## _cr1415

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### Executive summary and context
- The global crisis revealed weaknesses in Austria’s financial stability policy framework; recent European changes provide an opportunity to address them.
- Priority areas: (i) set up a macroprudential policy framework with a clear mandate and a range of instruments to address system risks; (ii) establish a full-fledged bank resolution framework to deal efficiently with failing banks while reducing the risk of future bank bailouts.
- Legislative action: Federal Law Gazette I Nr 184/2013 (macroprudential policy framework) and Federal Law Gazette I Nr 160/2013 (early intervention framework for banks) adopted; both laws to come into force on January 1, 2014.
- Institutional roles:
  - Financial stability is shared across FMA, OeNB, and MOF.
  - FMA: integrated supervisory agency for credit institutions, insurance and pension companies, investment funds, financial conglomerates and the stock exchange.
  - OeNB: collaborates in bank supervision (off-site analysis and on-site examinations based on FMA inspection orders) and oversees payment systems.
  - MOF (Federation): exclusive legislative and executive powers for monetary, credit, stock exchange and banking system issues.
- Existing supportive element: Financial Market Committee (FMK) provides an inter-institutional platform; past macroprudential measures have been supervisory guidance or “comply or explain” instructions without specific legal macroprudential authority.

### Macroprudential policy — findings and recommendations
- Institutional design and mandate:
  - OeNB should play a leading role in close coordination with MOF and FMA nationally, and ESRB and ECB at the European level.
  - Establish an authority with a clear macroprudential mandate; elements for legal design to include:
    - (i) objective of macroprudential authorities;
    - (ii) functions: identifying systemic risks, formulating policy responses, mitigating systemic risk through rule-making, supervision, and enforcement;
    - (iii) powers: rule-making, information collection, supervision, and enforcement.
  - Support macroprudential policy with a strong institutional framework for accountability, communication, and willingness to act.
- New law (Federal Law Gazette I Nr 184/2013) to rename FMK as Financial Market Stability Committee (FMSG) and redesign it into a macroprudential committee:
  - FMSG authorized to issue recommendations to the FMA under the ‘comply or explain’ principle when systemic risk assessments call for macroprudential measures.
  - FMSG composition: chaired by its two MOF members; includes one OeNB member, one FMA member, and two members from the Fiscal Council (one of which is the chair of the Fiscal Council).
  - FMA mandate to include macroprudential supervision with tools laid down in the CRD IV package; FMA rule-making continues to require ex ante MOF consent and consultation with OeNB.
  - OeNB mandate to explicitly include: (i) assess systemic risks and advise the FMSG; (ii) propose FMSG recommendations for submission to the FMA; (iii) assess FMA implementation and advise the FMSG; (iv) prepare an annual financial stability report (New Article 44c of the OeNB Act).
- Toolkit recommendations:
  - Consider tools beyond CRD IV, including structural measures and LTV and DTI ratios, in line with ESRB Recommendation.
  - Adopt principles to ensure activation and use of instruments: clear criteria for activation, recognition of multi-dimensional systemic risk, acceptance of a role for discretion, and rules to reduce uncertainty.
- Early-warning indicators and trigger design:
  - Candidate indicators: (i) credit to GDP ratio or deviation from trend (Gap measures) at aggregated or sectoral level; (ii) market volatility measures (CDS spread) or price-based measures of default/distress; (iii) bank vulnerability/funding stress indicators such as non-core bank liabilities.
  - Sectoral measures (household or corporate indebtedness) recommended to detect sectoral vulnerabilities.
  - Rule-based triggers should be transparent; market-price based triggers must be designed to minimize risk of downward spirals.

### Supervisory guidance example (March 14, 2012) for three large Austrian banks
- Three-pillar guidance aimed to improve sustainability of foreign operations and secure financial stability:
  - Higher capital buffers:
    - Basel III CET1 capital rules fully implemented by January 1, 2013 without transitional provisions (private and government participation capital under the Austrian bank support act initially included in Core Tier I and phased out according to CRR/CRD IV).
    - A CET1 capital surcharge of up to 3 percentage points from January 1st, 2016; exact amount to be determined.
  - Promotion of stable local funding of subsidiaries:
    - Use of Loan-to-Local-Stable-Funding-Ratios (LLSFR): loans to non-banks divided by local stable funding (deposits from non-banks; supranational funding; capital from third parties; and total outstanding debt securities with original maturities of one year or more issued to investors outside consolidated group).
    - “LLSFR flow ratio” uses year-on-year changes; subsidiaries with stock-LLSFR above 110 percent shall achieve a sustainable flow-LLSFR to reduce LLSFR to below 110 percent unless (i) no impediments to liquidity transfers between parent and subsidiary (including in stress) and (ii) burden sharing agreement exists between supervisors and fiscal authorities.
    - Parent banks expected to price intragroup liquidity transfers in line with EBA guidelines.
  - Recovery and resolution plans: parent banks submitted plans by end-2012.

