## _cr13283 ## Source details **Canonical URL:** [_cr13283](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13283.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13283.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13283.pdf.json) --- ### Executive summary — macroeconomic and financial system background - Credit growth decelerated since mid-2012 and stood at 0.4 percent (y-o-y) at the beginning of 2013. - Public sector debt increased by almost 15 percentage points since 2007, to about 74 percent of GDP at end-2012. - Private debt ratios are moderate relative to other euro area countries; corporate debt hovers around the euro area median; household debt is lower than the euro area average but includes a higher share of foreign currency–denominated debt (predominantly in Swiss francs) and housing loans with variable interest rates. - Banking sector size: about 350 percent of GDP and 80 percent of total financial system assets. - Number of banking institutions: more than 800; the three largest (Erste, Raiffeisen and UniCredit Bank Austria) account for almost half of total bank assets. - Non-bank financial institutions hold assets amounting to €300 billion, including over 2,000 mutual funds (€147 billion) and 50 insurance companies (€108 billion). Occupational pension plans hold €16 billion. - Extensive cross-border CESEE operations; CESEE activities contributed about 50 percent of total profits since the crisis while representing less than one-quarter of total bank assets. Market shares above one-third in the Czech Republic, Croatia, Romania, Slovakia and Bosnia for Austrian banks. ### Financial stability assessment — current state and vulnerabilities - The 2008–09 global financial crisis required substantial liquidity and capital support; three mid-sized domestic banks were fully or partly nationalized. - Austrian banks benefited from limited exposures to sovereign and market risks, stable funding structure, and relatively favorable macroeconomic conditions. - Bank asset quality is deteriorating and difficult to assess with full confidence owing to shortcomings in data on CESEE exposures. Consolidated NPL ratio for Austrian banks is above 9 percent, mainly reflecting CESEE assets where the NPL ratio reached almost 16 percent; domestic NPLs about 4½ percent. - Foreign-currency loans (FCL) remain important domestically and in CESEE; almost half of loans extended by Austrian bank subsidiaries in CESEE are in foreign currency (about 60 percent EUR, remainder CHF or USD). Domestic FCLs concentrated in CHF and include many “bullet loans” with repayment vehicles (RPVs). - Bank profitability declined due to falling interest margins and higher provisions against NPLs; net income and ROA fell in 2012. - Capital ratios are improving but include a significant share of participation capital (€5.2 billion, about 7 percent on aggregate), of which government participations amount to €4.1 billion; capital ratios remain slightly below peers. ### Stress tests — scope, scenarios, and headline results - Tests covered the entire Austrian banking system: top-down OeNB exercise (about 585 consolidated institutions; 100 percent of assets) and bottom-up tests by top five banks (about 60 percent of total bank assets). Horizon for top-down: 2013–2015; bottom-up instantaneous. - Adverse scenarios included: (i) global shock/intensification of euro area crisis (two-standard deviation shock to Austrian GDP growth), (ii) severe recession in CESEE/CIS, and (iii) global funding scenario calibrated to Q3 2008 funding stress. Sensitivity analyses included credit risk from FCL (1.5 SD CHF), market, sovereign, liquidity and contagion risks. - Key findings: - Under adverse medium-term scenarios, virtually all Austrian banks, including all internationally-active institutions, would meet regulatory capital requirements (taking into account Basel III implementation). - Under the most severe macroeconomic scenario, banks representing less than 7 percent of total bank assets would fall below the current regulatory threshold; estimated aggregate capital shortfall about €3.4 billion (0.3 percent of total bank assets, or one percent of GDP). - For the large internationally-active Austrian banks, baseline projected CET1 remains above 7 percent throughout the horizon, even netting out private and state participation capital; aggregate system CET1 under combined severe stress stands at 12.0 percent at end-2015 (regulatory hurdle 8 percent). - Sensitivity analysis: additional credit risk losses from FCL exposures could reduce CT1 for the five top banks by 41 bps; FCL-related sensitivity could deduct up to 35 bps of aggregate capital ratios. - Full Basel III implementation (including front-loading and Basel III RWAs) would have an additional impact of 1.4 percentage points of EBA CT1 capital for the system. - Caveats: results should be interpreted with caution given asset quality data limitations on CESEE exposures; upcoming ECB asset quality reviews expected to provide a more robust basis. ### Policy implications and prioritized recommendations - Capital and bank structure: - Austrian banks need to build stronger capital buffers above regulatory requirements to repay government participation capital and meet market expectations — High priority. - To comply with Basel III while repaying public capital, authorities estimate banks may need to raise additional CET1 capital of €1 billion and up to €7 billion additional Tier I and Tier II capital by 2022 (footnote breakdown: €1 billion CET1; €2 billion additional Tier I; and €5 billion replacement of Tier II). - Small and medium-sized banks require further efficiency gains over the medium term given a low-profitability domestic environment. - Macroprudential framework: - Priority: set up an authority with a clear policy mandate, chaired by the OeNB, coordinating with MOF and FMA nationally and with ESRB and ECB at European level — High priority. - Consider expanding macroprudential tools beyond CRR/CRD (e.g., structural measures, LTV, and DTI ratios) — Medium priority. - Supervision and governance: - Strengthen FMA governance and legal protection of its bodies and staff — High priority. - Enhance FMA supervisory powers related to prior approval, recovery and resolution plans, and corrective action — Medium priority. - Promote stronger governance in the industry (fit and proper tests; compliance and CRO functions) — Medium priority. - Continue active preparation for SSM implementation — High priority. - Early intervention, resolution and crisis management: - Introduce a full-fledged bank resolution framework consistent with forthcoming EU directives and assign FMA as resolution authority — High priority. - Strengthen cross-border resolution arrangements with non-EU/EEA countries — Medium priority. - Strengthen crisis preparedness, ensure FinStaG resources adequate, and give the Federal Government standing authorization to take necessary action — Medium priority. - Enhance FIMBAG’s role in negotiating and overseeing bank restructuring plans for recapitalized banks — High priority. - Deposit insurance: - Move to a unified, ex ante–funded, public national DGS aligned with the EU Directive and BCBS Core Principles; establish a high-level working group to design transition — High priority for working group, Medium for unified DGS. - Initial working group steps: determine target DGS fund size (minimum proposed 1.5 percent of eligible deposits), immediately start collecting flat-rate premiums to build ex ante fund, establish liquidity back-up with the MoF. - Insurance and pensions oversight: - Prepare for Solvency II implementation and improve solvency regime and supervisory practices — Medium priority. - Address life insurers’ low-interest-rate legacy guarantees and asset/liability duration mismatches. ### Banking sector CESEE exposures, funding and asset-quality specifics - CESEE direct and cross-border foreign lending exposures: €513 billion in 2012 (44 percent of overall banking system assets); of which €326 billion (105 percent of GDP) are to the CESEE region. The largest internationally-active banks account for about 80 percent of these exposures. - During 2008–2012 Austrian banks marginally increased aggregate CESEE asset exposure by about €11 billion while reallocating exposures within the region. Subsidiaries partly replaced cross-border funding with local funding but intra-group funding dependence remains significant. - NPL and provisioning patterns: - CESEE consolidated NPLs near 16 percent; LLP near 50 percent or below in some countries (Czech, Romania, Hungary, Croatia, Slovenia); LLP above 60 percent in Russia and Slovakia; LLP in Russia nearly 80 percent in some cases. - Differences in local accounting standards and recovery rates complicate consolidated asset quality assessment. - Funding and liquidity structure: - Deposits nearly half of funding; bonds and interbank liabilities about 20 percent each. Loan-to-deposit ratios declined from 140 percent to about 120 percent. - Wholesale markets and FX swap markets are important for funding foreign-currency asset portfolios; October 2008 measures increased resilience to USD and CHF liquidity shocks. - Interbank liabilities mainly intra-group, especially among cooperative and savings institutions. ### Insurance sector — structure and risks - Over the past 15 years the number of Austrian insurance companies declined by about 20 percent; two domestic companies now represent nearly half of the market. Life insurers account for more than two thirds of total assets. A third of income generated in CESEE after decades of expansion. - Solvency ratios (Solvency I, end-2011): industry near 200 percent; life insurers about 180 percent; non-life close to 590 percent. - Insurance industry holds roughly €20 billion (about 20 percent of its assets) in capital instruments of European banks (96 percent bank bonds; 4 percent bank equity). Technical provisions for products with external guarantors slightly more than €6 billion at end-2011. - Key challenges: low interest rate environment creating legacy guaranteed liabilities for life insurers; banking sector exposures; asset/liability duration mismatches. ### Liquidity, contagion and market risks - Credit risk from FCL has greater solvency impact than sovereign and market risks combined. Additional credit risk from FCL would reduce CT1 capital ratios for the five top banks by 41 bps under the most adverse scenario. - Under a scenario assuming closure for one year of unsecured interbank and FX-swap markets with substantial haircuts, total liquidity shortfall equals only 0.5 percent of total liabilities of the 29-bank sample. - For CHF liquidity, about half of Austrian banks need to further diversify funding sources and lengthen funding tenors. - Market-based analyses indicate severe distress of the top two Austrian banks could affect other banks in CESEE, though less than distress of some CESEE peer banks. Inward spillovers would be most significant from foreign banks with high regional presence. - Sovereign-bank feedback loop risk appears limited: Austrian banks have little direct exposure to the public sector (about 2 percent of banking system assets); however sovereign market perceptions have become more closely linked to banking system health. ### Crisis prevention, ELA, FIMBAG and operational recommendations - Austria lacks a special bank resolution regime; authorities prefer to await EU Directive but IMF recommends swift introduction of a full-fledged bank resolution framework consistent with international best practices and the proposed EU directive; FMA should become the resolution authority. - Short-term measures: continuous due diligence, aggressive loan collection and asset sales, orderly wind-down of non-viable entities, and coordination with host authorities to limit spillovers. Example tool: revoking license and creating a bridge bank with limited creditor/shareholder liability. - OeNB ELA: revise and formalize ELA policies to maintain OeNB discretion and autonomy while possibly capping total outstanding ELA; require that capital shortfalls be covered by the Federation and conclude an indemnity agreement with the Federation for ELA-related losses not covered by OeNB reserves. - Strengthen FIMBAG mandate and conditions for public capital support; in short term make FIMBAG responsible for overseeing implementation of current restructuring plans and negotiating changes where necessary. ### Supervisory framework, governance and SSM readiness - Dual supervisory system: FMA (integrated supervisor) and OeNB (on-site execution, off-site analysis, payment systems oversight); MOF develops financial sector legislation. Key cooperation: sharing all supervisory-related data in a single database. - Governance and legal improvements recommended: strengthen FMA independence, liability protection, and rule-making powers; expand fit and proper testing (including supervisory boards for smaller banks); require internal auditors to report directly to supervisory committee chairmen; require compliance functions and dedicated risk management units/CROs for larger banks. - Supervisory tools to enhance: extend prior approval to investments outside the EEA and greenfield credit institutions in third countries; broaden recovery and resolution plan requirements beyond the three largest groups; expand corrective actions beyond capital requirements and penalties. - SSM preparation: top eight Austrian banks expected under direct ECB supervision; prepare to mitigate operational risk from division of responsibilities between ECB, FMA and OeNB, enhance cooperation for on-site work and validation of recovery/resolution plans. ### Macroprudential and AML/CFT notes - Authorities are about to implement ESRB recommendation on national macroprudential mandates; legislative proposal to create a joint committee (initially chaired by MOF) to issue recommendations to FMA under “comply or explain.” IMF suggests designate the macroprudential regulator chaired by OeNB and consider tools beyond CRR/CRD. - AML/CFT