0; Maximum CAR: 18.8 (baseline). Credit risk - Domestic credit risk — 3-yr. recession scenario; LLP approach: Average CAR 13.6; Min. CAR -5.8 percent change; Max. CAR 8.6; observed maximum reduction of 5.8 percent of regulatory capital (LLP model). - Domestic credit risk — 3-yr. recession scenario; PD approach: Average CAR 14.1; Min. CAR -2.6 percent change; Max. CAR 8.8; impact up to -2.2 (table shows 18.6-2.2). - CEEC credit risk — Cyclical shock: Average CAR 14.2; Min. CAR -1.6 percent change; Max. CAR 7.9; Structural shock: Average CAR 14.2; Min. CAR -1.5 percent change; Max. CAR 7.5. - CEEC lending share: estimated at 13 percent of Austrian banks’ consolidated lending. Subsample of regionally active banks representing 44.3 percent of total banking sector assets resulted in a 3.3 percent decline in the sample’s average CAR.2/ - Foreign currency lending — 10 percent appreciation CHF and 20 percent appreciation JPY cumulatively reduce banks’ CAR by 3 percent, with two thirds of the effect from CHF loans. - Subsample of banks largely exposed to foreign currency lending representing 15 percent of banking sector assets shows an 8 percent decline in the sample’s average CAR; this shock translates into 8 small banks representing 0.3 percent of total banking sector assets going under the 8 percent limit in these scenarios.3/ 1/ Market risk - Interest rate risk — scenarios on Euro, USD, JPY, CHF yield curves. Most impacts < 0.4 percent of regulatory capital; exception: 130 basis point Euro parallel upward shift results in a 4 percent decline in regulatory capital. - Equity price risk — 30 percent domestic decline and 35 percent international decline yield cumulative impact of 2.6 percent of regulatory capital; exposure to equity prices equals 0.5 percent of total assets. - Exchange rate risk — “worst case” cumulation across USD, CHF, JPY and CEEC currencies reduces regulatory capital by no more than 1 percent; net open position in foreign currencies estimated at 2.2 percent of capital at end-December 2003. Liquidity risk - Simulated large withdrawals of customer and interbank deposits and large declines in value of liquid assets (e.g., government bonds) — impact on banks’ liquidity ratios is generally small. - Baseline liquidity ratio (ratio of liquid assets (maturity < 3 months) to short term liabilities): 1.1 (baseline average) ... 0.6 (Min) 3.3 (Max). Decline in value of bonds 10% -> liquidity ratio 1.0 ... 0.6 3.2 ...; decline in equities 20% -> 1.1 ... 0.6 3.2 ...; withdrawal of short-term interbank deposits 20% -> 1.1 ... 0.6 3.5 ...; withdrawal of short-term nonbank deposits 20% -> 1.1 ... 0.5 3.6 ... Interbank contagion risk - Model-based assessment shows the risk of contagion from the insolvency of a single bank is minimal. ### Main conclusions from standard assessments (Box 5) BCP (Banking Core Principles) - Austria has a high overall level of compliance with the Core Principles. - Recommendations include: - Introduce a pre-notification requirement for major investments/acquisitions in entities other than credit institutions. - Increase frequency of on-site inspections, especially of the largest institutions. - Strengthen prudential rules for connected lending. IAIS (Insurance) - Well defined regulatory and supervisory structure; resources currently adequate in insurance sector. - Recommendations include: - Develop detailed regulations/guidelines on internal control and procedure and enhance on-site inspections. - Improve technology for non-life, long tail technical reserves and life insurer overall prudential management. - Strengthen the supervisory unit responsible for the Pensionskassen (second pillar of the pension system). IOSCO (Securities) - Overall quality of supervisory framework for securities markets is very good; some enforcement aspects could be improved. - Recommendations include: - Make the FMA responsible for depositing prospectuses for public offering. - Consider raising the size of administrative fines which can be imposed by the FMA. AML/CFT - Significant progress toward compliance with international standards; overall legal and institutional framework is comprehensive. - Recommendations include: - More clarity in legal provisions defining suspicion of money laundering and obligation to screen unusual transactions. - Further guidance to financial institutions on AML/CFT duties, particularly customer identification. - Enhanced monitoring of compliance by supervisors across all sectors subject to AML/CFT obligations, including on-site inspections. - Sustained supervisory attention during the phasing out of anonymous passbooks. ### Supervision capacity, on-site program and legal/operational recommendations - The FSAP team identified need for: - More detailed or specific prudential guidance to financial institutions in some areas. - Strengthened focus on on-site inspections, especially for the most systemically important institutions. - Resolution of outstanding legal issues, in particular the public liability of supervisors. - Strengthening the AML/CFT regime. - Broader regulation-making authority for the FMA to address unforeseen issues expeditiously without legislative amendment or reliance on non-binding guidelines. - On-site inspection program enhancements: - Coordinate implementation of planned increase in supervisory resources and clarify division of on-site work between OeNB and FMA. - Maintain or enhance coordination and cooperation between FMA and OeNB. - Prioritize allocation of supervisory resources given the large number of banks. - Systemically important banks should be the principal focus of on-site programs; all banks should be inspected at some stage.35 ### Financial conglomerates and sector linkages - Important linkages exist between banking and insurance sectors; mapping by the FMA identifies extensive ownership linkages and complex group structures. - Life insurers’ dependence on associated banks as distribution channels increases vulnerability beyond ownership stakes. - FMA intends to use a broad definition of “financial conglomerate” for supervisory purposes. - FMA introduced a new “integrated supervision” department in early 2004 to supervise financial conglomerates and monitor linkages between parts of the financial sector. ### Securities market supervision and governance - FMA relies heavily on external auditors; additional staff would enable a more direct supervisory approach. - Administrative fines that the FMA can impose are relatively low and constrained by Austrian law (cannot currently be higher than criminal penalties). - Recommendations include broadening definition of price manipulation and increasing maximum fines where legally feasible. - Governance recommendations: - Enhance voluntary code of corporate governance (mandatory for listed companies) — consider making fully mandatory for financial institutions. - Strengthen internal audit function by having it report to the supervisory board rather than the management board. - Introduce formal fit and proper requirement for supervisory board members. ### AML/CFT detailed observations - Austria has achieved a good level of compliance with the FATF 40+8 Recommendations. - Areas for strengthening include further guidance to financial institutions on customer identification, greater clarity in some legal provisions, enhanced supervisory monitoring, and sustained attention during phasing out of anonymous passbooks. ### Medium-term challenges Profitability in the CEECs - Banks' margins in the CEECs are expected to narrow with greater market access and competition following integration with the rest of Europe. - Financial deepening in the CEECs will continue (bank asset to GDP ratios still significantly lower than in the EU), which will contribute to banks' profits. - Austrian banks are monitoring the situation; further consolidation and increased efficiency in domestic Austrian operations will be important to offset any reduction in CEEC profitability. Phasing out of state guarantees - The impact of phasing out state guarantees (agreed with the European Commission) will be relatively small compared with Germany; only the Hypo banks (mortgage banks) being materially affected. - Funding cost advantage from guarantees (market participants estimate in the range of 10 to 50 basis points) will disappear. - Hypo banks have sought a legal amendment to establish a funding vehicle (Pfandbriefstelle der Oesterreichischen Landes-Hypo) to permit issuance of instruments covered by low risk assets and thus rated highly. - Low proportion of Austrian bank assets affected, long phase out period envisaged, and current adjustment underway mean stability implications will be manageable. - Note: future recourse to covered bonds would engender increased risk (albeit small) to the system, mainly reflecting pledging of the lowest risk assets in the system in support of bond issues (Box 6). *Source: IMF staff report text as provided in the content unit.