### Early intervention and bank resolution — assessment and recommendations
- Need: a special bank resolution regime to resolve problem banks without endangering financial stability or fiscal sustainability.
- Authorities prefer to await EU Directive adoption (RRD) but should prepare swiftly to introduce a full-fledged bank resolution framework aligned with international best practices and the proposed EU directive; strengthen resolution arrangements with non-EU countries.
- FMA recommended as Austria’s bank resolution authority.
- Early intervention (current FMA powers):
  - Government Commissioner: appoint when risk a credit institution may not fulfill obligations; can prohibit capital withdrawals, restrict distributions, or discontinue operations.
  - Compliance Measures: impose penalties, remove Directors for repeated violations, revoke licenses.
  - Financial Measures: require additional capital, restrict interest/dividend payments, order conversion of hybrid capital if solvency at risk.
  - Private DGSs may also intervene within each association, often involving supervisory discretion and regulatory forbearance.
- Legal change effective January 1, 2014 (New Articles 71a and 71b of the Banking Act):
  - Triggers: (i) non-compliance with capital and liquidity requirements, or risk those requirements may not be met; (ii) failure to take recovery measures when a recovery indicator met, or failure to perform a measure requested by FMA to correct recovery/resolution plan obstacles.
  - Early intervention measures: implement recovery measures from plan; require improvements to risk management; convene General Meeting (e.g., for capital increases); prepare negotiation plan for voluntary restructuring with creditors.
- Current resolution gaps:
  - No special bank resolution framework; available alternatives are receivership and bankruptcy, both lacking adequate tools to ensure orderly resolution and limit risks to financial stability.
- Receivership (going concern):
  - Available only for banks; ordered in case of over-indebtedness or inability to pay where insolvency likely remedyable; receivership cannot exceed twelve months.
  - FMA and the problem bank—but not creditors—can request receivership; FMA is party to proceedings and must be heard before receiver appointment.
  - Receiver supervises management, may prohibit execution of bank body resolutions, consent required for non-core activities.
- Bankruptcy (going concern):
  - Results in winding down (no reorganization plan available); can be ordered for over-indebtedness or inability to pay.
  - FMA and Receiver—but not the bank and its creditors—can request bankruptcy; FMA must revoke the bank’s license when proceedings initiated.
  - Trustee sells assets (public auction or private sale); insolvency claims have equal rank.
- Lessons from recent experience:
  - Losses at troubled banks often exceed supervisors’ estimates; absence of adequate resolution framework increases pressure for open-ended public support.
  - Restructuring of three nationalized banks remains uncertain; recommended early intervention and special resolution frameworks would reduce fiscal and systemic risk.
- Recommendations (early intervention and resolution):
  - Early Triggers: broaden and better link possible measures to specific triggers ranging from early to late stages.
  - Loss Absorbance: FMA should have power to require increased loss absorbency (capital increases, surcharges, convertible bonds, unsecured long-term debt that could be bailed-in) and restrict dividends.
  - Special Administrator: FMA should be able to appoint special administrators and replace management.
  - Banking Groups: law should provide measures for banking groups (ring-fencing from parent actions, subsidiaries, related entities).
  - Within current framework: pursue full due diligence, collect loans and sell assets aggressively, and wind down non-viable institutions in an orderly fashion.