framework relatively strong but with remaining deficiencies noted in 2008 assessment; reassessment scheduled for first half of 2015; remaining deficiency highlighted: criminalization of terrorist financing. ### Repayment vehicles (RPVs) — exposures and stress results - Q3 2012: 11.2 percent of net loans to the private sector were based on RPVs. Total funding gap of RPV loans estimated about €5.5 billion (18.2 percent of total loan amount) as of September 2012. Almost 80 percent of FC bullet loans will mature after 2020. OeNB estimates share of vulnerable households (negative financial margins) would remain below 10 percent under a 5 percent CHF appreciation or a 3 percentage point decrease in RPV yields. - Baseline total RPVs outstanding debt: 28,983 (in million euros); total market sensitive outstanding debt: 21,483 (in million euros). - Projected funding gap (selected totals, in million euros and percent of product category): total market sensitive Baseline 21,483; 1.5 SD CHF 23,730; Baseline adverse 6,506; Baseline severe 7,580; Baseline+1.5 SD CHF severe 8,578; percentages: 27.4% 31.9% 36.1% (reported as product-level percentages in source). - Shocks: adding 100 bps (adverse) and 200 bps (severe) annual yield shocks increases maximum funding gap from accumulated €4.2 billion to €6.3 billion (annual increase €159 mn). Combining capital market shocks with 13 percent CHF appreciation (1.5 SD) raises accumulated funding gap to €8.6 billion (annual increase €332 mn). Residual maturity assumed average 13 years. ### Key macroeconomic, fiscal and financial soundness indicators (selected preserved values) - Total area: 83,850 square kilometers. - Total population (2012): 8.5 million. - GDP per capita (2012): US$ 46,642 (36,264 Euro). - GDP growth, 2007–2014 (yearly values): 2007: 3.7; 2008: 1.4; 2009: -3.8; 2010: 1.8; 2011: 2.8; 2012: 0.9; 2013: 0.4; 2014: 1.6. - Output gap (percent of potential GDP), 2007–2014: 2007: 3.3; 2008: 3.2; 2009: -2.1; 2010: -1.8; 2011: -0.3; 2012: -0.7; 2013: -1.6; 2014: -1.3. - Unemployment rate (Eurostat), 2007–2014: 2007: 4.4; 2008: 3.8; 2009: 4.8; 2010: 4.4; 2011: 4.2; 2012: 4.3; 2013: 4.9; 2014: 4.8. - General government gross debt (end of period), 2007–2014: 2007: 60.2; 2008: 63.8; 2009: 69.2; 2010: 72.3; 2011: 72.8; 2012: 74.1; 2013: 74.3; 2014: 74.7. ### Selected Financial Soundness Indicators (preserved values) - Regulatory capital to risk-weighted assets DCCBS: 13.2% (2006); 12.7% (2007); 12.9% (2008); 15.0% (2009); 15.4% (2010); 15.8% (2011); 16.5% (2012); 16.5% (2012Q2). - Total regulatory capital (EUR millions): 44,326; 49,525; 53,581; 64,067; 66,063; 66,783; 66,954; 65,879. - Risk-weighted assets (EUR millions): 335,019; 390,011; 415,617; 426,369; 427,831; 421,958; 405,356; 400,455. - Nonperforming loans to total gross loans DC: 2.7%; 2.2%; 1.9%; 2.3%; 2.8%; 2.7%; 2.7%; 2.8%. Consolidated NPL ratio (consolidation basis) noted above at about 9 percent. - Return on assets (ROA) DCCBS: 0.7%; 0.8%; 0.1%; 0.1%; 0.5%; 0.1%; 0.2%; 0.3%. - Net income (EUR millions): 5,099; 5,835; 993; 711; 3,934; 697; 1,880; 2,502. - Total assets (EUR millions): 712,494; 747,080; 831,402; 879,664; 857,608; 875,710; 884,734; 873,812. ### Implementation status of prior FSAP recommendations (selected) - Implemented: continue to develop cooperation with foreign supervisors; intensify on-site inspection program; enhance supervisory staff resources; raise administrative fines to European standards; ensure supervisors publicly acknowledge close cooperation; follow-up crisis management exercises with CESEE peers; etc. - In progress / Not implemented: define government institutional liability more narrowly; promote greater authority for FMA on fit and proper tests for some boards; set up mandatory early remedial action system; reconsider exemptions of small banks from some corporate governance regulations — Not implemented in the context of fit and proper tests. *Source: EXECUTIVE SUMMARY and selected excerpts, IMF Financial Sector Assessment Program — Austria (content unit _cr13283).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Macroeconomic background - Credit growth decelerated since mid-2012 and stood at 0.4 percent (y-o-y) at the beginning of 2013. - Private debt ratios are moderate relative to other euro area countries; public sector debt increased by almost 15 percentage points since 2007, to about 74 percent of GDP at end-2012. - Corporate debt level hovers around the euro area median. - Household debt is lower than the euro area average but includes a higher share of foreign currency–denominated debt (predominantly in Swiss francs) and housing loans with variable interest rates. ### Financial system structure and cross-border activity - Banking sector size: about 350 percent of GDP and 80 percent of total financial system assets. - Number of banking institutions: more than 800; the three largest (Erste, Raiffeisen and UniCredit Bank Austria) account for almost half of total bank assets. - Non-bank financial institutions hold assets amounting to €300 billion, including over 2,000 mutual funds (€147 billion) and 50 insurance companies (€108 billion). Occupational pension plans hold €16 billion. - Extensive cross-border operations in CESEE through a network of local subsidiaries. - CESEE activities have contributed to about 50 percent of total profits since the crisis while representing less than one-quarter of total bank assets. - Market shares above one-third in the Czech Republic, Croatia, Romania, Slovakia and Bosnia for Austrian banks in those countries. - Austria hosts foreign banking groups representing more than 20 percent of total bank assets in Austria (dominated by UniCredit Bank Austria AG, BAWAG, and Sberbank Europe). ### Financial stability — current assessment - The 2008–09 global financial crisis required substantial liquidity and capital support from the government; three mid-sized domestic banks were fully or partly nationalized. - Austrian banks on the whole benefited from limited exposures to sovereign and market risks, a stable funding structure, and relatively favorable macroeconomic conditions. - Bank asset quality is deteriorating and difficult to assess with full confidence owing to shortcomings in data on CESEE exposures. - Foreign-currency loans (FCL) remain important domestically and in CESEE. - Bank profitability has declined due to falling interest margins and higher provisions against non-performing loans (NPLs). - Bank capital ratios are improving but include a significant share of public participation, and remain slightly below peers. - The low interest rate environment has hurt profitability of life insurance companies. ### Stress test results and caveats - FSAP stress tests indicate that under adverse medium-term scenarios, virtually all Austrian banks, including all internationally-active institutions, would meet regulatory capital requirements (taking into account Basel III implementation). - Banks are found to be resilient to funding and contagion risks under the stress test scenarios. - Results should be interpreted with caution given asset quality data limitations on CESEE exposures. - Upcoming ECB bank asset quality reviews are expected to provide a more robust basis for balance-sheet assessment and policy responses. ### Policy implications and near-term priorities - Austrian banks need to build stronger capital buffers above regulatory requirements to repay government capital and meet market expectations. - Small and medium-sized banks require further efficiency gains over the medium term given a low-profitability domestic environment. ### Financial oversight — governance and supervisory framework - The Austrian Financial Market Authority (FMA) and the central bank (OeNB) collaborate effectively in banking supervision, including cross-border supervision. - Suggested improvements: - Strengthen FMA governance. - Strengthen cross-border information exchanges. - Strengthen governance standards in the banking industry. - Enhance the FMA’s supervisory tools and powers for corrective action. - The top eight Austrian banks are expected to fall under direct supervision of the European Central Bank (ECB); preparations for Single Supervisory Mechanism (SSM) implementation are underway. - FMA performs well in supervising insurers and pension funds; it should continue preparing for Solvency II and further improve observance of international best practices, including cross-sector collaboration, prudential rules, and industry governance requirements. ### Macroprudential policy - Priority: set up an authority with a clear policy mandate, with the OeNB playing a leading role in close coordination with the Ministry of Finance (MOF) and the FMA at the national level, and the European Systemic Risk Board (ESRB) and ECB at the European level. - Consideration: the need for macroprudential policy instruments that go beyond those included in forthcoming EU Directives. ### Crisis prevention and resolution - Austria needs a special bank resolution regime to resolve problem banks without endangering financial stability or fiscal sustainability. - Although authorities prefer to await formal adoption of the EU Directive on bank recovery and resolution, it would be in Austria’s interest to swiftly introduce a full-fledged bank resolution framework based on international best practices and consistent with the proposed EU directive. - The FMA should become Austria’s bank resolution authority. - Strengthen resolution arrangements with non-EU countries. ### Deposit insurance - Current Deposit Guarantee Scheme (DGS) has certain benefits, but authorities should use the forthcoming EU DGS Directive to introduce a unified DGS. - Recommendation: an ex ante–funded and publicly-administered national DGS would improve risk pooling, transparency, DGS fund management, and prompt payout. - A high-level working group should design the new DGS, taking the EU Directive and the BCBS Core Principles for Effective Deposit Insurance Schemes as minimum standards. ### Central bank finances and emergency liquidity - The framework governing OeNB’s finances in general, and Emergency Liquidity Assistance (ELA) operations in particular, could be improved to maintain the balance between financial stability and OeNB’s financial autonomy. - The mandate of the Federal Corporation of Financial Market Participation (FIMBAG) and conditions for capital support to distressed banks should be strengthened to increase FIMBAG’s role in overseeing and negotiating bank restructuring plans. ### FSAP — Key recommendations (selected and prioritized) - Macroprudential Oversight: - Set up a macroprudential authority with a clear legal mandate, chaired by the OeNB, coordinating with FMA, ESRB and ECB — High priority. - Consider expanding policy tools beyond CRR/CRD (e.g., structural measures, LTV, and DTI ratios) — Medium priority. - Banking Oversight: - Strengthen FMA’s governance, including legal protection of its bodies and staff — High priority. - Promote stronger governance in the industry (fit and proper tests; compliance and CRO functions) — Medium priority. - Enhance FMA supervisory powers related to prior approval, recovery and resolution plans, and corrective action — Medium priority. - Continue active preparation for SSM implementation — High priority. - Insurance and Pension Oversight: - Further prepare for Solvency II implementation and improve solvency regime in line with international best practice — Medium priority. - Further develop risk-rating and stress-testing methodologies, and more frequent on-site inspections — Medium priority. - Early Intervention/Bank Resolution: - Enhance early intervention framework by identifying required powers and widening intervention tools — Medium priority. - Introduce a bank resolution framework consistent with future EU Directives and assign FMA as resolution authority — High priority. - Strengthen cross-border resolution arrangements with non-EU/EEA countries — Medium priority. - Deposit Guarantee Scheme: - Introduce a unified, ex ante–funded, public DGS using BCBS Core Principles and EU Directive as minimum standards — Medium priority. - Establish a high-level working group to design and organize the transition to the unified DGS — High priority. - Systemic Crisis Management: - Strengthen crisis preparedness, ensure FinStaG resources are adequate, and give the Federal Government standing authorization to take necessary action — Medium priority. - Enhance FIMBAG’s role in negotiating and overseeing implementation of bank restructuring plans for which the Federal Government provides capital support — High priority. *Source: EXECUTIVE SUMMARY, IMF Financial Sector Assessment Program — Austria (excerpt).