* ### 42. Ongoing change in the banking sector may require changes to the sectoral ### Ongoing change in the banking sector may require changes to the sectoral approach to deposit insurance ### Deposit insurance: medium-term issue - The current sectoral framework would make it difficult to deal quickly with a large problem bank because "effectively every bank in Austria would have to be consulted," likely producing widespread public knowledge of the financial distress. - Increased public knowledge would raise the probability of using public funds to support a quick, non-disruptive solution (for example, an assisted merger or recapitalization) to avoid a systemic banking crisis. - Moving over the medium term to a single system-wide deposit insurance scheme could avoid complications and uncertainties inherent in the current sectoral system. ### Deposit insurance: near-term / pillar-specific concerns - Hypo bank pillar: - Phasing out of state guarantees for the Hypo banks will increase the probability of deposit insurance claims in the event of a Hypo bank failure. - With only nine members of the Hypo bank deposit insurance scheme, the cost of deposit insurance claims could be relatively high for the other members and could "quite possibly exceed the assessment cap for these members," causing costs to spill over into other pillars' deposit insurance schemes. - Commercial bank pillar: - Several differentiating factors could make deposit insurance an issue for the commercial bank pillar: - One member of the commercial bank deposit insurance scheme is "very much larger than the other members." - There is an absence of centralized oversight of the pillar by the scheme. ### Box 6 — Existing System of State Guarantees - Legal basis: - Under the Savings Bank Act and the Statutes (mortgage/Hypo banks), liabilities benefit from guarantees from regional (Federal Provinces) or local authorities (communities). - Guarantees are neither limited in duration nor to a certain amount and take the form of a deficiency guarantee: the guarantor can be called upon only if the bank's assets are insufficient to satisfy all creditors. - EC agreement (January 2003) to phase out state guarantees affecting: - 22 municipal savings banks and 7 mortgage banks, together accounting for "less than 10 percent of the assets of credit institutions in Austria." - The regional mortgage banks affected account for "less than 7 percent of the balance sheet of credit institutions." - The savings banks affected represent "only less than 3 percent." - Four key provisions of the agreement: - Liabilities existing at the time of the agreement ("April 2, 2003") continue to be covered until their maturity. - New liabilities incurred during the transitional period (from "April 2, 2003 to April 1, 2007") will be covered provided their maturity does not go beyond "September 30, 2017." - All new liabilities undertaken starting on "April 1, 2007" will not be covered. - Austria is committed to amend its laws and adopt by "end-September 2004" proposals for the necessary legal measures abolishing state guarantees in the Austrian banking sector. --- ### Insurance and pensions ### Insurance sector: current position and vulnerabilities - The insurance sector has performed well relative to many other developed countries, but the "sector’s cushion for safety has nevertheless been significantly reduced." - The sector faces new financial pressures and, in the life segment, "thin margins." - The FMA has reduced, effective "January 2004," the minimum guaranteed crediting rate to "2.75 percent" for investment-type insurance policies. ### Supervisory and policy recommendations for insurance - Consider: - (i) Accelerating FMA's move to risk-based supervision of the insurance sector, including enhanced monitoring of solvency and ensuring insurance companies' methodologies evolve with new, riskier products. - (ii) Improving reserving and pricing for long-tail non-life classes and working with the MoF to ensure the tax regime does not disincentivize technical reserve strengthening. - (iii) Enhancing and upgrading the actuarial and auditing professions for assessments of life insurers and long-tail liabilities for non-life insurers. - FMA action on new state-sponsored product: - Zukunftsvorsorge (a new state-sponsored savings product) offers private investors a government premium, a guaranteed return, a tax incentive, and a "10-year term" lock-in period. - System risks from Zukunftsvorsorge arise from: (i) the need to provide the guarantee; (ii) the relatively short lock-in period; and (iii) the requirement that "40 percent of the contributions be invested in securities listed on an eligible exchange in the European Economic Area with capitalization below 30 percent of GDP." - FMA has required insurance companies either to establish additional reserves or hedge contingent liabilities through an external capital guarantor; the intention to issue a similar regulation to banks in 2004 is noted. ### Occupational pensions (Pensionskassen) - Steps recommended: - (i) Improve smoothing of reserves, which are currently low following several years with negative returns. - (ii) Move away from investing defined benefit, defined contribution, and retiree funds in the same investment pool because this conflicts with lifecycle investment needs. - FMA has begun closer monitoring of capital adequacy of the Pensionskassen. --- ### Payment system ### Efficiency improvements - The nationwide ATM network to which all banks belong has been successful. - Consideration could be given to greater centralization in the system for domestic payments as potentially more efficient than the current system of bilateral correspondent accounts. --- ### Basel Core Principles for Effective Banking Supervision — Summary assessment ### General and institutional setting - The assessment was conducted within the FSAP for Austria. The FMA consolidated supervision in 2002 and faces the challenge of building institutional capacity. - The Financial Market Authority (FMA) is responsible for prudential supervision of banks. - The Austrian National Bank (OeNB) retains legal responsibilities including mandatory on-site examinations of credit and market risk upon FMA authorization, data collection and processing, and rendering expert opinions. ### Preconditions and safety net - Austrian banks benefit from sound macroeconomic policies and developed government infrastructure. - Accounting standards: Austrian commercial code consistent with EU directives; many larger banks use International Accounting Standards (IAS); those listed on the senior board of the Vienna Stock Exchange are required to use IAS. - Safety net components: - Deposit insurance to a limit of "€20,000" provided on a sectoral basis with compulsory membership and after-the-fact assessment based on size. - Mutual guarantee agreements in the savings bank and cooperative pillars make member banks jointly and severally liable for deposits of all banks in the pillar. - Supervisory authority has a full range of tools and sanctions for dealing with problem banks. ### Main findings - Austria has a high overall level of compliance with the Core Principles; some legal amendments and more detailed prudential guidance would be beneficial. - FMA and OeNB coordinate and cooperate well; on-site inspections and off-site analysis are of high standard. - Areas for improvement include more frequent on-site examinations of systemically important banks and enhanced guidance for internal processes and controls. ### Specific concerns and recommendations (selected) - CP 1 (Objectives, autonomy, powers, and resources): - A recent court decision potentially makes government (or possibly the FMA) liable for all losses in bank failures due to shortcomings of an external auditor performing supervisory duties—this raises concerns about limiting supervisory liability except in gross dereliction of duty. - CPs 2–5 (Licensing and structure): - Introduce a pre-notification requirement for major acquisitions and investments of credit institutions in entities other than credit institutions. - CPs 6–15 (Prudential regulations and requirements): - Expand definition of related parties to include significant shareholders. - Make substantial parts of the Austrian Code of Corporate Governance fully mandatory for credit institutions. - Require internal audit functions to report to the supervisory board (or a committee thereof). - CPs 16–21 (Methods of ongoing supervision): - Increase resources to permit examination of all systemically important