### Bank resolution regime design and cross-border arrangements
- Introduce resolution regime as soon as RRD adopted; ensure out-of-court resolution possible and provide full range of resolution tools used in leading jurisdictions.
- Resolution authority mandate: promote financial stability through depositor protection and continuation of systemic financial functions; include powers to deal efficiently with distressed assets to maintain business value.
- Role of DGS in resolution:
  - DGS staff should be involved early; DGS permitted to use funds to facilitate P&A up to amount that would have been expended to compensate insured depositors in straight liquidation.
  - Legal framework should include depositor preference; recommend two-tiered depositor preference: insured deposits higher priority than uninsured deposits, which have higher priority than general creditors.
  - Set trigger for insured deposit reimbursement as license revocation when bank enters special bank resolution process.
- Cross-border resolution:
  - Strengthen arrangements with non-EU/EEA countries; RRD will cover cross-border within EU/EEA but lacks burden-sharing.
  - Proposals: strengthen MoU-based cooperation, consider bilateral/multilateral agreements (e.g., CESEE cross-border stability group), and complementary national law changes for information sharing.
  - Put in place burden-sharing mechanisms; if non-binding, prepare contingency plans for non-compliance.
- Institutional governance for resolution:
  - FMA should become resolution authority; to address conflicts of interest establish governance measures and functional separation (different decision-making/reporting lines) within FMA.
- Legal protection and indemnification for FMA staff:
  - Strengthen legal protection: set monetary cap on liability of FMA bodies and staff vis–a–vis the Federation; align liability insurance; provide safeguards (immunity) against self-incrimination while assisting Bundes Finanzprokuratur.
  - Exclude Federation’s reimbursement claims against FMA bodies/staff where courts judged supervised institutions non-compliant with prudential rules.
  - Ensure protections persist after SSM introduction, particularly when acting on behalf of SSM.
- Existing insurance arrangements:
  - Liability insurance maximum: EUR 7.5 million yearly; no retained amount (Selbstbehalt).
  - Defense and recovery insurance maximum: EUR 225,000 yearly; no retained amount.
  - Insurance excludes claims from knowing violations of law ascertained by judgment/administrative ruling/acknowledgment/settlement.
  - Defense insurance covers costs for penal and disciplinary proceedings; cost coverage provisional for claims based on intentional crime, retroactively inapplicable upon final condemnation.

### Deposit Guarantee Scheme (DGS) — structure, shortcomings, and reform
- Current structure:
  - Five private guarantee schemes organized by sub-sectors, supplemented by a government guarantee introduced after 2008.
  - Private schemes cover deposits up to €50,000; government guarantee covers deposits exceeding €50,000 and up to €100,000 (both per depositor per bank).
  - Private schemes administered by respective bank association in sector; funded ex post; member banks contribute only when payout occurs.
  - Government guarantee is ex post funded.
- Private scheme payout mechanics (three-stage process for first tranche up to €50,000):
  1. Funding by contribution of banks in affected sector based on share of covered deposits in sector; contribution capped at 1.5 percent of their risk-weighted assets (adjusted upward for trading book size).
  2. If payout exceeds ceiling, individual banks’ contribution from other sectors calculated by same formula.
  3. If shortfall persists, originally affected DGS may take a loan or issue bonds to raise external funds, which may be guaranteed by government.
- Second tranche (€50,000 – €100,000) cost borne solely by government.
- Experience/features:
  - Payouts by private schemes are rare; none since 2001.
  - No payout in three cooperative sectors (IPS likely responsible).
  - Early warning and intervention systems exist; assistance accompanied by conditions including business policy intervention and management changes in some sectors.
- Shortcomings vs best practice:
  - Private, fragmented, ex post funded schemes fall short of best practice: lack explicit policy objectives/mandates, mostly powers granted by member institutions, and ex post funding limits ability to meet obligations during distress.
- Recommendations for transition to unified, pre-funded national DGS:
  - Use forthcoming EU DGS Directive opportunity to introduce a unified, prefunded national DGS.
  - Objectives: banks bear cost of bank failures; improve risk pooling, transparency, prompt payout, and simpler fund management.
  - Align with EU Directive on coverage quantities and prices; premiums adjusted for risk where practicable; shorten payout time.
  - Specific actions:
    - Form high-level working group (MOF, OeNB, FMA, various DGSs) to design transition to a simple public ex ante funded scheme using EU Directive and BCBS Core Principles (DICP) as minimum standards.
    - Create single DGS scheme to immediately start collecting premiums on a flat rate basis to build an ex ante fund and gain operational experience ahead of Risk Based Premiums (RBP).
    - Determine target DGS fund size; consider draft EU Directive target reserve level of 1.5 percent of eligible deposits as minimum.
    - Establish appropriate liquidity back-up arrangement with MOF.
    - Make single DGS integral to bank resolution: involve DGS personnel in advance preparation for resolution; permit DGS to facilitate P&A up to amount equal to insured depositor compensation in liquidation.
    - Set insured deposit reimbursement trigger as license revocation when bank enters special resolution process.
- Operational and governance recommendations for single public DGS:
  - Public-facing communications: comprehensive website, membership certificates at branch offices with periodic audits, public explanations during insured events.
  - Payout time objective: draft EU Directive reduces payout time to seven days; authorities noted objection but assessment finds seven days reasonable with Single Customer View (SCV) and advance preparation.
  - DGS role in P&A: prepare for P&A mechanics, legal/funding authority to use funds for P&A (capped), and ensure contract/operational details are specified in law.
- Principles from BCBS/IMF (selected):
  - Principle 1: public policy objectives should be explicit (protect small depositors; prompt reimbursement to promote financial stability).
  - Principle 11: funding should ensure prompt reimbursement; primary responsibility borne by banks.
  - Principle 12: public awareness obligations and disclosure.
  - Principle 16: effective resolution processes require a special bank resolution regime; courts should not be able to reverse FMA license revocation.
  - Principle 17: depositors should have legal right to reimbursement; current triggers include bankruptcy initiation, receivership, supervisory order to stop payments, or home authorities declaring deposit unavailability.
  - Principle 18: recoveries—DGS should share in proceeds and have higher priority via depositor preference.