* ### 5. The insurance industry has gone through a period of consolidation and also acquired a ### _cr13283 - 5. The insurance industry has gone through a period of consolidation and also acquired a ### Insurance industry structure and CESEE presence - Over the past 15 years, the number of Austrian insurance companies declined by about 20 percent. - At present, two domestic companies represent nearly half of the market. - Life insurance companies accounted for more than two thirds of total assets in the sector. - After decades of expansion in the CESEE region, a third of their income is now generated in this region. - Solvency ratios (under Solvency I, as of end-2011): industry near 200 percent; life insurers about 180 percent; non-life close to 590 percent. - The insurance industry holds roughly €20 billion (about 20 percent of its assets) in capital instruments of European banks, of which 96 percent are bank bonds and the remaining 4 percent bank equity. - Technical provisions for products with external guarantors were slightly more than €6 billion at end-2011. ### Banking sector CESEE exposures and scale - Direct and cross-border foreign lending exposures amount to €513 billion in 2012 (44 percent of overall banking system assets). - Of the €513 billion, €326 billion (105 percent of GDP) are to the CESEE region. - The largest internationally-active banks account for about 80 percent of these exposures. ### 2008–09 crisis impact and policy response - The 2008–09 crisis led to financial sector distress in Austria; high CESEE exposures weakened market confidence and boosted borrowing costs for both Austrian banks and the sovereign. - Three medium-sized banks fell into serious distress and have been relying on repeated government financial support since the crisis; their restructuring has been slow. - Large scale deleveraging away from CESEE did not materialize: during 2008-2012, Austrian banks marginally increased aggregate asset exposure to CESEE by about €11 billion, while reallocating exposures within the region. - Austrian bank subsidiaries in CESEE partly replaced cross-border funding with local funding, though dependence on intra-group funding remains significant. Policy measures introduced in response to the crisis: - Capital support and funding guarantees (October 2008 “banking package”): €15 billion for bank recapitalization measures; up to €75 billion of bank funding guarantees; and unlimited deposit insurance until end-2009. A federal entity was created to manage public participations in the banking system. - Foreign currency liquidity risk management: measures introduced in late 2008 to better monitor and contain FC liquidity risks, encouraging diversification of FC funding across counterparties and instruments and lengthening FC funding tenors. - Supervisory reforms: cooperation between the FMA and the OeNB strengthened, including by establishing a Financial Market Committee (FMK). New supervisory guidance was issued for the three largest internationally-active Austrian banks. - Cross-border collaboration: active participation in the Vienna Initiative to bolster coordination among home and host country authorities and avoid disorderly deleveraging. Box: Supervisory guidance for the three largest Austria-based banks (issued March 14, 2012) - Higher capital buffers: Basel III CET1 rules to be fully implemented by January 1, 2013 without transitional provisions, except regarding private and government participation capital issued under the Austrian bank support act (initially included in CET1 and phased out according to CRR/CRD IV). - Promotion of stable local funding of subsidiaries: Loan-to-Local-Stable-Funding-Ratio (LLSFR) introduced, defined as loans to non-banks divided by local stable funding; subsidiaries encouraged to reduce it below 110 percent. - Recovery and resolution plans: parent banks required to submit plans by end-2012. ### Financial soundness – asset quality, foreign-currency lending, funding, profitability, and capitalization - Consolidated NPL ratio for Austrian banks is above 9 percent, mainly reflecting CESEE assets where the NPL ratio reached almost 16 percent. - NPL ratio for domestic operations has remained stable at about 4½ percent in past years (slightly above peer country average). - NPL data in Table 5 (around 2.8 percent) refer to domestic NPL data before netting out interbank loans. - Asset quality in many CESEE countries deteriorating; NPLs more than doubled in Romania over the past three years; sharp rises in other CESEE countries where Austrian banks have large exposures. - Loan loss provisions (LLP) near 50 percent or below in some countries such as Czech, Romania, Hungary, Croatia and Slovenia; LLP above 60 percent in Russia and Slovakia; LLP in Russia nearly 80 percent in some cases. - Differences in local accounting standards and recovery rates make consolidated asset quality assessment difficult; most CESEE countries define NPLs as loans overdue for more than 90 days but vary on other classifications and restructured loan treatment. Foreign-currency loan (FCL) exposures: - Almost half of loans extended by Austrian bank subsidiaries in CESEE are in foreign currency; about 60 percent of these FCLs are denominated in EUR, and the remainder in CHF or USD. - Unmatched foreign currency positions originate mostly from lending in CHF, both in Austria and CESEE. Euroization and dollarization reduce mismatches for EUR and USD in CESEE and CIS respectively. - Most FCLs to domestic households are “bullet loans” with repayment vehicles (RPVs) invested in capital market instruments, exposing borrowers to exchange rate and asset price risks; sensitivity analyses suggest RVP-related risks remain manageable. - In March 2010 authorities issued minimum standards: FCLs in Austria may be extended only to households and SMEs with the highest creditworthiness or having a natural hedge; banks called on to develop sustained reduction strategies for FCLs; spring 2010 restrictions on new FCLs (except EUR) to un-hedged households and SMEs imposed on Austrian subsidiaries in CESEE. Funding and liquidity: - Deposits represent nearly half of all funding sources; bonds and interbank liabilities about 20 percent each. - Loan-to-deposit ratios declined from 140 percent to about 120 percent. - Austrian banks rely on wholesale markets to fund large foreign-currency asset portfolios, largely via FX swap markets; disruptions could affect funding although October 2008 measures increased resilience to USD and CHF liquidity shocks. - Interbank liabilities mainly comprised of intra-group transactions, especially among cooperative and savings institutions. Profitability and capital: - Austrian banks are above average on consolidated return on assets and net interest margin compared with international peers; large CESEE operations support overall profitability. - In 2012 net income declined partly due to higher provisioning needs against rising NPLs in CESEE. - Capital ratios improving but remain slightly below peer country and bank group comparisons. - Austrian banks increased core capital since the crisis via state capital injections, retained earnings, liability management, and high risk asset disposals. - Capital quality issue: CET1 capital includes a relatively high share of participation capital (€5.2 billion, i.e., about 7 percent on aggregate, concentrated among the largest banks), of which government participations amount to €4.1 billion. ### Insurance sector challenges - Solvency not a concern under Solvency I; overall premium revenues remain stable. - Key challenges: - Low interest rate environment: life insurers have legacy liabilities guaranteeing rates well above current yields on government bonds; asset/liability duration mismatches affect profitability. - Banking sector exposures: insurance industry holds roughly €20 billion in capital instruments of European banks (96 percent bank bonds, 4 percent bank equity). - Internationally-active insurers with diversified product lines have been better insulated, benefiting from rapid premium income growth in CESEE. ### Stress tests: scope, scenarios, and results - A broad range of stress tests were conducted covering the entire Austrian banking system, using OeNB solvency stress testing platform (top-down) and bottom-up tests by top five banks (about 60 percent of total bank assets). Tests included sensitivity analyses (indirect credit risk from FCLs), liquidity and contagion risks, and combined market and balance sheet approaches for contagion under extreme distress; CoVaR methodology used in some analyses. Three adverse scenarios for top-down solvency stress tests: - A global shock and intensification of the euro area economic crisis, generating a two-standard deviation shock to Austrian GDP growth, with spillovers to the CESEE/CIS region. - A severe recession in CESEE/CIS, adding aggravated downturns in that region to the previous scenario. - A global funding scenario reflecting acute stress conditions observed in late 2008, when Austrian banks faced increased funding costs and restricted access to FX swap markets. Key stress-test findings: - For the system as a whole, analysis suggests Austrian banks benefit from sufficient capital buffers to meet regulatory requirements by 2015, including under adverse circumstances, though results should be interpreted with caution given limitations on asset quality data. - Under the most severe macroeconomic scenario, banks representing less than 7 percent of total bank assets would fall below the current regulatory threshold, and the estimated aggregate capital shortfall would be about €3.4 billion (0.3 percent of total bank assets, or one percent of GDP). - Key pockets of vulnerability are among smaller Austrian banks, some combining low initial capital buffers and weak profitability prospects; some small local banks would even fail under the baseline scenario. - Sensitivity analyses show potential additional credit risk losses from FCL exposures in Austria and CESEE (from exchange rate appreciation) of up to 35 bps of aggregate capital ratios. - Full Basel III implementation (including front-loading phase-in capital arrangements and Basel III RWAs) would have an additional impact of 1.4 percentage points of EBA CT1 capital. - Under the combination of severe macroeconomic stress and sensitivity-analysis assumptions, the capital adequacy ratio of the system would stand at 12.0 percent at end-2015, above the regulatory capital hurdle rate of 8 percent. - For the large internationally-active Austrian banks, baseline projections of estimated CET1 remain above 7 percent throughout the horizon, even netting out private and state participation capital; projected capital ratios for this group are on aggregate above transitional quantitative hurdle rates under Basel III implementation by 2015, even under the most severe scenario. *Source: IMF staff summary of "_cr13283 - 5. The insurance industry has gone through a period of consolidation and also acquired a" (PDF content provided).* ### 19. Market, liquidity and contagion risks also appear manageable, although some banks ### _cr13283 - 19. Market, liquidity and contagion risks also appear manageable, although some banks ### Market, liquidity and contagion risks; H1/FCL impact - Credit risk from FCL appears to have greater solvency impact than sovereign and market risks combined. - The additional credit risk from FCL would reduce CT1 capital ratios for the five top banks by 41 bps under the most adverse scenario. - Under a scenario assuming the closure for one year of unsecured interbank and FX-swap markets, and with substantial haircuts in the counterbalancing capacity, the total liquidity shortfall amounts to only 0.5 percent of total liabilities of the 29 banks in the sample. - For CHF liquidity, about half of Austrian banks need to make further progress to: - diversify funding sources across counterparties and instruments, and - lengthen funding tenors. - Market-based analyses indicate the risk that severe distress of the top two Austrian banks may affect other banks in CESEE is not negligible, but is less than that potentially introduced by distress of other CESEE peer banks. - Inward cross-border spillovers would be most significant from distress of foreign banks that have the highest presence in the region. ### C. Summary Assessment — capital, Basel III, and public participation capital - Austria’s large banks seem well positioned to meet Basel III requirements over the medium-term, but will need to replace government participation capital. - Basel III impact mitigants: - Austrian banks’ very limited capital market activities and exposures (which carry much higher risk weights under Basel III). - Length of the transitional period. - Government participations must be phased-out between 2014 and 2022, and it is expected that most will be repaid between 2015 and 2017. - The authorities estimate that to comply with Basel III regulatory capital ratios while repaying public capital, Austrian banks may need to raise additional CET1 capital of €1 billion and up to €7 billion additional Tier I and Tier II capital by 2022. - Footnote breakdown: €1 billion for additional CET1, €2 billion for additional Tier I capital, and €5 billion for the replacement of Tier II capital. ### Risk of deleveraging and CESEE spillovers - The risk that Austrian banks may become subject to strong deleveraging pressures, with potential spillovers to host CESEE countries, appears contained at this point. - Potential bank actions that could affect CESEE: - Repay public support, - Reduce loans to meet local stable funding ratios for subsidiaries, - Address asset quality concerns in individual CESEE countries, possibly leading to cutbacks in certain CESEE operations. - Sales of CESEE operations will not necessarily result in reduced credit supply from new owners. - A broad-based reduction in the overall presence of Austrian banks in the region seems unlikely given current strategies and the importance of CESEE operations to overall profitability. ### Need for stronger capital buffers and asset quality review - Austrian banks will need to build stronger capital buffers above the regulatory minimum. - Reasons: - Investors may impose additional capital requirements to ensure parity with peers. - Business model specifics and comparatively large exposures to the CESEE region, where underlying asset quality is subject to significant uncertainty. - The upcoming bank asset quality reviews by the ECB should provide a more robust basis for assessing balance sheet strength and needed policy responses. - Concerns may be exacerbated by increased financial market fragmentation across the region, including potential capital or liquidity ring-fencing measures in host countries that would: - constrain funding relationships between local subsidiaries and parent Austrian banks, and - constrain profit repatriation. ### Sovereign-bank feedback and exposures - The risk of adverse feedback loops between Austria’s banks and sovereign appears limited. - Austrian banks have little direct exposure to the public sector (about 2 percent of banking system assets). - Sovereign risk perceptions have deteriorated during the crisis; market perceptions of Austria’s creditworthiness have become more closely linked to the health of its banking system. - Since 2011, the Austrian sovereign has shown a higher correlation in CDS spreads