banks on a one-to two-year cycle in addition to reliance on external auditors. - Establish a formal FMA process to coordinate banking and insurance supervision for conglomerates; the new Integrated Supervision Department (created January 2004) should address this. - CP 22 (Formal powers of supervisors): - Legal burdens of proof in less obvious cases may deter timely remedial action, although no undue delays were observed in practice. - CPs 23–25 (Home-host supervision): - Austria maintains memoranda of understanding with many foreign supervisors, explicit evaluation of risks from foreign establishments, and periodic on-site examinations abroad. ### Table 6 — Recommended Action Plan (selected entries preserved verbatim) - CP 5: Investment Criteria - Introduce a pre-notification requirement for major investments/acquisitions in entities other than credit institutions (for which pre-notification already exists in the case of qualifying participations). - CP 10: Connected Lending - Establish a requirement for transactions with related parties to be undertaken on market terms and conditions. - Explicitly require banks to have dedicated credit administration for related party transactions. - Include significant shareholders in the legal definition of related parties. - CP 13: Other Risks - Introduce guidelines on interest rate risk, operational risk and the ability to require capital to be held against risks in addition to credit and market risk. - CP 15: Money Laundering - Use recently promulgated guidelines on AML/CFT to banks as the yardstick for verification by external auditor and in on-site examinations; build on this step through additional guidelines and follow-up. - CP 16: On and off-site Supervision - Increase frequency of on-site inspections, especially of the largest institutions. - CP 20: Consolidated Supervision - Establish procedures and structure within FMA to coordinate banking and insurance supervision for conglomerates, including cases falling outside the EU conglomerate definition. The creation of the new Integrated Supervision Department should fulfill this recommendation. - Routinely assess the risks to banking groups from nonbank activities, including those undertaken in insurance and non-financial affiliates. *Source: IMF staff report text as provided in the supplied PDF content unit.* ### 64. The Austrian Ministry of Finance, the Financial Market Authority and the ### _cr04238 - 64. The Austrian Ministry of Finance, the Financial Market Authority and the ### Authorities' response and overall assessment - The Austrian Ministry of Finance (MoF), the Financial Market Authority (FMA) and the Oesterreichische Nationalbank (OeNB) expressed gratitude for the IMF discussions and appreciation of IMF conclusions that: - The Austrian financial sector is "stable and sound," as verified by comprehensive stress tests carried out by IMF and OeNB. - The sector is "overall supervised in compliance with the Basel Core Principles for Effective Banking Supervision." ### Banking supervision — actions and planned measures - Investment criteria: - MoF drafted a bill amending the Austrian Banking Act (BWG) to require special involvement of the FMA via a permission or notification when a bank undertakes a relevant investment (acquisition surpassing a certain threshold of voting rights or share capital) in an entity other than a credit institution. - The proposal is currently under discussion. - Guidance and on-site supervision: - In autumn (year not specified in excerpt), the FMA introduced minimum standards for the management of foreign currency loans. - FMA is preparing minimum standards for Internal Audit and for Credit Business. - FMA is preparing guidelines on AML/CFT (Internal control and procedures as well as suspicious transactions reporting). - FMA and OeNB jointly work on Best Practice Papers (“Leitfäden”) in fields including: - Risk Management of Securitization - Rating Models and Validation - Credit Risk Management - Credit Risk Mitigation Techniques - On-site inspections and management engagement: - FMA and OeNB plan to increase total number and frequency of on-site inspections, starting with the inspection plan for 2004. - FMA has highly increased the number of Management Discussions with senior management of banks. - Consolidated supervision: - As of January 1, 2004, FMA created a new department, “Integrated Supervision,” responsible for financial conglomerates and risk transfer within groups, taking fully into account linkages between banking and insurance sectors. - Austria is transposing the EC Directive on Financial Conglomerates into Austrian Law; provisions will enter into force from January 1, 2005. ### IAIS Insurance Core Principles — assessment scope and institutional setting - Assessment carried out between October 22 and October 31, 2003 within the FSAP for Austria, using the IAIS Methodology approved in October 2003 and an IMF/World Bank Template. - Assessment reviewed compliance of Austrian insurance law and supporting regulation with modern insurance supervisory concepts (multi-pillar approach: prudential supervision, corporate governance, market transparency). - Supervisory body examined: Insurance and Pensions Supervisory Department of the FMA (carries out most insurance supervisory activities; certain legal/enforcement issues and direct supervision of intermediaries lie with other government arms). - Governing insurance law responsibility: Ministry of Finance (MoF). ### Insurance sector structure and market conditions - Market structure and players: - Austrian insurance sector has 54 locally licensed players and two non-EEA branches (ignoring relatively tiny rural mutual insurers). - Industry structure stable following 1990s consolidation; five insurers tend to dominate. - Two dominant insurers are overtly foreign (one Italian and one German); two have links to German institutions through shareholdings in associated banks. - Links with banking groups: - All major insurers associated with local banking groups; linkages focus on efficient use of distribution systems rather than true bancassurance. - Banks expect fee income to generate at least 40 percent of gross revenues in the future. - Market segments and penetration: - Non-life sector is mature. - Life segment operates at approximately half its potential compared with peer Western European countries. - Life insurance penetration (premiums divided by GDP) was 2.75 percent in 2001, placing Austria at 29th position in the world, behind Portugal. - Voluntary supplementary second pillar employer-based pension system (Pensionskassen) established in early 1990s; Pensionskassen are joint stock companies mainly owned by banks or insurers, with characteristics similar to life insurance. - Financial pressures and reserving: - Industry faced natural disasters (the 2002 floods), price competition in non-life, falling asset markets and returns, introducing new financial pressures and, for life insurers, significant reduction in safety margins. - Long-tail classes (e.g., motor bodily injury third party and medical malpractice) show chronic poor run-off patterns; grounds for improving reserving and pricing technology exist. - Tax regime that does not allow full deductibility of non-life technical reserve strengthening could inhibit implementation of improved reserving technology. - Life insurer features: - Minimum guaranteed crediting rate increased from 3 percent to 4 percent in 1995, and reduced again to 3.25 percent in mid-2000. - Austrian life insurers adopted relatively conservative investment policy over the last decade; life sector performed poorly in 2002 but to a lesser extent than some other jurisdictions. - Third pillar pensions contract: - New third pillar pensions contract involves difficult technical issues. - FMA, with MoF support, required insurers writing the product to set up special reserves using a VAR methodology unless the risk is laid off to a bank. - In practice, most market risk has to date been transferred to the banking sector. ### Main findings on insurance supervision and market conduct - Overall performance: - "Austria has performed well against the new, much more demanding, IAIS assessment methodology." - Conditions for effective insurance supervision: - Strong auditing and legal/judicial framework exists. - Actuarial profession is potentially strong but needs to upgrade role to cover overall financial position of life insurers and opine on long-tail liabilities for non-life insurers; requires strengthening professional infrastructure and broadening training. - Domestic capital markets are rather thin and subject to active development program. - Supervisory system: - Well-defined regulatory and supervisory structure. - Resources currently