### Risk-based premiums and transitional implementation (Box 8)
- Options regarding cooperative sectors:
  - Option 1: provide discount on DGS premiums for cooperative banks (questions on discount level and intra-sector governance).
  - Option 2: no cooperative discount; use supervisory risk scoring to determine premiums allowing case-by-case discounts.
  - Ancillary benefit: stronger consolidated supervision could reduce the number of small units under supervision (currently 700+).
- Implementation recommendations:
  - Start collecting flat-rate premiums immediately to build ex ante fund and gain operational experience; transition later to risk-based premiums.
  - Operational preparedness: develop SCV, contingency plans, publish reimbursement process in press, and frequently test insured deposit computations.
- Prohibitions and permitted uses:
  - Ex ante funds should be permitted to facilitate P&A (not exceed payout amount) and prohibited from Open Bank Assistance (OBA).
- OBA concerns:
  - OBA generally discouraged; fails "least cost" test, increases moral hazard and political pressure, and is open-ended.
  - OBA only acceptable in systemic crises under strict conditions (private capital injection, burden sharing, management changes, strict oversight, limits on compensation/dividends, clear exit strategy).

### Emergency Liquidity Assistance (ELA) and systemic crisis management
- OeNB ELA framework and status:
  - OeNB Act lacks explicit ELA legal basis; OeNB relies on provision authorizing “to effect transactions” other than ESCB tasks; national transactions executed on OeNB responsibility and liability.
  - OeNB policy (2006): ELA should be provided (i) in exceptional cases when Eurosystem operations impossible due to lack of eligible collateral; (ii) to solvent banks; (iii) against adequate collateral with appropriate haircuts; (iv) short term (renewable).
  - OeNB awaits Eurosystem-wide rule-based ELA arrangement and does not intend to update policy before it is concluded.
  - Losses from ELA fully carried by NCBs; OeNB must inform ECB if ELA above certain thresholds.
  - OeNB’s unconditional preferential right does not apply to minimum reserves held with OeNB (per Article 77(4) of OeNB Act).
- Key ELA principles (Box 5):
  - ELA only to temporarily illiquid but solvent institutions, with adequate collateral and haircuts, coordinated with supervisor and MOF.
  - Solvency requirement: ELA excludes capital support.
  - Collateral policies: broad range of eligible assets, published schedule, haircuts to account for risks.
  - Limits: eligible collateral adjusted for haircuts imposes natural upper limit; central bank may set caps in consultation with MOF.
  - Interest rates: normally no less than standing credit facility rate; could be lower in system-wide emergencies.
  - Loss coverage: government should promptly indemnify central bank for ELA losses contractually or by law.
  - Maturity: short-term but renewable with supervisory conditions.
  - Supervisory follow up: intensified monitoring and plans to reduce future ELA use.
  - Disclosure: report, at least ex post, actions and timing sensitive to market conditions.
- Recommendations to strengthen OeNB ELA framework:
  - Formalize ELA policies while maintaining OeNB discretion and autonomy; consider cap on total outstanding ELA.
  - Ensure unconditional preferential right applies to minimum reserves by deleting paragraph 4 of Article 77 of the OeNB Act.
  - Prescribe in OeNB Act that capital shortfalls be promptly covered by the Federation via cash or marketable government securities; alternatively ensure future profits not transferred to State until OeNB statutory capital and reserves replenished.
  - Conclude agreement between Federation and OeNB to promptly indemnify OeNB for ELA losses; alternatively provide ongoing statutory government guarantee.
- Systemic crisis management recommendations:
  - Parliament should adopt pre-crisis legislation authorizing government to act promptly (in cooperation with FMA and OeNB) under strict conditions with ex post parliamentary accountability.
  - Recent measures:
    - Crisis Team under FMK acts as Austrian standing group per 2008 MoU.
    - Cross-Border Stability Group (CBSG) established in 2011 with Bulgaria, Czech Republic, Hungary, Slovakia, Slovenia; conducted crisis simulation in 2012.
    - FinStaG framework and FIMBAG established in November 2008 for government financial support and holding recapitalization interests.
  - Further steps:
    - Increase FinStaG financial envelope; introduce escape clause in Federal Organic Budget Act for financial crises.
    - Give Federal Government standing statutory authorization to take actions for financial crises (solvency/liquidity support, nationalization powers) with prompt ex post accountability to parliament.
    - Clarify FMK responsibilities regarding Federal Government actions; increase CBSG meeting frequency and mandate multilateral binding frameworks.
    - Create cooperation mechanism with non-EU/EEA countries similar to CBSG.
- FIMBAG recommendations:
  - Short-term: make FIMBAG responsible for overseeing restructuring plan implementation and negotiating changes; grant power to replace management.
  - Strengthen FinStaG Ordinance with good-practice principles for “open bank assistance.”
  - For future recapitalizations, give FIMBAG a more prominent negotiation role and consider making FIMBAG accountable to ÖIAG and thereby to Federal Government.