with the top two Austrian banks. ### Structural challenges in parts of the banking system - Significant structural challenges over the longer term, especially for smaller banks. - Domestic market characteristics: - Crowded with small banks. - Low profitability environment. - High operational costs due to lower economies of scale and higher bank employee density. - Domestically-focused retail banks will likely face increasing competition and cost pressures from lower cost non-traditional retail banking vehicles (mobile branches, co-branching, internet banking). ### Financial oversight — institutional responsibilities - Financial stability is a shared responsibility of the FMA, OeNB, and MOF. - Austria’s dual supervisory system: FMA and OeNB; MOF develops financial sector legislation. - FMA responsibilities: supervising all significant providers of financial services (including insurance companies and pension funds, investment funds, and the stock exchange). - OeNB responsibilities: collaborates with the FMA in implementing bank supervision and oversees payment systems. - A key cooperation element: sharing of all supervisory-related data held by both institutions in a single database. ### A. Banking Oversight — effectiveness and needed governance improvements - Overall, bank supervision performed by the FMA and OeNB appears effective. - Governance and legal framework improvements suggested: - Strengthen FMA independence and liability protection for the FMA and its staff. - Empower the FMA to undertake fit and proper tests on all members of bank supervisory boards, including for smaller banks. - Require internal auditors to report directly to supervisory committee chairmen. - Explicitly require all banks to have a compliance function; larger and more complex banks to have a dedicated risk management unit overseen by a chief risk officer or equivalent. - Cross-border supervisory cooperation: - Generally adequate frameworks exist, including fully-fledged colleges for the largest groups. - Legal constraints limit effective information exchange with some non-EEA host supervisors; inability to conclude agreements on exchange of confidential supervisory information limits cooperation for some groups. - Where information exchange is inadequate, the FMA has authority to order the dissolution of the affected part of the banking group. ### Supervisory tools and powers recommended to be enhanced - Prior approval: extend to investments by Austrian banks in non-bank financial institutions outside the EEA and for greenfield credit institutions in third countries. - Recovery and resolution plans: obligation to draw up plans currently only for the three largest banking groups; may need extension to other large banks. - Corrective actions: expand powers beyond extra capital requirements and penalties to include direct prohibitions, limits, or other conditions on specific business activities or exposures. - Related party lending: strengthen supervisory rules to ensure transactions with related parties are not on favorable terms. - Rule-making authority: FMA has only limited authority to issue legally-binding rules; this should be expanded. ### SSM preparation - Top eight Austrian banking groups are expected to fall under direct ECB supervision. - Authorities should prepare for SSM implementation by: - Mitigating operational risks from division of responsibilities between the ECB, the FMA and the OeNB, especially during transition. - Enhancing cooperation with the ECB for ongoing supervision (especially on-site). - Ensuring effective coordination with the ECB in validating recovery and resolution plans for SIFIs. ### B. Insurance Oversight — regime performance and reforms - Austrian regulatory and supervisory regime for insurers and pension funds continues to perform well based on IAIS Insurance Core Principles assessment. - Steps already taken by FMA to strengthen insurance and pension regulation and supervision. - Anticipated role of Solvency II: - Many reforms expected to be dealt with under Solvency II, but authorities may need to act sooner. - FMA should continue preparations and ensure industry readiness to implement Solvency II. - Specific supervisory enhancements recommended: - Strengthen prudential requirements (revise liability valuation, require consistent provisioning for guarantees, issue minimum standard on enterprise risk management, consider a wider range of risks than Solvency I). - Enhance supervisory assessments (improve and harmonize risk-rating methodologies, more structured internal review of risk assessments, increased on-site inspections, wider and more refined stress test scenarios including internal models). - Increase supervisory collaboration (ongoing involvement in macroprudential policy decisions, enhanced cross-border cooperation via additional MoUs). ### Insurance industry governance recommendations - Strengthen control functions by: - Extending suitability requirements to key persons in control functions. - Requiring insurers to establish a compliance function. - Requiring non-life insurers to establish an actuarial function and appoint a responsible actuary. - Requiring that the responsible actuary and the head of internal audit report directly to the supervisory board or have guaranteed access to it. - Strengthening requirements for public disclosure by insurers. ### C. Macroprudential Perspective - Authorities are about to implement the ESRB recommendation on national macroprudential mandates and introduce a formal macroprudential framework. - Legislative proposal: create a joint committee to issue recommendations to the FMA under a ‘comply or explain’ principle; committee chaired by the MOF; introduce new macroprudential instruments consistent with CRD IV. - Suggested improvements to the envisaged framework: - Designate the new joint committee as the macroprudential regulator, and have it chaired by the OeNB, in line with ESRB Recommendation to give a leading role to central banks. - Consider additional tools beyond CRR/CRD macroprudential tools, such as structural measures, and LTV and DTI ratios. - Revise the FMA mandate to clarify that the FMA will enforce macroprudential rules in addition to being the microprudential supervisor. ### D. AML/CFT - Austria’s AML/CFT framework is relatively strong, but areas for improvement remain. - Last assessed in 2008; reassessment scheduled for the first half of 2015. - 2008 assessment findings: framework comprehensive and supported by well-developed law enforcement and supervisory bodies; shortcomings in preventive measures (including customer due diligence and suspicious transaction reporting requirements), confidentiality provisions, the financial intelligence unit, and transparency of legal entities. - Authorities reported steps since 2008: facilitating access to confidential information, strengthening customer due diligence and reporting requirements, increasing transparency of legal entities. - Remaining deficiency highlighted: criminalization of terrorist financing. ### Crisis prevention — A. Early intervention and liquidity support - Authorities proposed a more comprehensive legal framework for early intervention; additional changes may be warranted. - Current FMA corrective powers exist under supervisory enforcement framework (appoint a government commissioner, prohibit capital withdrawals, restrict distribution of capital and earnings, discontinue operations; impose penalties; remove Directors; revoke license; require additional capital; restrict payment of interest and dividends; order conversion of hybrid capital). - Proposal introduces more specific intervention triggers and tools; suggested further expansions: - Link tools to specific (and graduated) triggers. - Empower FMA to require increases in bank loss absorbency (capital increases, issuance of convertible bonds or bail-inable unsecured long-term debt). - Allow appointment of a special administrator, replacement of management, and restriction of dividend payments. - Provide for measures related to banking groups (e.g., ring-fencing institutions from parent bank decisions or related entities). - OeNB ELA framework: - Revised in 2006; intended to be updated once new Eurosystem-wide ELA arrangements for NCBs are introduced. - Recommended steps for Austria: - Formalize new ELA policies that maintain discretionary nature of ELA and preserve OeNB autonomy, possibly with a cap on total outstanding ELA to prevent adverse fiscal consequences. - Require that a capital shortfall be covered by the Federation. - Conclude an agreement with the Federation to promptly indemnify the OeNB for ELA-related losses that cannot be covered by the OeNB’s reserves. *Source: Excerpts from IMF staff report chapter on Austria (PDF filename: _cr13283 - 19. Market, liquidity and contagion risks also appear manageable, although some banks).* ### 39. Recent experience with the three nationalized banks confirms the importance for ### Recent experience with the three nationalized banks confirms the importance for Austria to be better prepared to resolve banks going forward. ### Bank resolution framework: findings and recommendation - Austria does not have a special framework in place to support orderly resolution of troubled banks and the authorities do not intend to introduce such a framework before the adoption of the EU Bank Recovery and Resolution Directive. - Cross-country experience suggests that losses at troubled banks are almost always greater than supervisors estimate, and in the absence of adequate resolution framework, may more likely give rise to pressures for open-ended financial support. - The full details and implementation of restructuring plans for the three nationalized Austrian banks remain uncertain, introducing significant risks as to their eventual cost, even though such a cost appears manageable from a fiscal standpoint. - Recommendation: introduce a full-fledged bank resolution regime based on international best practices and consistent with the forthcoming EU directive, allowing for out-of-court bank resolution by a resolution authority with the full range of resolution tools. - Recommendation: the mandate of the resolution authority should be clearly cast in terms of promoting financial stability through depositor protection and continuation of systemic financial functions. - Recommendation: the FMA should become Austria’s bank resolution authority and the legal protection of FMA’s bodies and staff should be strengthened in preparation for this role. ### Short-term measures within the current framework - While swift action is essential to limit costs, the authorities need to follow a flexible approach to maximize recoveries and minimize losses. - Due diligence should be performed to assess and monitor on a continuous basis the operations and asset quality of troubled banks. - Procedures to collect loans and sell assets as soon as possible should be pursued aggressively, as shrinking the balance sheet lessens the need for capital. - Entities that are not viable must be wound down in an orderly fashion, coordinated among domestic and foreign public agencies as necessary, including to limit potential spillovers to host countries. - Example resolution tool: revoking a bank license and creating a bridge bank, and limiting liability for losses to creditors and/or shareholders whose claims go against the bankruptcy estate. ### Cross-border bank resolution arrangements - The EU Directive will cover cross-border bank resolution within the EU and EEA when in force. - In light of Austrian banks’ very large cross-border exposures, authorities should strengthen current MoU-based cross-border arrangements for inter-agency cooperation and effective cross-border resolution. - Recommendation: pursue bilateral or multilateral international agreements (e.g., as part of the CESEE cross-border stability group) to provide adequate information exchanges and burden-sharing mechanisms. ### Deposit Insurance Scheme (DGS): diagnosis - Austria has five private guarantee schemes (DGS), organized by sub-sectors and supplemented by a government guarantee introduced in 2008. - The two-tranche system provides that private schemes cover deposits up to €50,000 while the government guarantee covers deposits that exceed €50,000 and up to €100,000. - Each private scheme is administered by the respective bank association in the sector, funded ex post, and performs oversight and intervention functions that reinforce and complement the FMA’s. - Repayment of insured depositors (up to €50,000) is accomplished through a three-stage process, which may ultimately involve the provision of public guarantees, while the cost of repaying the second tranche of insured deposits (€50,000–€100,000) is borne solely by the government. - In times of economic distress, extensive public support may thus be required. - Historical note: At the beginning of the 2008 financial crisis the maximum amount of insured deposits per bank and per customer by the private DGS was set at the EU minimum of €20.000. During the crisis, unlimited coverage of deposits of natural persons was introduced, which expired at end 2009, when the new EU-wide minimum was raised to €100.000. ### Transition to a unified and prefunded national DGS: recommendations and initial steps - Recommendation: use the forthcoming EU DGS Directive as an opportunity to move to a unified and prefunded national DGS to allow for a higher degree of risk pooling, greater transparency, prompt payout, and more efficient fund management. - The national DGS should be aligned with the EU Directive in terms of quantities (through minimum coverage limits) and in terms of prices, with premiums adjusted for risk as far as practicable, and a shortened length of time to payout. - Recommendation: form a high-level working group to organize transition to the new unified DGS, including officials from the MOF, OeNB, FMA, and the various DGSs. - Initial steps for the working group: - (i) determine the appropriate target DGS fund size for Austria, taking the target reserve level specified in the forthcoming EU Directive (currently proposed at 1.5 percent of eligible deposits) as a minimum; - (ii) immediately start to collect premiums on a flat rate basis to begin building an ex ante fund for the new DGS; - (iii) establish an appropriate liquidity back-up arrangement with the MoF. - The single DGS should be an integral part of a new bank resolution framework, with DGS personnel involved in the advance preparation of bank resolution procedures. ### Systemic crisis management: recent steps - A crisis team has been established under the FMK, consisting of experts from the MOF, FMA, and OeNB, in line with the MoU of 2008 on co-operation between the financial supervisory authorities, central banks, and finance ministries of the EU. - A Cross-Border Stability Group (CBSG) was established in 2011 with Bulgaria, Czech Republic, Hungary, Slovakia, and Slovenia, and a crisis simulation exercise was conducted with these countries in 2012. - The FMK organizes regular meetings of the CBSG to identify emerging systemic risks. - The FinStaG legal framework was created to provide government financial support, and in November 2008, FIMBAG was established to hold the government financial interests stemming from recapitalization operations. *IMF staff report excerpt on Austria (sections 39–46).