adequate in the insurance (but not pensions) supervisory arm of the FMA. - Industry levy charged appears low by international standards. - FMA, a relatively young organization, has faced legal interpretation challenges in courts and maintained relevant liability insurance coverage. - Supervised entities and governance: - Austria satisfies most requirements under supervised entity heading. - Bicameral board structure creates issues applying governance CP; voluntary Code of Corporate Governance points to growing supervisory board role in monitoring risk. - Ongoing supervision: - Austria meets most ongoing supervision requirements. - Prudential requirements: - Prudential requirements somewhat stronger than EU minima. - A form of asset-based stress testing for life insurers has been introduced. - Current technical reserving methodologies and techniques likely inadequate for increasingly risky market and more complex life products and greater exposures to volatile assets. - Some mild forbearance for life insurers on asset and liability sides in recent years, although life industry appears to satisfy statutory solvency requirements at the aggregate level. - Early intervention: - Early intervention mechanisms are anticipated by law but tend to be applied on an ad hoc basis; no written statements on how process will operate in practice. Documenting the process would improve consistency and transparency. - Markets and consumers: - Formal supervision of intermediaries exists, but insurance supervisor has only indirect overview of agents and brokers via supervision of insurers. - Consumer protection handled through separate law and agencies; FMA can receive complaints and attempt to resolve them but has no formal powers in this regard. - Anti-money laundering / combating financing of terrorism (AML/CFT): - Apart from Section 18a of the Insurance Supervision Act, few regulations/guidelines/manuals issued by FMA or Insurance Association regarding AML/CFT requirements. - Latest FMA circular for the life insurance sector (October 2003) added substance, but no inspection manual exists yet to review compliance with AML/CFT requirements. ### Recommended actions to improve observance of IAIS Insurance Core Principles (extracted) - Conditions for effective insurance supervision (CP 1): - Upgrade role of responsible actuary to include reporting overall financial position of life insurers. - Institute relevant standards and professional development. - The supervisory system (CPs 2–5): - Clarify legal liability of staff. - Develop a more stable and adequate basis for funding the pension company supervisory team. - Examine long-term viability of the insurance levy given development of foreign subsidiaries of Austrian insurers and pressures on life insurance sector. - The supervised entity (CPs 6–10): - Consider introducing positive fit and proper criteria related to understanding of the business or financial market matters. - Suggest or require that substantive insurers observe the new Austrian Code of Corporate Conduct. - Ongoing supervision (CPs 11–17): - Strengthen supervisory unit responsible for Pensionskassen. - Introduce more explicit rules on circumstances for early intervention. - Increase fines to meaningful levels. - Prudential requirements (CPs 18–23): - Require Supervisory Board of an insurer to have an overview role regarding underwriting policy. - Strengthen technology for non-life long-tail technical reserves and life insurer overall prudential management (including DST where AML issues exist). - Maintain a watching brief for underwriting of risk through credit instruments on liability or asset sides of insurer balance sheets. - Markets and consumers (CPs 24–27): - Introduce a midway claims resolution process between FMA and courts. - Give FMA more direct influence over licensing of intermediaries, particularly those selling complex pension products. - Anti-money laundering / combating financing of terrorism (CP 28): - Develop detailed regulations/guidelines on internal control and procedure at insurance companies and enhance on-site inspections. - Consider developing an inspection manual for insurance companies in addition to those for banks and securities firms already planned. ### Authorities' response to the IAIS assessment - Authorities viewed the assessment procedure and outcome positively, noting it was particularly challenging because Austria was first jurisdiction to undergo FSAP based on the new IAIS Insurance Core Principles. - FMA welcomed proposals to maintain good quality supervision in a more risky environment. - FMA actions already underway: - Strengthening the actuarial profession. - Examining adequacy of long-tail provisioning. - Accelerating shift toward a more risk-based supervision system. ### IOSCO Objectives and Principles of Securities Regulation — scope and market overview - Assessment conducted in October 2003 within FSAP for Austria, referencing February 2002 IOSCO Objectives and Principles and October 2003 IOSCO Methodology. - Assessment focused on powers and responsibilities of FMA (assumed on April 1, 2002 under Financial Market Authority Act (FMABG)). - FMA is integrated financial supervisory authority for banking, insurance and pension funds, securities and stock exchange supervision. - Compliance with take-over rules is supervised by a separate Take-Over Commission (not assessed here). - Reform established FMA as an institution under public law; independence secured by constitutional provision. - Assessment basis: - (i) FMA self-assessment using IOSCO high-level questionnaire; - (ii) Extensive FMA documentation (legislation, ordinances, guidance, annual report, statistical data); - (iii) Meetings with market participants (credit institutions, investment service providers, stock exchange, industry associations). - Capital market and structural overview: - Five capital market segments: (i) equity market (prime market and standard market); (ii) bond market (government, bank, corporate bonds); (iii) derivatives market; (iv) warrants; (v) other listings. - As of end-2002: - 91 domestic publicly listed companies. - Stock market capitalization was €30.4 billion, or about 14 percent of GDP. - Annual stock market turnover was about 42 percent. - Total volume of debt securities outstanding was €178.9 billion, or 82.5 percent of GDP. - About 58 percent of all bonds outstanding are federal government issues, nearly 39 percent are bank issues. - Kontrollbank acts as clearing house for Vienna Stock Exchange, and is central securities depository and settlement agency. - As of end-2002: - 339 investment service providers. - As of August 2003: - 23 operators of collective investment schemes managing €96.2 billion. - 1,391 funds, of which 481 were funds of funds. - 578 special funds (open to maximum of ten institutional investors). - 3,202 foreign funds from other EU states and globally eligible to be marketed in Austria. - General preconditions for effective securities regulation: - Preconditions in place: no discernible barriers to entry or exit for markets/products. - Austrian accounting standards are good and comprehensive; law permits use of International Accounting Standards. - Companies listed on the prime market obliged to prepare financial statements according to IAS (or US-GAAP). - Auditing regulated by mix of law and self-regulation; greater supervision of auditors’ application of accounting standards by an Austrian authority would be desirable. - EU Directive on Application of IAS (adopted 2002): all EU companies listed on a regulated market (or preparing to be listed) must draw up consolidated accounts in line with IAS/IFRS by 2005 at the latest; Austria must implement 41 new accounting rules and establish effective supervisory structure for IAS/IFRS application. - Main findings on securities regulation: - Overall quality of supervisory framework for securities markets in Austria is "very good," but enforcement aspects could be further improved. - Regulator principles (Principles 1–5): - FMA is the single authority responsible for regulation of securities markets and participants. - FMA tasks and competences are defined in relevant laws; FMABG has standing of constitutional law; FMA performs tasks without being bound by instructions from other parties. - Minister of Finance (MoF) can commission FMA to conduct audits of financial institutions (part of accountability framework but somewhat inconsistent with FMA’s independent status). - MoF has right to nominate the exchange commissioner (supervisory responsibilities concerning exchange trading); consideration could be given to shifting this responsibility to the FMA. *Source: IMF staff assessment excerpts contained in the provided document.