### Appendix I — EU developments on macroprudential policies
- ESRB established January 2011 following 2009 De Larosiere Report; ESRB responsible for macroprudential oversight to prevent/mitigate systemic risks, avoid widespread distress, contribute to internal market functioning, and ensure sustainable contribution of financial sector to growth.
- ESRB submits warnings and policy recommendations to national authorities and relies on ECB for analytical/support functions.
- Consideration of a macroprudential mandate for ECB:
  - ESCB/ECB Statute primary objective: price stability (Article 2).
  - ECB has supporting/advisory tasks on financial policies/stability but no macroprudential mandate under existing statutes (Articles 3.3, 4, 25.1).
  - Draft Single Supervisory Mechanism framework (Article 4a of draft Regulation) would give ECB supervisory responsibilities and macroprudential powers over banks (national authorities retain responsibility for measures not provided by EU law; ECB authorized to impose or apply more stringent capital buffers/measures).
- CRD IV package:
  - Regulation (EU) No 575/2013 of 26 June 2013;
  - Directive 2013/36/EU of 26 June 2013.
- ESRB recommendations:
  - ESRB/2011/3: designate national authority for macroprudential policy with clear objectives, tasks, powers; recommend leading role to central banks and operational independence; measures recommended in force no later than July 1, 2013.
  - ESRB/2013/1: indicative list of instruments and recommendation for macroprudential authorities to develop strategy; instruments and objectives in place by end-2014; strategy by end-2015.
- Indicative ESRB instruments by objective include counter-cyclical capital buffer, sectoral capital requirements, macro-prudential leverage ratio, LTV, LTI, liquidity adjustments, NSFR, limits on less stable funding, margin/haircut requirements, large exposure restrictions, SIFI capital surcharges, and structural systemic risk buffer.

*Source: Excerpt from IMF staff report _cr1415 — selected chapters on macroprudential policy, bank resolution, deposit insurance, ELA, systemic crisis management, and EU developments.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Key findings and context
- The global crisis revealed weaknesses in Austria’s financial stability policy framework, and recent changes at the European levels provide an opportunity to address them.
- Priority areas identified: (i) setting up a macroprudential policy framework with a clear mandate and a range of instruments that effectively address system risks; (ii) establishing a full-fledged framework for bank resolution to deal efficiently with failing banks while reducing the risk of future bank bailouts.
- Three months after the FSAP mission, the authorities adopted legislations covering the macroprudential policy framework (Federal Law Gazette I Nr 184/2013) and early intervention framework for banks (Federal Law Gazette I Nr 160/2013). Both laws will come into force on January 1, 2014.

### Recommendations — Macroprudential policy
- Establish an authority with a clear policy mandate:
  - The OeNB should play a leading role in close coordination with the Ministry of Finance (MOF) and the FMA at the national level, and the ESRB and ECB at the European level.
- Consider macroprudential policy instruments that go beyond those included in forthcoming EU Directives.
- Elements for legal framework design should include provisions on:
  - (i) the objective of macroprudential authorities;
  - (ii) the functions: identifying systemic risks, formulating policy responses, and mitigating systemic risk through rule-making, supervision, and enforcement;
  - (iii) powers: rule-making, information collection, supervision, and enforcement.
- Support macroprudential policy with a strong institutional framework to foster the ability and willingness to act, provide accountability to the public and political principals, and enable effective communication.

### Austria’s existing framework — findings
- Financial stability is a shared responsibility of the FMA, OeNB, and Ministry of Finance:
  - The FMA is the integrated supervisory agency responsible for supervising credit institutions, insurance and pension companies, investment funds, financial conglomerates and the stock exchange.
  - The OeNB collaborates with the FMA in implementing bank supervision (off-site analysis and on-site examinations based on inspection orders issued by the FMA) and is responsible for oversight of payment systems.
  - The Federation (MOF) has exclusive legislative and executive powers for monetary, credit, stock exchange and banking system issues.
- Certain elements supportive of macroprudential policy are already in place:
  - The Financial Market Committee (FMK) at the MOF provides a platform to discuss financial stability-related issues; it comprises one representative each from MOF, FMA, and OeNB; the MOF appoints the FMK chair for a three-year, renewable term; FMK is mandated to “promote inter-institutional cooperation and exchange of experiences” and to “adopt recommendations on financial market issues with a majority of votes.”
  - Macroprudential measures have been taken, such as supervisory guidance for the three large Austrian banks issued in March 2012; however, without specific legal authority for macroprudential supervision, measures to date are non-binding supervisory guidance or “comply or explain” instructions.