* ### 47. Additional steps could be considered to further strengthen Austria's crisis ### _cr13283 - 47. Additional steps could be considered to further strengthen Austria's crisis ### Crisis-management legal and institutional reforms - Give the government the authority to act promptly and under strict conditions, in cooperation with the FMA and OeNB, with ex post accountability to Parliament, instead of having to go through regular legislative and budgetary procedures prior to taking action. - Increase the financial envelope under the FinStaG. - Introduce in the Federal Organic Budget Act an explicit escape clause for financial crises. - Give the government standing statutory authorization to take action to deal with financial crises (including financial support and nationalization powers) with ex post accountability to parliament. - Mandate the CBSG with the preparation of a multilateral binding framework to ensure effective information exchange and cooperation during crises. - Create a cooperation mechanism with non-EU/EEA countries similar to the CBSG. ### Operational and supervisory enhancements (FIMBAG and crisis implementation) - Strengthen FIMBAG’s mandate and the conditions under which public capital support is provided. - In the short term, make FIMBAG responsible for overseeing the implementation of current restructuring plans, and where necessary negotiating changes in these plans. - For future recapitalization operations, give FIMBAG a more prominent role in negotiating financial contracts and restructuring plans. ### Key macroeconomic and fiscal indicators (selected figures preserved exactly) - Total area: 83,850 square kilometers - Total population (2012): 8.5 million - GDP per capita (2012): US$ 46,642 (36,264 Euro) - GDP growth, 2007–2014 (yearly values as listed): - 2007: 3.7 - 2008: 1.4 - 2009: -3.8 - 2010: 1.8 - 2011: 2.8 - 2012: 0.9 - 2013: 0.4 - 2014: 1.6 - Total domestic demand, 2007–2014: - 2007: 2.5 - 2008: 0.7 - 2009: -2.0 - 2010: 1.4 - 2011: 3.2 - 2012: 0.1 - 2013: 0.2 - 2014: 1.5 - Components of demand (2007–2014, individual series): - Consumption: 1.2; 1.6; 0.9; 1.5; 0.7; 0.4; 0.5; 1.1 - Gross fixed capital formation: 3.6; 0.7; -7.8; -1.4; 8.5; 1.6; -0.3; 2.5 - Net exports (growth contribution in pp): 1.4; 0.8; -2.2; 0.6; -0.1; 0.9; 0.2; 0.2 - Exports of goods and nonfactor services: 8.9; 1.4; -15.6; 9.4; 6.6; 1.2; 1.9; 4.5 - Imports of goods and nonfactor services: 7.1; 0.0; -13.6; 9.1; 7.6; -0.3; 1.6; 4.7 - Output gap (percent of potential GDP), 2007–2014: - 2007: 3.3 - 2008: 3.2 - 2009: -2.1 - 2010: -1.8 - 2011: -0.3 - 2012: -0.7 - 2013: -1.6 - 2014: -1.3 - Unemployment rate (in percent; Eurostat definition), 2007–2014: - 2007: 4.4 - 2008: 3.8 - 2009: 4.8 - 2010: 4.4 - 2011: 4.2 - 2012: 4.3 - 2013: 4.9 - 2014: 4.8 - Consumer price index (period average), 2007–2014: - 2007: 2.2 - 2008: 3.2 - 2009: 0.4 - 2010: 1.7 - 2011: 3.6 - 2012: 2.6 - 2013: 2.1 - 2014: 1.8 - General government finances (percent of GDP), 2007–2014: - Revenue: 47.6; 48.3; 48.5; 48.3; 48.3; 49.1; 49.1; 48.7 - Expenditure: 48.6; 49.3; 52.6; 52.8; 50.7; 51.7; 51.7; 51.1 - Balance (EDP-definition): -0.9; -0.9; -4.1; -4.5; -2.5; -2.5; -2.6; -2.4 - Structural Balance 1/: -2.5; -2.4; -3.0; -3.0; -2.1; -1.3; -1.7; -1.7 - Gross debt (end of period): 60.2; 63.8; 69.2; 72.3; 72.8; 74.1; 74.3; 74.7 - Balance of payments: - Current account (percent of GDP), 2007–2014: 3.5; 4.9; 2.7; 3.4; 1.4; 1.8; 2.2; 2.2 ### Financial sector structure and selected FSIs (preserved values) - Banking sector assets and shares (December 2007 / September 2012): - Total financial system assets (EUR billion): 3,268 / 3,210 - Total financial system percent of total assets: 1,149 / 1,363 - Total financial system percent of GDP: 423 / 452 - Selected Financial Soundness Indicators (consolidation basis and periods shown): - Regulatory capital to risk-weighted assets DCCBS: 13.2% (2006); 12.7% (2007); 12.9% (2008); 15.0% (2009); 15.4% (2010); 15.8% (2011); 16.5% (2012); 16.5% (2012Q2) - Total regulatory capital (in millions of Euro): 44,326; 49,525; 53,581; 64,067; 66,063; 66,783; 66,954; 65,879 - Risk-weighted assets (in millions of Euro): 335,019; 390,011; 415,617; 426,369; 427,831; 421,958; 405,356; 400,455 - Regulatory Tier 1 capital to risk-weighted assets DCCBS: 9.0%; 8.8%; 9.3%; 11.1%; 11.7%; 12.0%; 12.7%; 12.6% - Nonperforming loans net of provisions to capital DC: 9.5%; 6.0%; 8.6%; 6.3%; 8.2%; 8.0%; 7.8%; 8.2% - Nonperforming loans net of provisions (EUR millions): 3,978; 3,502; 5,770; 4,530; 5,979; 5,865; 5,835; 6,179 - Capital (EUR millions): 41,801; 58,331; 67,200; 72,151; 73,327; 72,887; 74,658; 75,314 - Nonperforming loans to total gross loans /1 DC: 2.7%; 2.2%; 1.9%; 2.3%; 2.8%; 2.7%; 2.7%; 2.8% - Nonperforming loans (EUR millions): 16,281; 14,868; 15,335; 17,287; 20,498; 20,525; 20,892; 21,130 - Total gross loans (EUR millions): 594,336; 663,040; 805,818; 768,163; 724,123; 758,255; 766,759; 767,033 - Return on assets (ROA) DCCBS: 0.7%; 0.8%; 0.1%; 0.1%; 0.5%; 0.1%; 0.2%; 0.3% - Net income (EUR millions): 5,099; 5,835; 993; 711; 3,934; 697; 1,880; 2,502 - Total assets (EUR millions): 712,494; 747,080; 831,402; 879,664; 857,608; 875,710; 884,734; 873,812 - Return on equity (ROE) DCCBS: 16.8%; 17.0%; 2.6%; 1.5%; 7.9%; 1.4%; 3.7%; 5.0% - Interest margin to gross income DCCBS: 71.4%; 70.7%; 64.6%; 69.7%; 67.4%; 63.3%; 56.2%; 56.9% - Liquid assets to total assets DC: 27.7%; 26.8%; 26.8%; 26.1%; 23.5%; 25.4%; 26.6%; 26.6% - Liquid assets (EUR millions): 220,840; 240,769; 286,257; 270,264; 229,524; 257,319; 268,781; 268,951 - Liquid assets to short-term liabilities DC: 68.5%; 67.1%; 69.7%; 76.2%; 68.0%; 71.6%; 76.6%; 76.3% - Short-term liabilities (EUR millions): 322,262; 358,780; 410,503; 354,520; 337,737; 359,499; 350,904; 352,542 - Net open position in foreign exchange to capital DC: 6.5%; 2.5%; 1.6%; 0.6%; 0.3%; 0.1%; 0.0%; 0.4% - Net open position in foreign exchange (EUR millions): 3,906; 1,971; 1,432; 575; 279; 105; 393; 32 - Capital (EUR millions, alternate series): 60,428; 79,933; 88,559; 93,248; 92,162; 91,367; 92,417; 93,029 ### Supervisory implementation status (Appendix I: Implementation of the Key Recommendations of 2007 FSAP Update) - High priority / All Sectors: - Continue to develop cooperation with foreign home and host supervisors. — Implemented - Define government institutional liability for financial sector supervision more narrowly. — In progress - Intensify the on-site inspection program and complementary off-site analysis and monitoring. — Implemented - Enhance supervisory staff resources and expertise. — Implemented - Medium priority / All Sectors: - Raise administrative fines to European standards. — Implemented - Define the responsibilities of external auditors in line with supervisory priorities. — Fully implemented - Promote the periodic rotation of external audit firms. — Fully implemented - Banking sector (selected items): - Have the FMA and the OeNB publicly acknowledge their common commitment to cooperate very closely in bank regulation and supervision, and corrective action and enforcement, and enshrine the commitment in operating procedures. — Implemented - Intensify coordinated or joint inspections with foreign supervisors, and joint risk assessments of groups, followed by joint supervisory plans. — Ongoing - Follow up the planned crisis management exercise with peers in CESE countries with an exercise involving countries farther afield where Austrian banks are active. — Implemented and ongoing - Ensure that banks continue to manage indirect credit risk stemming from foreign currency loans (FCL), both domestically and abroad, and promote borrowers’ awareness of the risks. — In progress - Set up a system mandating early remedial action when warning signs are detected. — In progress - Further develop stress testing, focusing especially on links between credit quality and macroeconomic performance in all markets where Austrian banks operate. — Fully implemented - Give the FMA greater authority to object to group structures that impede effective supervision and corporate governance. — In progress - Reconsider current exemptions of small banks from some corporate governance regulations. — Not implemented (in the context of fit and proper tests). - Insurance, Pensions, and Securities (selected items): - Abolish the current restriction that 30 percent of contributions in Zukunftsvorsorge funds must be invested in European Economic Area stock markets with low market capitalization. — Fully implemented - Become a full signatory to the International Organization of Securities Commission (IOSCO) Multilateral Memorandum of Understanding. — Fully implemented - Ensure that tax and regulatory policies are neutral across otherwise comparable savings vehicles to support competition. — Implemented - Support the expansion of the supply of well-trained actuaries. — Fully implemented - Extend stress testing of insurance companies’ and pension funds’ liabilities and investigate the use of market-based soundness indicators. — Fully implemented *Source: IMF staff report excerpt as provided.* ### Appendix II. Risk Assessment Matrix (RAM) ### Appendix II. Risk Assessment Matrix (RAM) ### Global shock / Intensification of the Euro Area debt crisis - Overall Level of Concern: Medium - Likelihood of Realization in the Next 1–3 Years: The IMF's Global Risk Assessment Matrix assigns a low/medium probability to a sharp slowdown in global growth or subdued domestic demand in the hard-hit euro zone periphery countries. - Expected Impact on Financial Stability if Realized: High - Key channels and consequences: - Decrease in demand for Austrian exports and slowdown in the CESEE/CIS region → higher NPLs, lower profitability, potential solvency pressures in some institutions. - Fiscal impact of financial sector-related public liabilities may trigger adverse market dynamics. - Tight funding conditions if European banks accelerate deleveraging, hoard liquidity and cut interbank lending affecting some Austrian banks. - Safe haven strategies may lead to sudden CHF appreciation (despite SNB interventions), heightening credit risk from FX lending to domestic borrowers. - Authorities have taken steps to promote local funding and to decrease the flow of FX lending in Austria. ### Contagion to/from CESEE countries - Overall Level of Concern: Medium - Likelihood of Realization in the Next 1–3 Years: Medium - Expected Impact on Financial Stability if Realized: Medium - Key points: - Several large CESEE countries may be subject to severe macroeconomic and financial shocks. - Highest Austrian bank exposures: Czech Republic, Croatia, Romania, Slovakia and Hungary. - Banks carry large exposure to FCL in host countries. - Austrian banking system provides significant cross-border lending to CESEE; a sharp slowdown in CESEE would likely result in higher NPLs, lower profitability, and potential solvency problems for Austrian banks. - Local currency depreciation in host countries could raise debt burdens and NPL levels for Austrian banks. - Accelerated deleveraging in CESEE by Austrian banks could fuel a negative feedback loop and trigger fiscal impacts with adverse market dynamics. ### Severe Funding Stress of Global Banks - Overall Level of Concern: Medium - Likelihood of Realization in the Next 1–3 Years: Medium - Expected Impact on Financial Stability if Realized: Medium - Key channels and consequences: - Risk of renewed disruption in international funding and foreign currency swap markets reinforcing home bias shifts and tightening cross-border funding for Austrian banks. - Significant net cash outflows → higher haircuts and unexpected margin calls on Austrian banks’ securities portfolios. - Austrian banks may pass on rising funding costs to customers and cut high risk-weight activities, exacerbating credit contraction; effect severe for banks with negative funding gaps in USD and CHF. - Liquidity support from the ECB, repo operations by the SNB, and swap facilities provided by the SNB and the ECB may mitigate funding pressures. - FX-liquidity position improved since 2008 through lengthening of tenors and diversification of counterparties. *Source: Appendix II. Risk Assessment Matrix (RAM) — _cr13283* ### Appendix III. Stress Test Matrix (STeM) — Banking Sector ### Scope and Perimeter (Solvency Risk) - Bottom-Up by Banks: - Institutions included: Five largest banks. - Market share: Two thirds of banking sector assets. - Data and baseline date: Institutions’ own data as of Q4 2012; consolidated banking group. - Top-Down by OeNB with FSAP Team Inputs: - Institutions included: All banking institutions: approx. 