* ### 98. As with other areas of financial market supervision in Austria, the size of ### _cr04238 - 98. As with other areas of financial market supervision in Austria, the size of ### Securities regulation: overview of supervisory powers and gaps - Administrative fines that can be imposed by the FMA as administrative sanctions are relatively low and "tend to limit their role as a regulatory tool." - The legislator is limited in its ability to increase fines because under Austrian law they must be in line with other administrative fines and "cannot currently be higher than criminal penalties." - There are no self-regulatory organizations in the securities markets in Austria (Principles 6–7). - The FMA has inspection, investigation and surveillance powers, including: - power to require production of information; - power to carry out inspections of business operations; - ability to conduct investigations and take all measures to counteract the abuse of inside information. - Suspicion of violation of the law is not a prerequisite to use these powers. - The FMA "relies heavily on external auditors to undertake supervision"; additional staff would enable a more direct supervisory approach. - The FMA and the stock exchange can exchange confidential information; the FMA may share public and confidential information with other national authorities, including on an unsolicited basis. - In insider trading cases the FMA can exchange non-public information; in other cases the extent of competences is "not entirely clear" and "may not include market manipulation which was until recently not covered by an EU directive." - Austrian legislation embodies international best practice regarding issuers (Principles 14–16) on: - full, accurate and timely disclosure of financial results and other material information; - fair and equitable treatment of holders of securities; - high and internationally acceptable accounting and auditing standards. - Supervision of collective investment schemes (CIS) and their operators is generally of a high standard: - licenses required for marketing a CIS or operating a CIS; - unit certificates may be offered in Austria only if a comprehensive prospectus has been published and deposited with the Kontrollbank; - Investment Funds Law governs legal form, structure, and valuation requirements; - industry quality standards becoming fully compulsory in early-2004 will strengthen governance and minimize conflicts of interest. - Market intermediaries: - investment services providers must be licensed by the FMA with minimum capital requirements varying by business type; - FMA can refuse licenses if authorization qualifications are not met; - credit institutions and investment services providers must be properly organized with appropriate internal control systems and adequate security precautions for electronic processing; - intermediaries must act with necessary expertise, diligence and conscientiousness in customers' best interest and minimize conflicts of interest; - cold calling is forbidden under Austrian law. - Commodity futures are currently outside the scope of supervision but will be included with the implementation of the new EU directive adopted on "April 30, 2004." - Secondary market (Principles 25–30): - exchange operating companies require approval, initial capital requirements, and fitness and propriety of management and undergo ongoing FMA supervision; - regulations promote trading transparency and aim to ensure proper management of large exposures, default risk and market disruption; - supervisory framework relies in part on self-supervision by the exchange operating company, creating potential conflicts of interest; - framework could be strengthened by broadening the definition of price manipulation and increasing maximum fines; - implementation of the EU Market Abuse Directive will address these gaps. - Systems for clearing and settlement of securities transactions are subject to regulatory oversight to ensure fairness, effectiveness, efficiency, and reduction of systemic risk. ### Recommended plan of actions to improve implementation of IOSCO Objectives and Principles (extracts) - Principles Relating to the Regulator (P 1–5): - Consider whether the MoF should continue to be able to commission the FMA to conduct audits, and whether the MoF’s right to nominate the exchange commissioner with supervisory responsibilities concerning exchange trading should be shifted to the FMA. - Principles for the Enforcement of Securities Regulation (P 8–10): - Additional staff would enable the FMA to take a more direct approach to supervision, particularly inspections of firms. - Consideration should be given to raising the size of administrative fines which can be imposed by the FMA. - Principles for Cooperation in Regulation (P 11–13): - The rule concerning international cooperation should allow full cooperation in all matters that FMA is responsible for, including conducting investigations on behalf of a foreign authority. - Principles for Issuers (P 14–16): - The FMA should be responsible for the depositing of prospectuses for public offering as the competent authority in securities supervisory matters in Austria. - Principles for Collective Investment Schemes (P 17–20): - The FMA should impose an explicit obligation to disclose any pending legal proceedings involving the fund, the operator or its management which may be material to the decision to invest. - Principles for Market Intermediaries (P 21–24): - Commodity futures are outside the current scope of regulation in Austria but this will be addressed with implementation of the new EU-Financial Investment Markets Directive adopted by EU as of "end-April 2004." - Principles for the Secondary Market (P 25–30): - Consider giving the surveillance department of the exchange an independent status and the FMA the right to give instructions to this department to address possible conflicts of interest arising from self-supervision. ### Authorities’ response (key points) - Austrian Ministry of Finance and FMA welcome the IMF discussion and conclusions that the Austrian securities sector is of high quality and "overall supervised in compliance with the international Standards and Codes for effective supervision." - Major IMF comments will be addressed through implementation of the Market Abuse Directive, Prospectus Directive and the "new ISD" Directive in Austria. - On enforcement (P 8–10): increase of the maximum size of administrative fines is a main topic of discussion between the FMA and the MoF, particularly regarding implementation of the Market Abuse Directive in "October 2004." - On cooperation (P 11–13): gaps referring to international cooperation and market manipulation "will be removed with implementation of the Market Abuse Directive in October 2004." - On collective investment (P 17–20): authorities do not see an urgent need for further action because CIS disclosure requirements are consistent with the relevant EU Directive (UCITS, 85/611, as amended), though the FMA will discuss the recommendation for a more explicit obligation with the MoF. - On market intermediaries (P 21–24): with implementation of Directive 2004/39/EC ("new ISD") adopted "21 April 2004", a license from the FMA will be required for providing investment services regarding commodity futures. - On the secondary market (P 25–30): discussions with the MoF during Market Abuse Directive implementation have led to the FMA being expected to have the right to give instructions to the exchange surveillance department. --- ### FATF: AML/CFT assessment — scope, methodology, and main findings - Report prepared by IMF staff and an Independent AML/CFT Expert (IAE); IAE-attributable portions shown in italicized text in the original. - Assessment based on information available at completion in "November 2003" and subsequent discussions and additional information provided through "May 2004." - Main findings: - Austria has made significant progress in bringing its AML/CFT regime into compliance with international standards. - The overall legal and institutional framework is comprehensive, and Austria has achieved a "good level of compliance with the FATF 40+8 Recommendations." - Main public sector institutions involved: Financial Market Authority (FMA), Ministry of Finance (MoF), Austrian National Bank (OeNB), Federal Ministry of the Interior (BMI), Federal Ministry of Justice (BMJ), Federal Crime Office (BKA), Austrian Financial Intelligence Unit (FIU), Federal Agency for State Security and Counterterrorism (BVT), Federal Ministry of Economy and Labor (BMwA). - The private sector, notably larger internationally active banks, participates through the Austrian Chamber of Commerce (WKO). - The FMA is the primary financial regulatory and supervisory