### Legal and institutional changes enacted or proposed
- A recently adopted law (Federal Law Gazette I Nr 184/2013) to enter into force on January 1, 2014 provides a framework for macroprudential policies in Austria:
  - The FMK will be renamed Financial Market Stability Committee (FMSG) and redesigned into a macroprudential committee authorized to issue recommendations to the FMA under the ‘comply or explain’ principle when systemic risk assessments show macroprudential measures are called for.
  - The FMSG will be chaired by its two MOF members; it will include one OeNB member, one FMA member, and two members from the Fiscal Council—one of which the chair of the Fiscal Council.
  - The FMA’s mandate will include macroprudential supervision with tools laid down in the so-called CRD IV package. The FMA’s existing rule-making power will include macroprudential measures; FMA regulations will continue to require ex ante consent from the MOF and the FMA is required to act after consultation with the OeNB.
  - The OeNB’s financial stability mandate will explicitly specify that it is responsible to: (i) assess systemic risks and advise the FMSG; (ii) propose FMSG recommendations for submission to the FMA; (iii) assess the FMA’s implementation of these recommendations and advise the FMSG; and (iv) prepare an annual financial stability report. (New Article 44c of the OeNB Act.)

### Boxed example — Supervisory guidance for large internationally active Austrian banks (March 14, 2012)
- Supervisory guidance for the largest three Austria-based banks aims to improve sustainability of foreign operations and secure financial stability both in Austria and host countries. The guidance consists of three pillars:
  - Higher capital buffers:
    - Basel III capital rules regarding CET1 capital were fully implemented by January 1, 2013 without transitional provisions (though private and government participation capital issued under the Austrian bank support act will initially be included in the Core Tier I capital base, and phased out according to CRR/CRD IV).
    - A CET1 capital surcharge of up to 3 percentage points from January 1st, 2016. The rules governing the exact amount of this surcharge remain to be determined.
  - Promotion of stable local funding of subsidiaries:
    - Supervisors will monitor the funding of subsidiaries to encourage more reliance on local funding.
    - Monitoring will use Loan-to-Local-Stable-Funding-Ratios (LLSFR), defined as loans to non-banks divided by local stable funding (sum of deposits from non-banks; supranational funding; capital from third parties; and total outstanding debt securities with original maturities of one year or more issued by the subsidiary to investors outside their consolidated group).
    - The “LLSFR flow ratio” uses year-on-year changes in the numerator and denominator of the LLSFR. Subsidiaries with a stock-LLSFR above 110 percent shall achieve a sustainable flow-LLSFR so as to reduce their LLSFR over time to below 110 percent, unless home and host supervisors agree that (i) there are no impediments to liquidity transfers between parent and subsidiary and there would not be any in a stress situation either; and (ii) a burden sharing agreement is in place between the supervisory and fiscal authorities of the countries concerned.
    - Parent banks are expected to price intragroup liquidity transfers taking into account adequate risk, in line with relevant EBA guidelines.
  - Recovery and resolution plans:
    - Parent banks submitted recovery and resolution plans by end-2012.

### Early intervention and bank resolution — summary recommendation
- Austria needs to put in place a special bank resolution regime to resolve problem banks in a manner that does not endanger financial stability or fiscal sustainability.
- Authorities prefer to await the formal adoption of the EU Directive on bank recovery and resolution, but it would be in Austria’s interest to swiftly introduce a full-fledged bank resolution framework with a wide range of tools and powers—based on international best practices and consistent with the proposed EU directive—and strengthened resolution arrangements with non-EU countries.
- The FMA should become Austria’s bank resolution authority.

### Deposit Guarantee Scheme (DGS) — summary recommendation
- While the current DGS has certain benefits, the authorities should use the opportunity of the forthcoming EU DGS Directive to introduce a unified DGS.
- Specifically, an ex ante-funded and publicly-administered national DGS would improve risk pooling, transparency and DGS fund management, and prompt payout.
- A high-level working group should be tasked with designing the new DGS, taking the EU Directive as well as the Basel Committee on Banking Supervision (BCBS) Core Principles for Effective Deposit Insurance Schemes as minimum standards.