585 consolidated. - Market share: 100 percent of banking sector assets. - Data and baseline date: Supervisory data as of Q4 2012; consolidated banking group. ### Channels of Risk Propagation and Methodology - Bottom-Up: - Banks’ internal models. - Internal models for market risk. - Top-Down: - OeNB Balance-sheet model. - Separate satellite model for the Austrian portfolio (using insolvency data across six industry sectors) and the CESEE/CIS portfolio (using LLPR data broken down by currency) linking PDs/LGDs with macro scenarios. - Stressed PDs and LGDs; OeNB consensus rating across banks applied to single loans. - Solvency and funding interactions included. - Stress test horizon: - Bottom-Up: Instantaneous. - Top-Down: 2013-2015. ### Tail shocks and Scenario Analysis - Scenarios applied: - Global Slowdown/Euro Area Debt Crisis: Deviation of 2-year accumulated growth rate of 2.0 SD for the Austrian economy and 1.5 SD for the CESEE/CIS region. Country specific projections for twenty-two CESEE/CIS countries. - Recession in the CESEE/CIS region: Country-specific add-on shocks applied to seven countries raising the overall size of the shock to 1.7 SD for CESEE and 1.8 for CIS. - Global Funding Scenario calibrated to Q3 2008 (domestic currency, Eurocurrency, deposit runs, FX swap markets, market issuances). - Sensitivity analyses: - Market risk applied to trading book positions as of Dec 2012; valuation effects reported across stressed risk parameters. - Sovereign risk (banking and trading book), including CESEE subsidiaries: 64 countries, maturities 3m, 6m, 1y-10y, 15y, 20y, 30y. - Credit risk from foreign currency lending for Austrian exposures, cross-border lending, and CESEE loan books (assumption: 1.5 SD of CHF). - Funding risk calibrated to 2008Q3-2009Q1. - Securitization portfolio following 2011 EBA methodology. - Market risk from underperformance of repayment vehicles and FX appreciation. ### Risks, Buffers, and Behavioral Assumptions - Risks/factors assessed: - Market risk parameters: interest rates (23), major FX (8), equity indices (15), commodities (4), credit spreads (8), counterparty risk (2). - Credit losses, operating profits, funding costs, performance of repayment vehicles, sovereign risk, counterparty risk, exchange rate, taxes. - Full implementation of Basel III phase-in arrangements on aggregate CET1. - Behavioral adjustments assumed: - Constant balance sheet. - No asset disposals allowed. - No credit growth assumed. ### Regulatory and Reporting Standards - Calibration of risk parameters: - Major interest rates and FX rates jointly determined with macro adverse scenario. - EBA’s EU-wide stress test 2011, historical volatility, and expert judgment for remaining risk factors. - Stressed PDs and LGDs applied to compute both credit losses and stressed RWA calculations. - Regulatory/Accounting standards: - Capital definition according to EBA CT1 and Basel 2.5 RWAs. - Estimates of Basel III capital ratios (CET1, Tier 1, CAR) and RWAs for top 3, and whole banking system. - Hurdle rate: EBA’s Core Tier 1 (5 percent), Tier 1 (6 percent), and CAR (8 percent) for whole banking system. - Aggregate estimate of CET1 ratio for large internationally-active banks. - Reporting format for results: - Dispersion of valuation losses in absolute and capital terms. - Distribution of capital ratios; percentage of assets in capital buckets; weighted average capital ratios; percentage of assets that fail; recapitalization needs. *Source: Appendix III. Stress Test Matrix (STeM) — _cr13283* ### Banking Sector: Liquidity and Contagion Stress Frameworks ### Liquidity Risk (Top-Down by OeNB with FSAP Team) - Institutional perimeter: - Institutions included: 29 banking institutions (80 percent of banking sector assets). - Data and baseline date: Supervisory data as of Q4 2012; consolidated banking group; granular contractual and behavioral expected cash-flows over maturity buckets: 5 days, 1m, 3m, 6m, and 12m. - Methodology: - Cash-flow-based using 6 major currency buckets. - Scenarios based on solvency stress test: PD shifts feed into counterbalancing capacity and cash inflows; feedback effects included due to rising funding costs under adverse macro scenario. - Risks and buffers: - Channels: NPL impact on cash inflows via a credit risk migration matrix; capital ratios affect cash outflows (funding cost and rollover rates); asset quality affects counterbalancing capacity. - Shocks: funding liquidity shock; market liquidity shock. - Buffers: counterbalancing capacity accounting for haircuts to liquid assets. - Tail shocks and scenarios: - Bank run and dry up of wholesale funding markets over 45 scenarios including full/limited/restricted/closed access to money markets covering domestic currency, Eurocurrency, FX swap markets. - Scenario groups: baseline, market mild, market medium, market severe, and combined scenario (market and idiosyncratic). - Detailed assumptions/results reported for the mild market scenario consistent with recent EU FSAPs liquidity stress test scenarios. - Instantaneous outflow and gradual outflows over 30-day, 90-day, and 1-year horizons. - Reporting format: - Percentage of assets that fail under each horizon. ### Contagion Risk (Top-Down by OeNB; Top-Down by FSAP Team) - Institutional perimeter: - OeNB: Banks operating in the Austrian interbank market; top listed Austrian banks and major global European banks (40) and in the CESEE (14). - FSAP Team: All banking institutions: 585 consolidated; market share ranging between 40 percent and 60 percent of banking system assets. - Data and baseline date: Supervisory data as of Q4 2012; unconsolidated exposures with consolidated capital ratios (OeNB); balance sheet and market data as of Q4 2012 on consolidated basis (FSAP Team). - Methodology: - Impact study of liquidity risk on solvency risk. - Network Analysis in the Austrian interbank market using a default cascade model. - CoVaR framework; assessment of asymmetric response in deleveraging episodes. - State variables: volatility index, liquidity spread, changes in short-end and slope of yield curve, changes in high-yield credit spreads, equity market returns; European and US financial variables considered. - Tail co-dependence assessed in banks’ market valued assets’ growth rates and banks’ equity returns. - Individual risk computed using a quantile approach and a GARCH (1,1) framework. - Tail shocks: - Contagion from negative funding gaps (linked to macro stress test) leading to: (i) fire sales of assets; (ii) rising funding costs; (iii) partial closure of capital markets under a Global Funding Scenario replicating post-Lehman funding strains. - Size: 5% quantile of the conditional loss distribution; robustness checks at 1% and 2.5%. - Reporting format: - Capital shortfall, system wide. - Impact on regulatory capital ratios. - Contribution to systemic risk; vulnerability to systemic risk. - Effect of financial state variables on tail inter-dependence. - Distribution of results for (i) a European banking system, and (ii) a CESEE banking system peer group. *Source: Appendix III. Stress Test Matrix (STeM) — _cr13283* ### Appendix IV. Risks to the Financial Sector from Repayment Vehicles (RPVs) ### Overview and Key Statistics - In Q3 2012, 11.2 percent of net loans to the private sector (mainly to households) were based on repayment vehicles. - Total funding gap of RPV loans estimated at about €5.5 billion (or 18.2 percent of the total loan amount) as of September 2012; mutual funds-based life insurance products are the main contributors. - Almost 80 percent of FC bullet loans will mature after 2020. - OeNB estimates: the share of vulnerable households (with negative financial margins) would remain below 10 percent under a scenario of a 5 percent appreciation of the CHF or a 3 percentage point decrease in RPVs yields. - Austrian banks have refrained from issuing new FCLs and RPVs amid tightened regulatory standards and strengthened risk management practices for RPVs. ### FSAP Sensitivity and Stress Test Findings - Baseline total RPVs outstanding debt: 28,983 (in million euros). - Total market sensitive outstanding debt: 21,483 (in million euros). - Projected funding gap (yield and FX shock) by product category (in million euros and in percent): - Equity funds: Baseline 1,254; 1.5 SD CHF 1,388; Baseline adverse (100 bps) 342; Baseline severe (200 bps) 405; Baseline+1.5 SD CHF adverse severe 464; percentages: 24.6% 29.2% 33.4%. - Fixed income funds: Baseline 485; 1.5 SD CHF 510; Baseline adverse 93; Baseline severe 119; severe 143; percentages: 18.2% 23.3% 28.0%. - Balanced funds: Baseline 2,586; 1.5 SD CHF 2,782; Baseline adverse 569; Baseline severe 706; severe 833; percentages: 20.5% 25.4% 30.0%. - Mutual funds-based life insurance: Baseline 15,655; 1.5 SD CHF 17,386; Baseline adverse 5,019; Baseline severe 5,794; severe 6,514; percentages: 28.9% 33.3% 37.5%. - Other instruments: Baseline 1,503; 1.5 SD CHF 1,663; Baseline adverse 483; Baseline severe 556; severe 624; percentages: 29.0% 33.4% 37.5%. - Total market sensitive: Baseline 21,483; 1.5 SD CHF 23,730; Baseline adverse 6,506; Baseline severe 7,580; severe 8,578; percentages: 27.4% 31.9% 36.1%. - Total RPVs outstanding debt: 28,983. - Stress scenarios and impacts: - Adding an additional annual yield shock of 100 yield shock (adverse) and 200 yield shock (severe) across market sensitive product categories to current funding gaps over the remaining maturity of the RPVs: - Maximum funding gap increases from an accumulated €4.2 billion over the life of the loan to €6.3 billion (an estimated annual increase of €159 mn). - Combining capital market shocks with adverse foreign exchange developments (13 percent CHF appreciation, equivalent to 1.5 standard deviations): - Accumulated funding gap would rise to €8.6 billion (equivalent to an annual increase of €332 mn). - Notes and assumptions: - Residual maturity assumed average of 13 years. - 50th percentile of daily annual returns over Jan 2005 through Dec 2012 used for proxy instruments by product category. - A foreign exchange appreciation increases outstanding debt at maturity as a function of CHF denominated debt across product categories. *Source: Appendix IV. Risks to the Financial Sector from Repayment Vehicles — _cr13283* ### Annex I — Observations on Market Structure and Cross-Border Exposures - Assessment conducted during February 18–25 and April 3–18, 2013. - Financial intermediation in Austria is dominated by the banking sector; CIs cover approximately 80 percent of financial market intermediation. - Number of registered CIs: 822 as of mid-2012, largely due to decentralized sectors (local cooperative banks). - Consolidated total assets of the Austrian banking sector in June 2012: €1,189 billion or about 350 percent of GDP. - Cross-border operations: - Extensive CESEE presence via local subsidiaries; CESEE activities contributed about 50 percent of total profits while representing less than one-quarter of total bank assets. - Within CESEE, Austrian banks have market shares above one-third in the Czech Republic, Croatia, Romania, Slovakia and Bosnia. - Austria is a host country for foreign banking groups representing more than 20 percent of total domestic bank assets. *Source: Annex I. Report on the Observance of Standards and codes—Basel Core Principles—Summary Assessment — _cr13283* ### 4. The tasks of the supervisory system are governed by a range of separate laws. These ### _cr13283 - 4. The tasks of the supervisory system are governed by a range of separate laws. These ### Supervisory framework and institutional responsibilities - Laws governing supervisory tasks: Financial Market Authority Act, National Bank Act, Banking Act, Insurance Supervision Act, Pension Funds Act, Stock Exchange Act, Investment Fund Act, Provision of Payment Act, Capital Market Act. - Dual supervisory system: - Financial Market Authority (FMA): - Integrated supervisory institution responsible for supervising credit institutions (CIs), financial institutions (e.g., payments institutions, e-money institutions), insurance undertakings, pension companies, corporate provision funds, investment firms and investment service providers, investment funds, financial conglomerates and stock exchanges. - Only competent authority for regulatory supervision in Austria. - Issues rulings and considers legal questions in banking supervision. - Performs fit and proper tests on all directors of the management board irrespective of balance sheet size and on the chairman of the supervisory board for CIs with total assets exceeding €750 million. - Central Bank of Austria (OeNB): - Executes all on-site inspections on the basis of inspection orders issued by the FMA; can request audits or expansion of inspection orders. - Responsible for off-site analysis using all reported CI data. - Solely responsible for oversight of payment systems in Austria. - Key element of cooperation: sharing all supervisory-related data held by both institutions in a single database. ### Preconditions for effective supervision - Macroeconomic environment: - Sustainability of public finances and growth-promoting policies have contributed to the generally healthy state of the banking industry. - High share of rented accommodation reduces price volatility in the housing market. - Legal environment: - Highly developed system of business laws; legal and accounting regime consistent with an advanced economy. - Financial stability framework: - OeNB’s Financial Markets Analysis and Surveillance Division (part of Financial Stability and Bank Inspections Department) identifies, monitors and assesses systemic risk, including stress testing. - FMA and OeNB participate actively in European System of Financial Supervision bodies. - Recent changes: - Austria passed a law requiring credit institutions to set up recovery and resolution plans and providing the FMA with early intervention tools; provisions for bank resolution postponed pending EU Bank Recovery and Resolution Directive implementation. ### Main findings — objectives, powers, independence, accountability, cooperation (CPs 1–3) - Clear responsibilities, objectives and powers attributed to the FMA; OeNB assigned