body responsible for monitoring AML/CFT compliance by credit and financial institutions, insurance and investment service provider firms. - Issues identified that may require legal amendments: - the definition of suspicion and the obligation to screen unusual transactions; - provision of further guidance to financial institutions on AML/CFT duties, particularly customer identification; - intensifying supervision of AML/CFT compliance across the financial sector, including monitoring the phasing out of anonymous passbooks; - increasing resources for financial supervisors and the FIU. ### Criminal justice measures and international cooperation — key points - Criminalization of ML and FT: - Austria has ratified all international treaties related to ML and FT, except the Palermo Convention. - Main ML offense: Section 165 of the Criminal Code extends to all (serious) crimes; recent amendments enlarged predicate offenses. - Some aspects of the ML offense (knowledge requirements and penalty regime) need revisiting. - Legal persons cannot be held liable for ML at present, though a legal reform is being considered. - Amendment effective "October 1, 2002" introduced FT as a separate criminal offense (Section 278d of the Criminal Code); FT is a predicate offense to ML and included in the list of offenses subject to domestic jurisdiction regardless of where the act occurred. - Convictions obtained so far: "13 cases for ML" but "none for FT." - Austria is a party to the UN Drug Convention and the Council of Europe Convention; signed but not yet ratified the Palermo Convention (signed "December 2000"); ratified the UN International Convention for the Suppression of the Financing of Terrorism on "April 15, 2002." - Austria is a FATF member and the Austrian FIU is an Egmont Group member. - Confiscation of proceeds/property used to finance terrorism: - Value-based confiscation system broadly follows international standards and allows confiscation of any criminal proceeds; provisions enable forfeiture of property of organized crime or terrorist groups. - Two avenues introduced in 1996: - value-confiscation of profits (Sections 20 and 20a); - criminal forfeiture (Sections 20b and 20c). - Neither avenue requires a conviction. - Confiscation applies generally to economic benefits from any criminal offense; forfeiture applies to property at the disposal of a criminal organization (Section 278a) or a terrorist group (Section 278b). - Decision of confiscation or forfeiture can be made as part of the main criminal trial or separately. - Forfeiture provision allows partial reversal of the onus of proof but evidentiary issues remain. - Both avenues are underutilized in practice. - Other issues: instrumentalities cannot be confiscated and "there is no forfeiture fund." - Law enforcement powers and statistics: - Code of Criminal Procedure provides broad authority to prosecutors and police to identify, freeze and seize criminal proceeds and terrorist assets under judicial control. - Adequate legal provisions exist for protection of bona fide third parties. - Statistical collection needs improvement, particularly regarding the amount of property frozen, seized or confiscated. - Apart from FIU statistics on transactions blocked, there is no centralized system for statistics on predicate offenses to ML, disclosures, freezing or confiscation orders. - Regular training for law enforcement personnel, including prosecutors, on ML legislation and trends. ### The FIU: structure, capacity, and operations - The Austrian FIU: - is a police-type unit with robust investigative but limited analytical capability; - has full access to police information; - established in 1994 within the Federal Ministry of the Interior on the basis of the Banking Act; in 2002 absorbed as one section within the newly established Austrian BKA; - continues as the central repository of suspicious transaction reports (STRs) and is responsible for analyzing and disseminating disclosures related to ML and FT. - Operational features and constraints: - Main function is investigation of ML offenses with access to police data and many databases. - Access to financial information is subject to judicial authorization unless information relates to an STR. - Financial analytical capability is limited. - Bank secrecy does not apply when banks and other financial institutions are required to report suspected ML or FT; such cases may be subject to authorities' instructions (i.e., FIU) regarding processing of such transactions. - The FIU can order temporary blocking of transactions but has no freezing power. - Resources and outputs: - The FIU has "13 staff" and can pool resources from other parts of the BKA or rely on local police for investigations. - FIU entered into an MOU with the Federal Agency for Security and Counterterrorism (BVT) under which disclosures related to FT must be transferred to the BVT. - The FIU receives an average of "300–350 suspicious transaction reports a year." - The FIU provides information on typologies through training seminars but is reluctant to issue written guidance on suspicious transactions. - The FIU regularly organizes training and awareness-raising seminars in partnership with private sector entities. *Source: Excerpt from IMF Report (Annex) on Austria: securities regulation and AML/CFT assessment.* ### 127. The police and prosecutors have adequate powers to investigate and prosecute ### _cr04238 - 127. The police and prosecutors have adequate powers to investigate and prosecute ### Investigative powers and prosecution capacity - Police and prosecutors have adequate powers to investigate and prosecute ML-cases, including searches, wiretaps and undercover operations. - The Code of Criminal Procedure consolidates police powers and contains specific provisions on police observations, undercover operations and pseudo-purchases; further clarity on controlled delivery has been recently provided. - Accessing bank information: disclosure orders under Section 145a of the Code of Criminal Procedure are restrictive at the stage of the FIU’s intelligence work; judges may lift bank secrecy for ML or FT-related investigations only if justified. - Staffing and capacity: - Both police officers and prosecutors are well-trained and equipped, but a staff increase may prove necessary if the number of STRs increases. - Prosecutors at times face legal challenges in proving the predicate offense; a lighter burden of proof and task-force type investigations may help improve results. ### International cooperation - Austria is party to numerous bi- and multi-lateral MLA and extradition treaties and can offer assistance on the basis of domestic law. - Austria has ratified all Council of Europe treaties on MLA and extradition and concluded supplementary agreements with a number of jurisdictions. - Assistance without a treaty: provided under the Extradition and Mutual Legal Assistance Act, if reciprocity is guaranteed. - Dual criminality: - Dual criminality is a general condition under the Extradition and Mutual Legal Assistance Act and under the European Convention on Mutual Assistance in Criminal Matters; this may be an issue in ML cases involving different mens rea (knowledge) standards. - The principle of double criminality is, however, partly being abandoned. - Extradition of nationals: Austrian law does not enable extradition of Austrian nationals; prosecutors have an obligation to prosecute mandatorily crimes committed by Austrian citizens. - Asset sharing: Austria has not enacted legislation to share confiscated assets with other governments; bilateral mutual legal assistance treaties can be used as an alternative. - Statistics and handling of MLA: - Statistics are not kept on MLA requests nor on information exchange, given direct communication channels in Europe. - The Ministry of Justice does not centralize MLA and relies largely on courts to deal with requests. ### Preventive measures for financial institutions — General framework - Principal AML/CFT legislation for credit and financial institutions is contained in Sections 40 and 41 of the Banking Act. - General duty of diligence: Section 39 paragraph 3 requires attention to any transaction which in the credit institution’s opinion strongly suggests connection to ML or FT. - The Banking Act provisions came into force on January 1, 1994, and have been amended multiple times. - Definitions and scope: - “Credit institutions” (Section 1 paragraph 1) broader than banks; “financial institutions” (Section 1 paragraph 2) include leasing. - Bureaux de change and money remittance services are covered by these AML requirements. - Cross-references: - Identical AML requirements apply to investment service providers under the Securities Supervision Act (Section 21) and to life insurance companies under the Insurance Supervision Act (Section 18a). - Supervisory structure: - AML/CFT-related supervision is part of general supervisory activity; for a large portion of the financial sector it is carried out by the FMA, designated as single supervisory authority under the FMA Act as from April 1, 2002. - For banks, FMA supervision relies to a large extent on operational involvement of the OeNB, which can be entrusted with on-site inspections and regularly is entrusted with the bulk of on-site inspections. - Since its establishment, the FMA inspected one bank specifically for AML/CFT in a targeted inspection and conducted 25 inspections of investment service providers which also covered AML/CFT. - The FMA plans to strengthen on-site inspections of banks with focus on AML/CFT for 2004 and developed an inspection manual in the 1st Quarter of 2004 (manual for internal use only). - FMA powers and communications: - Under the FMA Act, the FMA can issue ordinances, impose administrative penal sanctions and enforce supervisory rulings (for bureaux de change and money transmitters these powers are in force as from January 1, 2004). - The FMA issues circulars to the Chamber of Commerce distributed to member CIs, FIs, insurance companies and investment service providers; circulars include information on latest NCCT list of the FATF and results of FATF plenary meetings. - Guidance and oversight: - The FMA has been cautious in providing detailed guidance to financial industries; it should verify and ensure effectiveness of internal controls at each firm. - In April 2004 the FMA issued a guideline regarding internal controls and procedures, and suspicious transaction reporting requirement for AML/CFT (banks); similar guidelines for insurance companies and investment service providers are in preparation. - The FMA should follow up with further guidance, e.g., on customer identification requirements, and enhance on-site inspections using inspection manuals developed in the first quarter of 2004. ### Customer identification - Anonymous accounts: not expressly prohibited in Austrian law; authorities argue customer identification requirements logically disallow such accounts. - Dormant anonymous savings passbooks: - Continue to exist but can only be accessed after prior identification and a waiting period accompanied by reporting to the FIU above a certain threshold (€15,000). - Authorities have a proactive program to monitor not yet identified passbook accounts in accordance with strengthened internal controls mandated for these accounts. - Recommendations: - Authorities need to continue monitoring phasing out of remaining accounts and may wish to explicitly prohibit anonymous accounts and reduce the general closure term of 30 years for dormant accounts to a more limited period. ### Wire transfers and originator information (FATF SR VII) - Austrian law does not require that credit and financial institutions include accurate and meaningful originator information on funds transfers and related messages or that such information remain with the transfer through the payment chain. - Austria favors a common EU regulation on this matter; EC indicated such a regulation should be proposed in 2004. - In practice among Austrian banks, money transfer overseas is often limited to customers who already have accounts; walk-in customers are charged higher fees. - With proposed EU regulations, requirements should be in place to comply with SR VII. ### Suspicious transaction reporting (STRs) - The Banking Act requires reporting where there is “reasonable suspicion”; the level of suspicion, as interpreted in practice, seems too high, resulting in a relatively low number of STRs. - The FMA Guideline on Internal Controls and Procedures and Suspicious Transaction Reporting for AML/CFT (April 2004) may partly correct this interpretation; it contains an express requirement to detect unusual and large transactions. - The FMA will need to monitor closely the level of reporting and take corrective action as necessary to ensure disclosures are made in all cases of “reasonable suspicion.” ### Internal control, compliance and audit - Internal auditors and external auditors are required to review effectiveness of internal control for AML/CFT compliance. - Assessments by external auditors are included in supervisory reports submitted to the FMA and the OeNB twice a year. - Current template of supervisory reports is not sufficient for the FMA to identify weaknesses of AML/CFT internal control at each firm. - The FMA should, in consultation with external auditors, ensure supervisory reports produced by external auditors provide sufficient information on effectiveness or weaknesses in AML/CFT internal controls of individual entities; this might require issuing guidance on external auditing in AML/CFT audits. ### Enforcement powers and sanctions - The FMA’s enforcement powers and sanctions are adequate, but on-site inspections are under-resourced. - FMA plans targeted inspections of banks focused on AML issues in 2004. - Inspection manuals have been developed: - Banking sector manual completed. - Insurance supervision intends to develop a manual. - Existing securities sector manual is to be revised based on the banking one. - The FMA needs to enhance on-site inspections, including increasing resources and continuing to develop inspection manuals. ### Co-operation between supervisors and other competent authorities - The FMA created an internal Task Force on Money Laundering with experts from all units involved in AML, including banking (regulatory, legal, on-site examination, off-site analysis), insurance, securities, international and legal, to exchange information, establish common policy and ensure consistent approach. - The FMA holds ad hoc meetings with other agencies (Ministry of Finance, OeNB, Chamber of Commerce plus individual banks, Ministry of Justice where necessary, Ministry of Interior where necessary) and acts as national coordinator on AML/CFT issues. - The MoF and the FMA have concluded a number of MoUs with foreign counterparts on exchange of supervisory information and on-site inspections; relevance to AML/CFT information exchange is unclear and could be improved. ### Non-prudentially regulated sectors - Bureaux de change: - Amendment of the Banking Act in June 2003 defined bureaux de change as credit institutions under Section 1(1) and subject to licensing and FMA supervision as of January 1, 2004; previously supervised by the Ministry of Trade. - Relevant AML requirements under the Banking Act apply to bureaux de change. - After the introduction of the Euro, the number of bureaux de change has declined; further decline expected due to FMA licensing requirement. - All existing bureaux de change in Austria (under 50 in total) have been contacted by FMA to be made aware of new requirements and the timeframe for submitting a license application, which ends on June 30, 2004. - Money remitters: - Included in the Banking Act as business of credit institutions as from January 1, 2004 and subject to licensing and FMA supervision. - Remittance business explicitly subject to AML/CFT requirements under the Banking Act (June 2003 amendment). - All three remittance firms present in Austria will either be subject to AML/CFT requirements and supervision by FMA, or will need to stop operating by June 30, 2004. ### Summary assessment against the FATF 40+8 Recommendations - Austria has achieved a good level of compliance with the FATF 40+8 Recommendations for AML/CFT, but shortcomings identified in several areas. - Recommended improvements include: - More clarity in legal provisions defining suspicion of money laundering and obligation to screen unusual transactions. - Further guidance to financial institutions on AML/CFT duties, particularly on customer identification. - Enhanced monitoring of compliance by supervisors in all sectors subject to AML/CFT obligations, including on-site inspections. - Permanent supervisory attention during phasing out of remaining anonymous passbooks. - More resources for supervisors and the FIU. - Strengthening the suspicious transaction reporting regime; low levels of disclosures and investigations may stem from FIU’s limited resources and legal definitions of suspicion. - Actions needed to comply with FATF 40+8 Recommendations are summarized in Table 9; other recommended actions are summarized in Table 10. ### Table 9 — Selected recommended action plan highlights (preserve original references) - General framework (FATF 1-3): Revisit Section 145a of the Code of Criminal Procedure so as to enable easier FIU access to bank information. - Scope of the criminal offense of money laundering (FATF 4-6): Introduce an