### Systemic crisis management, ELA, and fiscal considerations
- The existing systemic crisis management framework could be further strengthened.
- Recommendations include strengthening early intervention powers, improving the framework governing the OeNB’s finances in general and Emergency Liquidity Assistance (ELA) operations in particular in line with recent EU developments, and taking complementary measures to decrease possible adverse effects on OeNB’s balance sheet and the country’s fiscal position.
- The mandate of the Federal Corporation of Financial Market Participation (FIMBAG) and the conditions under which capital support is provided to distressed banks should be strengthened.

*Prepared by Atilla Arda (LEG), Paul Mathieu, David Parker, and Jianping Zhou (all MCM).*

### 11.      The new framework as described above could be further improved in several respects.

### 11.      The new framework as described above could be further improved in several respects.

### Macroprudential governance and toolkit
- Building on the comparative advantages of the FMA (‘prudential supervision’) and the OeNB (‘systemic risk monitoring’), the following measures are recommended:
  - The FMSG should be designated as the macroprudential regulator. This would ensure that macroprudential measures are implemented, while respecting the constitutionally protected autonomy of the FMA. The FMSG would formulate macroprudential policies and set related rules, either on its own initiative, or to implement ESRB or ECB decisions; the FMA would continue to be the sole supervisor enforcing both microprudential and macroprudential rules.
  - The OeNB should chair the FMSG. OeNB chairmanship of the FMSG would be in line with the ESRB Recommendation to give a leading role to central banks.
  - A broader macroprudential toolkit should be considered. While the macroprudential tools enshrined in the CRDIV package are a welcome expansion of existing prudential measures, more tools could usefully be considered, such as structural measures, and LTV and DTI ratios; this would be in line with the ESRB Recommendation on macroprudential tools.

### Principles to ensure activation and use of instruments
- A set of principles should be adopted to ensure the ‘will-to-act’ and trigger the use of macroprudential instruments during upswings:
  - The ability to identify and measure systemic risks and vulnerabilities is a key factor for successful implementation of macroprudential tools, and there must be clear criteria for activation.
  - Decision to trigger activation is likely to be complex as there is no easy measurement of systemic risk being by nature multi-dimensional.
  - Assessing success is difficult, as the counterfactual may not be known.
  - Costs of a mistimed activation could be asymmetric as delayed action may be more costly than intervention taking place too early.
  - Having rules in place would be important to reduce uncertainty and anchor expectations, but given the limited experience with macroprudential policies, a large element of discretion and judgment is likely to be necessary to decide the timing and extent of tightening.

### Early warning indicators and trigger design
- Finding a set of early warning indicators to trigger the use and release of instruments is key:
  - Candidate indicators include:
    - (i) the credit to GDP ratio or its deviation from a trend level (the Gap measures), at aggregated or sectoral level;
    - (ii) indicators for market volatility (CDS spread) or other price-based measures of default or distress;
    - (iii) indicators measuring bank vulnerability and potential funding stress, such as non-core bank liabilities.
  - Sectoral measures (such as measures of household or corporate indebtedness) would more easily identify the build-up of sectoral vulnerabilities that may not be well captured by the private credit to GDP ratio.
  - Rule-based triggers should be transparent, thus avoid surprises to markets, help constrain incentives for risk taking, and prevent forbearance.
  - Triggers based on market prices need to be carefully designed to minimize the risk of triggering a downward spiral, which could undermine financial stability.

### Early intervention and orderly bank resolution — Introduction
- Early identification of problem institutions and prompt remedial action is essential to reduce moral hazard and to prevent more intrusive resolution measures.
- Early intervention is the supervisory authority’s general enforcement power authorizing it to require supervised financial institutions to address any violation of law or regulation or unsafe and unsound practices. Typically, use of this power does not require a finding that the financial institution is in danger of failure and the institution remains under the control of its shareholders and management.
- Where early intervention fails or time-constraints do not allow for early intervention, it may be necessary to resolve a problem bank. Special bank resolution regimes allow resolution authorities to quickly intervene through private sector solution and to resolve a bank against minimum costs for the taxpayer.

### Framework in Austria — Early intervention (FMA powers)
- The FMA has several corrective and remedial measures at its disposal under its supervisory enforcement framework:
  - Government Commissioner—When there is a risk that a credit institution may not be able to fulfill its obligations, the FMA can appoint a government commissioner, prohibit capital withdrawals, restrict distribution of capital and earnings, or discontinue the institution’s operations.
  - Compliance Measures—For breach of licensing or other legal requirements, the FMA can impose penalties and compliance, remove Directors in cases of repeated or continuous violation, and/or revoke a license.
  - Financial Measures—In specified circumstances, the FMA can require additional capital, restrict the payment of interest and dividends, and order the conversion of hybrid capital if the solvency of a credit institution is at risk.
- Complementing these functions, the private DGS of the bank associations may also intervene banks within each association—although this has often involved large supervisory discretion and regulatory forbearance.