non-regulatory banking supervision tasks and powers. - Existing supervisory approach, techniques, tools, and reporting systems are generally adequate. - Adequate resources and skilled professionals available for supervisory tasks. - Governance improvements needed concerning FMA independence and accountability; FMA has limited authority to issue legally-binding rules and current liability framework insufficiently protects FMA and its staff. ### Ownership, licensing and structure (CPs 4–7) - FMA is licensing authority; permissible activities of licensed institutions clearly defined; clear definition of the term ‘bank’ and clear processes for new licenses. - Fit and proper testing: - FMA tests management board directors regardless of balance sheet and chairman of supervisory board for CIs with total assets exceeding €750 million. - FMA lacks legal powers to undertake fit and proper tests on other senior employees, supervisory board members, or chairman of supervisory board in CIs with total assets below €750 million. - Supervisor cannot directly require changes in supervisory board composition if members fail duties; must order CI to remove chair where applicable. - Legislative changes being implemented to expand FMA powers on fit and proper tests. - New entrants: - Subject to all relevant regulations at licensing; no specific supervisory regime for early years — a more hands-on regime might be warranted. - Transfer of significant ownership: - FMA has adequate powers for transfers, but no explicit legal requirement for banks to notify FMA as soon as they become aware of material information negatively affecting suitability of major shareholder or controller. - Major acquisitions: - No prior approval process for investments by Austrian banks in non-bank financial institutions outside the EEA or in non-bank non-financial institutions inside/outside the EEA. - No prior approval required for setting up a credit institution in a third country via Greenfield operation. ### Methods of ongoing banking supervision (CPs 8–10) - FMA maintains forward-looking assessment of banks’ risk profiles proportionate to systemic importance; uses an extensive early warning system. - Recovery and resolution plans: - Obligation existed only for the three largest internationally active banking groups at the time. - Bank Reorganisation Act (Federal Law Gazette no. I 160/2013) entering into force on January 1, 2014 will require credit institutions to set up recovery and resolution plans. - FMA lacks a clear framework for handling banks in times of stress to ensure timely recovery/resolution decisions despite extra corrective powers. - Supervisory tools: - Appropriate range of on- and off-site tools used, including a state-of-the-art supervisory reporting system. - OeNB and FMA jointly define an audit plan annually; consideration suggested for multi-year planning. ### Corrective and sanctioning powers (CP11) - Corrective powers rely heavily on extra capital requirements and penalties. - FMA lacks power to directly issue orders to remedy deficiencies at an early stage (e.g., risk management systems) or to prohibit/limit business activities or exposures when risks build up. - Only natural persons can be penalized for administrative and criminal offences (institutional sanctioning not permitted); understood that CRD IV implementation will extend sanctioning powers to legal persons. ### Consolidated and cross-border supervision (CPs 12–13) - Legal and regulatory framework generally supports cross-border cooperation; protection of confidential information implemented. - Fully-fledged colleges exist for largest cross-border banks; Austria played a leading role. - Legal constraints prevent agreements on exchange of confidential supervisory information with some non-EEA host supervisors, limiting effective cooperation for affected banking groups. ### Corporate governance (CP 14) - Internal auditor reports directly to board of directors; audit results reported quarterly to chairman of supervisory committee. - Best practice would have internal auditor report directly to chairman of supervisory committee with full ongoing access. ### Prudential requirements, regulatory framework, accounting and disclosure (CPs 15–29) - No explicit requirement for larger and more complex banks to have a dedicated risk management unit overseen by a Chief Risk Officer; FMA and OeNB expect such arrangements, and evidence suggests they exist; proposal that FMA introduce explicit requirement. - Basel implementation: - Austria applied Basel II through EU CRD; will implement Basel III through CRD IV/CRR later this year. - Estimated additional capital required by Austrian Bank Sector to meet Basel III: €3–8 billion. - Three largest banking groups (Erste Group Bank, Raiffeisen Zentralbank and Unicredit Bank Austria) already meet the 7 percent threshold for Common Equity Tier 1. - Government/private sector capital injections in 2008: total of €5.2 billion by way of participation shares in a number of Austrian banks; this capital qualifies as Tier I capital until 2017 under a special transitional provision in CRD IV and is due for repayment at end 2017. - No specific provisions requiring banks to make credit decisions free of conflicts of interest and on an arm’s length basis. - Non-performing loans (NPLs): - Austria domestic NPL level stable at less than 5 percent. - CESEE NPLs rose by 5 percentage points over last 4 years and stand at 16 percent. - Consolidated figure for Austrian banks about 9 percent. - Foreign currency lending (FCL): - FCL exposures in Austria (domestic largely Swiss Francs; foreign subsidiaries largely Euros) stand at more than €50 billion. - No new FCLs being extended. - CESEE total NPLs: 15.9 percent at end June 2012; CESEE FX loans NPLs: 19.7 percent. - FMA measures and minimum standards on FCL and loans with repayment vehicles (LRV) issued; from October 2008 to March 2013 total FCL volume to private households declined by 35 percent (fx-adj.) or €16.3 billion. - FCL share for private households decreased to 23.1 percent in Q1 2013 (Q4 2008 31.2 percent). - Related-party transactions: - Deficiencies exist; absence of explicit requirement that related-party transactions not be on more favourable terms than corresponding transactions with non-related counterparties. - Market, interest rate and operational risks: detailed requirements exist and compliance is monitored closely. - Funding and liquidity: - Austrian banks rely heavily on retail and corporate deposits; loan to deposit ratios both domestically and including foreign subsidiaries are comparatively low and decreasing. - Liquidity concern relates to long-term FCL exposures (mostly mortgages); FMA monitors currency risk exposure; banks have swap arrangements. - Compliance function: - Very restrictive requirement to have a compliance function related to securities services; no general business-wide compliance function requirement. - Accounting and audit: - Austrian local GAAP based on EU regulation; unconsolidated financial statements prepared on this basis. - Supervisor has no power to access external auditors’ internal working papers due to professional confidentiality. - AML/CFT: - Austria criticized in 2008 FATF Mutual Evaluation; follow-up reports in 2011 and 2012; third follow-up scheduled for later in 2013. - According to FMA, one minor issue outstanding relating to definition of terrorist financing; Austria requested this be last follow-up meeting. ### Annex — Key recommendations to improve observance of BCPs (selected) - Independence, accountability, resourcing, legal protection for supervisors: - Delete confirmation by supervisory board of second level staff below supervisory board. - Discontinue industry presence on FMA Supervisory Board; create separate industry forum. - Consider staggered terms for Supervisory Board members. - Introduce legal obligation to publicly disclose reasons for dismissal of an Executive Board member. - Clarify ex ante considerations/criteria for MoF use of Article 16 para 4. - Clarify ex ante that MoF will always give consent on a proposed FMA regulation if within its mandate. - Consider more limited/focused right for MoF to receive information regarding FMA oversight. - Clarify that national economic interest must not impede FMA’s supervisory considerations. - Provide internal audit direct access to Supervisory Board; consider multi-year audit planning. - Remedy legal protection weaknesses, especially given envisaged resolution powers for FMA. - Licensing criteria: - Introduce fit and proper criteria for all supervisory board members; provide supervisor powers to require changes in Supervisory Board composition. - Implement more hands-on regime for new entrants in first years to monitor progress and compliance. - Transfer of significant ownership: - Introduce explicit notification requirement for CIs to notify supervisor as soon as they become aware of material information affecting suitability of major shareholder or controller. - Major acquisitions: - Provide FMA powers to pre-approve investments/acquisitions in non-bank financial institutions and non-bank non-financial institutions. - Clarify/revise Banking Act so Greenfield operations via setting up a subsidiary in another country require FMA pre-approval. - Supervisory approach: - Consider introducing a unit/functionary responsible for development of supervisory approach and quality control. - Provide FMA powers to require recovery and resolution plans, assess resolvability, require measures to remove resolution barriers, and provide a clear framework for handling CIs in stress to ensure timely decisions. - Supervisory techniques and tools: - Consider supervisory planning beyond one year and periodic independent review of supervisory processes by FMA and OeNB. *Source: IMF country report content unit _cr13283.* ### 10. Supervisory reporting Implement the current draft Article 4 No.53 of the CRR as soon as possible, ### _cr13283 - 10. Supervisory reporting Implement the current draft Article 4 No.53 of the CRR as soon as possible, ### Supervisory reporting - Implement the current draft Article 4 No.53 of the CRR as soon as possible, concerning the changeover for prudential purpose of national GAAP to IFRS. ### Corrective and sanctioning powers of supervisors - Provide the supervisor with the powers to directly intervene at an early stage by issuing an order to remedy a deficiency in for instance the CI’s risk management systems. - Provide the supervisor with the power to issue an order that would prohibit, limit, or set conditions on the business activities or exposures of a CI, when risks are building up or are not properly captured by the CI. - Consider extending the FMA’s power in applying penalties to the CIs in addition to natural persons, which might also impact the maximum level of these penalties. - Provide the FMA with the power to directly take a measure against a person (more specifically the director or member or chairman of the supervisory board of the CI) which is not deemed fit and proper. ### Home-host relationships - Evaluate the measures that have been taken to effectively exercise supervision in the absence of such arrangements, amongst others in the context of the effective handling of a crisis situation. - Assess in the context of the supervisory college, the recovery and resolution plans that will be developed by the CI’s and assessed by the supervisory authority as a result of the changes to the law in Austria, in conjunction with the host authorities concerned. ### Corporate governance - Require the internal auditor to report to the supervisory board in the first instance. ### Risk management process - Introduce explicit requirements for all larger and complex banks to have a dedicated risk management unit overseen by a Chief Risk Officer or equivalent function. ### Credit risk - Introduce specific provisions requiring banks to make credit decisions free of conflicts of interest and on an arm’s length basis. ### Problem assets, provisions, and reserves - Ensure that the supervisor has appropriately trained staff who are familiar with local laws and regulations in the CESEE region, particularly in the area of collateral valuations (e.g., real estate). ### Transactions with related parties - Re-examine the whole area of related party regulations due to quite a number of deficiencies in the area of related party lending, although in certain areas there are indirect mitigants. - Consider introducing new, more restrictive, limits on such lending than that which exists currently. ### Internal control and audit - Introduce an explicit requirement for banks to have a total business wide compliance function (as opposed to the current restrictive securities-related one). - Consider lowering the threshold for the need for banks to establish an audit committee from €1 billion to, say, €500,000 in total assets. ### Financial reporting and external audit - Consider allowing banks to prepare their non-consolidated financial statements using IFRS. - It is recommended that the FMA be given the power to access external auditors’ working papers, where necessary. *Source: _cr13283 - 10. Supervisory reporting Implement the current draft Article 4 No.53 of the CRR as soon as possible,* ### 28. Disclosure and ### 28. Disclosure and transparency ### Authorities’ Response — overview - The Ministry of Finance (MoF), the Austrian Financial Market Authority (FMA) and the OeNB appreciated the discussions and analysis in the report and provided detailed comments on supervisory independence, governance, legal protection, and the compliance with Basel Core Principles (BCP) and EU requirements. ### CP 2: Independence, accountability, resourcing and legal protection for supervisors - On independence: - Legal supervision of the FMA is limited to whether the FMA carries out their business within the legal framework; it does not interfere with operational work except in cases of wrongful action or omission. - Section 16 FMABG must be read together with section 1 FMABG; the authorities do not