effective system of liability for legal persons involved in ML or FT. - Provisional measures and confiscation (FATF 7): Enable the confiscation of instrumentalities used in or intended for use in the commission of ML or predicate offenses for ML. - Customer identification and record-keeping rules (FATF 10-13): (actions listed in Table 9). - Increased diligence (FATF 14-19): Ensure “reasonable suspicion” is interpreted similarly across reporting entities and that it embraces an obligation to report at least “any fact which might be an indication of money laundering” as required by Directive 91/308/EEC and more general suspicions “that funds stem from a criminal activity” (FATF 15). - Mutual legal assistance and evidence (FATF 33-35): Ensure conditions for obtaining bank records under 145a do not unnecessarily limit ability of foreign authorities to obtain disclosures for ML or FT investigations, nor delay related MLA procedure. - Special recommendations (SR VII — Wire transfers): With proposed common EU regulations, requirements that oblige financial institutions to include accurate and meaningful originator information in wire transfers need to be established. ### Table 10 — Other recommended actions (selected) - Criminalization: - Ratify the Palermo Convention as a matter of priority. - Reexamine knowledge requirements under Section 165 to ensure full conformity with the Vienna Convention. - Consider easing burden of proof on prosecutors in ML-related prosecutions and raising penalty level for simple ML offenses so that all ML offenses are “crimes”. - Confiscation/seizure: - Alleviate further the burden of proof on the prosecution in forfeiture cases under Section 20b of the Criminal Code. - Consider empowering the FIU to have easier access to bank information and, if justified, to freeze bank accounts, subject to subsequent prosecutorial control. - Set up an asset forfeiture fund. - Finalize and implement EU Framework Decision on asset-sharing and enable asset-sharing with non-EU jurisdictions. - Develop additional statistics on amounts of property frozen, seized and confiscated relating to ML, predicate offenses and FT. - FIU, law enforcement and prosecution: - The FIU should provide written, practical and updated guidance to reporting entities on suspicious transactions. - The FIU should have increased analytical capability and easier access to information subject to bank secrecy; be provided with appropriate resources (software, financial analysts); consider empowering the FIU to issue disclosure orders subject to subsequent prosecutorial authorization. - Procedures for reporting STRs should be further described in regulation or guidance; authorities should provide standard templates for reporting STRs. - FIU-FIU information exchange should be facilitated and supported by bilateral MOUs, in particular with administrative (non-police) type FIUs. - Make use of investigative powers regulated in the Code of Criminal Procedure. - Examine causes of actual number of STRs and divergences in reporting by different entities; develop and publish additional statistics. - Review evidentiary requirements for ML prosecutions and, if necessary, issue guidance or legislative amendment to ensure prosecutors do not need to prove the predicate offense to the usual criminal standard. - Allocate further resources to prosecutors and the FIU as necessary; further develop task forces in ML investigations. - International cooperation: - Dual criminality should not obstruct MLA if the request concerns behavior that is at least an administrative offense under Austrian law; consider official interpretation applying dual criminality “in abstracto”. - Consider granting assistance in cases of negligent ML and self-laundering. - If extradition is refused because of nationality, include in Section 12 of the Extradition and Mutual Legal Assistance Act an obligation to submit the case without undue delay to competent authorities for prosecution. - Further steps to abandon principle of double criminality. - Develop additional statistics on all MLA requests, results, and information exchanges with foreign law enforcement authorities. - Preventive obligations and supervision: - The FMA ensures financial institutions establish procedures for high standards in hiring new employees. - The Declaration of Due Diligence of the Austrian Banking Industry and the Standard Compliance Code of the Austrian Credit Industry needs review and updating. - The FMA should enhance supervisory oversight, develop detailed regulations/guidelines and enhance on-site inspections based on the inspection manual. - Strengthen on-site inspection regime (increase resources, develop further manuals, upgrade inspectors’ skills). - Develop inspection manual for insurance companies as planned; consider publishing inspection manuals when completed for transparency and to encourage industry compliance. - The FMA should, in consultation with external auditors, ensure supervisory reports by external auditors provide sufficient information on effectiveness/weaknesses in AML/CFT internal control at each entity, including issuing guidance on external auditing approach for AML/CFT audit. - More specificity regarding exchange of information relating to ML and FT in MoUs would be helpful. *Source: _cr04238 - 127. The police and prosecutors have adequate powers to investigate and prosecute* ### 145. Austria thanks the IMF, the Assessment Team and the experts for the good ### 145. Austria thanks the IMF, the Assessment Team and the experts for the good cooperation and interesting discussions within this assessment. ### Implementation progress and institutional developments - Creation of the new independent integrated supervisor, the FMA, which, together with international developments in FATF, the self-assessment, and the assessment process, has provided an important impetus for Austria to review and enhance its AML/CFT regime substantially in the last few years. (Paragraph 146) - Many recommendations in the report are already being actively implemented in Austria. (Paragraph 147) - Further guidance for the obliged entities is being developed by the FMA. (Paragraph 147) - The FIU shares practical typology knowledge through a proactive program of seminars and “awareness raising meetings” with obliged entities. (Paragraph 147) - The on-site inspections programme has been both enhanced and increased. (Paragraph 147) - Austria, as part of the EU, is actively working on a common implementation of the new 40 Recommendations (2003) to improve its system together with the whole European Union. (Paragraph 147) ### Specific actions and legal measures - Palermo Convention: - The parliamentary process of Ratification of the Palermo Convention is already completed. (Paragraph 148) - The publication in the Federal Law Gazette and the formal deposition of the instrument of ratification will take place as soon as possible, at any rate in 2004. (Paragraph 148) - Section 145a of the Code of Criminal Procedure (access to bank records): - In addition to possibilities provided for the FIU under the Banking Act, providing information under Section 145a para. 1 n. 1 and 2 of the Code of Criminal Procedure (personal data related to accounts) is obligatory in all cases where it appears to be necessary for investigating an offence, which is punishable by imprisonment of more than 1 year. (Paragraph 148) - More detailed information (on specific transactions) and continued control of transactions under Section 145a para. 1 n. 3 of the Code of Criminal Procedure require the suspicion of a connection with the commission of a criminal offence or with possible confiscation of profits or possible forfeiture. (Paragraph 148) - The same relation (suspicion of connection to criminal offence or confiscation/forfeiture) is required for other interferences with privacy and property (e.g., house search, seizure or provisional injunction). (Paragraph 148) - These rules are based on the principle of proportionality, which is guaranteed under constitutional law by Article 8 of the European Human Rights Convention. (Paragraph 148) ### Summary of policy emphasis - Strengthen AML/CFT supervisory structure via the FMA and enhanced FIU outreach. (Paragraphs 146–147) - Align national measures with international standards, notably the 40 Recommendations (2003) and the Palermo Convention. (Paragraphs 147–148) - Maintain legal safeguards (proportionality and Article 8 ECHR) when authorizing access to personal and transactional banking information, with specific thresholds and suspicion requirements set out in Section 145a of the Code of Criminal Procedure. (Paragraph 148) *IMF country assessment excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04238.pdf_