agree to amending Article 16 FMABG as proposed. - The FMA has been commissioned only once with an on-site examination. - Consent of the MoF on FMA regulations is limited to a small number of cases. - Article 16 para. 1 allows requests for information only to ensure statutory tasks are fulfilled and laws/regulations are not violated or scope overstepped. - Industry representatives participate in supervisory board meetings only on specific, cost-related topics, do not receive the full set of documents and have no voting rights. - Appointment of supervisory board members follows general corporate practice; members are appointed for the same period of office. - Possible reasons for dismissals of Executive Board members are stipulated in Article 7 para. 3 FMABG; dismissal information is subject to the “Auskunftspflichtgesetz” and Parliament’s information right. - On governance: - Austria applies a two-tier governance system: supervisory board monitors/oversees the executive board; executive board manages day-to-day operations and issues binding instructions. - Internal Audit reporting line: audit function remains a tool of the executive board; Internal Audit must report quarterly on significant findings to the chair of the supervisory board. - Direct and constant access of Internal Audit to the supervisory board does not fit the Austrian two-tier governance system. - On legal protection: - FMA staff acting in good faith cannot be held directly (personally) liable by third parties; damages must be claimed against the Republic of Austria. - Under “Amtshaftungsgesetz—AHG,” no compensation can be claimed by the Republic for minor or ordinary negligence; in gross negligence the court may reduce damages. - Where AHG does not apply, employees are protected by “Organhaftpflichtgesetz—OrgHG” or “Dienstnehmerhaftpflichtgesetz—DNHG”; no compensation for minor negligence; courts can reduce or release employees from paying damages for ordinary negligence. - Any court ruling to pay damages must not threaten the livelihood of the employee. - For the unlikely case of a suit against an employee, Article 14 para. 3 FMABG requires the FMA to grant adequate legal protection. - The authorities agree that with the introduction of the SSM and forthcoming resolution powers, complementary arrangements in the public liability framework will need to be considered. ### CP 5: Licensing criteria - EBA Guidelines on the Assessment of the Suitability of the Members of the Management body and Key Function Holders (EBA/GL/2012/06, “F&P-GL”) enter into force on May 22, 2013; according to Article 69 para. 5 Banking Act these Guidelines are directly applicable by the FMA. - Scope and application: - F&P-GL apply to competent authorities and CIs; financial and mixed financial holding companies are included. - FMA published a Circular (Fit & Proper—Rundschreiben) as of May 2013 setting out criteria and minimum requirements. - “Key function holders” include staff with significant influence over the direction of the CI, equivalent to “senior employees.” - Internal auditor suitability: - FMA monitors suitability under Article 42 paras. 1 and 2 Banking Act; duties must not be entrusted to persons lacking required expertise and experience. - Internal auditor must be notified to the FMA and supporting documents presented; FMA can require exclusion by administrative ruling (Article 70 para. 4 Banking Act). - Implementation and enforcement: - FMA is incorporating F&P-GL into supervisory practices and expanding fit and proper assessments to all supervisory board members in a risk-based manner. - If a supervisory board member is not suitable, FMA will order the CI to reestablish lawful conditions per Article 70 para. 4 Banking Act. - Upon amendment of the Banking Act as of January 1, 2014, FMA will have direct power in the Banking Act to require changes in supervisory board composition following a breach. - New entrants: - No specific supervisory regime applies to new entrants beyond existing licensing requirements. - During license application (Articles 4–6 Banking Act), new entrants must present business plan, budget calculation and processes/systems/models; license granted only if these are plausible and effective (in accordance with the OeNB). - Post-licensing monitoring: monthly/quarterly and annual reports to the OeNB detect differences; routine management discussions and on-site inspection planning (with OeNB) include new entrants. - FMA considers current procedure for new entrants a hands-on regime. ### CP 7: Major acquisitions - Planned amendment: obligation for prior approval for setting up a CI in a third country by greenfield operation via amendment to Article 21 Banking Act. - FMA powers: - FMA can prohibit investments if deemed necessary (see CP 11). - Risk mitigation and limits on acquisitions: - OeNB and FMA have regular meetings with CI executive boards covering cross-border participations; additional info may come from state commissioner. - Individual acquisition of a non-bank non-financial institution is permitted up to 15 percent of own funds. - Total share of non-bank non-financial activities must not exceed 60 percent of own funds. - Any exceeding amount must be fully covered by own funds due to Article 29 Banking Act; internal auditor and bank auditor audit this regularly. - An individual acquisition of non-bank non-financial institution must not exceed 25 percent of own funds in any case. - Risks of participations in non-bank financial institutions are monitored on a consolidated group level (Article 30 Banking Act). - Assessment: - Of CP 7’s essential criteria only the aspect of prior permission of certain types of investments is not fully covered by legislation. ### CP 8: Supervisory approach with respect to recovery and resolution - The Bank Reorganisation Act entered into force (Federal Law Gazette I Nr. 160/2013). - All institutions are obliged to draw up recovery and resolution plans that will be assessed by the FMA; obligation subject to proportionality. - FMA has a set of early intervention tools at its disposal. ### CP 11: Corrective and sanctioning powers of supervisors - FMA’s role: ensure arrangements/processes/mechanisms of CIs are comprehensive and proportionate to nature, scale and complexity of risks. - Existing powers: - Article 70 Banking Act provides a broad range of corrective and sanctioning powers if CI obligations to creditors are jeopardized. - In case of quick deterioration, FMA may issue administrative rulings under threat of penalty (Article 70 para. 2 Banking Act) as remedial action. - Administrative ruling may (fully or partly) prohibit withdrawal/distribution of capital and earnings, appoint an expert supervisor (government commissioner), prohibit transactions that exacerbate jeopardy, allow individual non-exacerbating transactions, (partly) prohibit directors from managing the CI, or (partly) prohibit continuation of business operations. - Early warning and reporting: - FMA will be informed of a “problem situation” immediately by the bank auditor (Article 63 para. 3 Banking Act), the state commissioner (Article 76 para. 8 Banking Act), the CI on circumstances indicating endangered ability to fulfill obligations, insolvency/over-indebtedness, or non-compliance in excess of one month with Banking Act standards (Article 73 Banking Act). - Planned clarifications: - It is planned to further clarify the range of supervisory tools in law to explicitly enable FMA to restrict/limit business, operations or network of CIs, request divestment of activities posing excessive risk, or require reduction of risk in activities/products/systems. - Conclusion: - Under present rules the supervisor can intervene directly via administrative ruling; some early intervention measures are provided in the Bank Reorganisation Act. ### CP 13: Home-host relationships - FMA is fully committed to information exchange and cross-border cooperation. - Austria aligns with EBA and European framework for supervisory colleges; equivalence of third countries must be assessed on a European level and align with confidentiality regimes. - Article 131a Directive (EC) 2006/48 (=CRD): confidential exchange with third-country authorities requires equivalent confidentiality requirements to Articles 44 to 52 CRD. - No European framework exists yet for resolution plans; ahead of regulation, Austrian supervisor received resolution plans from the three largest CIs accounting for almost half of total bank assets of the Austrian market. - Recovery and resolution plans will be discussed within supervisory colleges. ### CP 14: Corporate Governance - Legal obligation: Internal audit must report quarterly to the chair of the supervisory board and the audit committee. - Audit committee requirement: obligatory for all banks with a balance sheet exceeding €1 billion. - Audit committee guarantees frequent and direct reporting to the relevant committee of the supervisory board. - See CP 2 comments on internal audit reporting lines. ### CP 15: Risk management process - No explicit legal requirement currently for appointment of a dedicated risk officer. - FMA Minimum Standards for the Credit Business and other Transactions entailing Credit Risks (FMA-MS-K) stipulate clear functional separation between front office and risk management / back office functions. - Supervisory expectations for segregation of duties across lines of business follow the standards set for credit risk. - In practice, a dedicated CRO is in place in all larger banks and strict separation of market/control-functions exists. - Planned introduction in 2013: - Explicit requirement for CIs to have a dedicated risk management function independent from operational functions. - Obligation for CIs to establish a “risk committee” as a subcommittee of the supervisory board; Banking Act amended accordingly. - Risk committee shall advise the executive board on overall risk strategy and assist supervisory board in overseeing implementation. ### CP 17: Credit Risk - Austrian supervisor has comprehensive rules on credit risk. - On credit decisions free of conflict of interest (EC 5): - No specific provision requiring banks to make credit decisions free of conflict, but FMA relies on Minimum Standards for the Credit Business and other requirements. - Minimum Standards state “prudent lending practices imply a segregation of duties and the involvement of more than one person when granting a loan. Depending on the amount of the loan, different hierarchies are involved. This system of involvement of different groups in the lending process (loan officer, risk manager, credit committee, supervisory board, etc.) provides a high level of safety against a possible conflict of interests or pressure from outside parties.” - Authorities state this aspect is not adequately reflected in the assessment. ### CP 18: Problem assets, provisions and reserves - Supervisory colleges guarantee mutual exchange with host country supervisors knowledgeable about home jurisdiction laws, procedures and risks. - Supervisory actions in CESEE host countries may take forms of inspections of host subsidiaries in coordination with respective supervisors. - On-site actions have taken place in several CESEE countries; OeNB supervisory staff includes personnel from CESEE-countries. ### CP 20: Transactions with related parties - Provisions relating to related party transactions aim primarily at protecting shareholders (as reflected by IFRS transparency requirements), not solely at reducing supervisory risks. - Liability and criminal law provisions also apply; in practice, transactions with related parties are not a major concern. - Current legal regime: - Any transaction requires unanimous consent of the Board and approval of the Supervisory Board. - Annual reporting about these transactions to the Supervisory Board. - Supervisory Board has access to individual cases. - The framework is described as comprehensive and based on experience and external recommendations. ### CP 26: Internal Control and Audit - Assessment did not fully consider explicit legal requirement in Art. 15 and 18 Securities Supervision Act for all CIs carrying out investment services to have a compliance function with duties as enshrined in Directive 2004/39/EC (MiFID). - Footnotes: - Article 18 para. 3 Securities Supervision Act, Article 18 para. 4 no. 2 Securities Supervision Act, Article 15 para. 1 Securities Supervision Act. - Investment services defined in Article 1 Securities Supervision Act (reception/transmission of orders, execution, dealing on own account, portfolio management, investment advice, underwriting, placing, operation of Multilateral Trading Facilities). ### CP 27: Financial Reporting and external audit - Accounting rules and principles of the Company Code (Austrian GAAP) comply with EC harmonized accounting standards: - Fourth Council Directive 78/660/EEC on annual accounts of certain types of companies. - Seventh Council Directive 83/349/EEC on consolidated accounts of certain types of companies. - EC Regulation 1606/2002 on application of international accounting standards. - Article 5 of EC Regulation 1606/2002 cited: Member States may permit or require preparation of annual or consolidated accounts in conformity with international accounting standards. - Austrian GAAP are widely accepted in the EC and internationally due to European regulation. - Preparation of (un-)consolidated financial statements: - Austrian banks prepare unconsolidated financial statements in accordance with Austrian GAAP; consolidated financial statements are usually prepared in accordance with IFRS, binding or optional. - Consolidated accounts have to be prepared according to Article 59a Banking Act by using IFRS. - According to FINREP consolidated financial statements have to be prepared by using IFRS, beginning in 2014. - Within COREP context, IFRS will be used if it enhances data quality of institutions. *Source: _cr13283 - 28. Disclosure and transparency — Authorities’ Response (Austria).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13283.pdf_