### Framework in Austria — Legal change effective January 1, 2014
- A recently adopted law is going to introduce a more comprehensive early intervention framework starting on January 1, 2014.
- New Articles 71a and 71b of the Banking Act will include more specific intervention triggers and tools:
  - Triggers will include (i) non-compliance with capital and liquidity requirements, or a risk that these requirements may not be met; or (ii) failure to take recovery measures when a recovery indicator has been met, or failure to perform a measure requested by the FMA to make corrections in a recovery or resolution plan or to remove obstacles to recovery or resolution.
  - Early intervention measures will include (i) the implementation of one or more recovery measures from the recovery plan; (ii) carrying out specific improvements to risk management practices; (iii) convening a General Meeting, for instance to decide about capital increases; and (iv) preparing a negotiation plan for a voluntary restructuring of liabilities with creditors.

### Bank resolution in Austria — current gaps
- Austria does not have a special bank resolution framework in place. In the absence of such a framework, two main alternative options are currently available to deal with problem banks: an Austrian-specific receivership regime, and bankruptcy. Both options lack adequate tools to ensure orderly resolution and to limit potential risks to financial stability.
- Authorities do not intend to introduce a national bank resolution framework before the adoption of the RRD.

### Austrian-specific receivership (going concern)
- Receivership is available for banks only and is aimed at reorganizing the problem bank while satisfying existing claims.
- Receivership can be ordered in case of over-indebtedness or inability to pay debts, and it appears likely that the insolvency can be remedied.
- Both the FMA and the problem bank—but not creditors—can request an insolvency court to order receivership. If ordered:
  - The decision must be published; the court appoints and oversees a receiver.
  - The FMA is party to proceedings and must be heard before appointment of the Receiver; the FMA can appeal the court’s decision not to order receivership.
  - Unless the court decides otherwise at the request of the Receiver, a problem bank may continue its business while under receivership.
  - The Receiver supervises the bank’s management, may prohibit execution of resolutions adopted by the bank’s bodies, and consent is required for non-core business activities.
  - Receivership cannot last more than twelve months and must be terminated earlier where the bank’s financial problems have been remedied or bankruptcy proceedings have been initiated.

### Bankruptcy (going concern) for banks
- Bankruptcy under gone concern basis is available for banks except for the possibility of a ‘reorganization plan’; consequently, every bankruptcy case results in winding-down of the problem bank.
- Bankruptcy can be ordered in case of over-indebtedness or inability to pay debts.
- Both the FMA and the Receiver—but not the problem bank and its creditors—can request an insolvency court to order bankruptcy. If ordered:
  - The decision must be published; the court appoints and oversees a Trustee.
  - The FMA is party to proceedings and must be heard before appointment of the Trustee; the FMA can appeal the court’s decision.
  - When bankruptcy proceedings have been initiated, the FMA must revoke the problem bank’s license.
  - The Trustee may sell the problem bank’s assets either through public auctions or through privately negotiated contracts and can sell all assets to one buyer or strip assets and sell individually. Distribution of proceeds takes place as often as reasonable; all insolvency claims have equal rank.

### Lessons from recent experience and need for reform
- Recent experience with the three nationalized banks confirms the importance for Austria to be better prepared to resolve banks going forward.
- 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.
- Restructuring plans for the three nationalized banks remain uncertain and cannot provide the needed mechanisms to resolve these institutions in a least-cost manner. This introduces significant risks as to their eventual cost even though such a cost appears manageable from a fiscal standpoint.
- These risks would be greatly reduced if the recommended early intervention and special bank resolution frameworks were in place to deal effectively with both banks currently under restructuring and with future bank failures.

### Recommendations (early intervention and resolution)
- The new framework for early intervention is a step in the right direction, but should have a clear objective of limiting supervisor discretion and regulatory forbearance, and be fully consistent with the RRD.
  - Early Triggers—The set of measures that may be taken by the FMA could be increased and better linked to specific triggers, ranging from early triggers, when banks’ capital ratios have declined but solvency is not an immediate concern, to late triggers, where viability is at risk.
  - Loss Absorbance—The FMA should have the power to require an increase in bank loss absorbency (such as through a capital increase or surcharges, the issuance of convertible bonds, or unsecured long-term debt that could be bailed-in) and restrict dividend payments.
  - Special Administrator—The FMA should also have the power to appoint a special administrator and to replace management.
  - Banking Groups—The law should also provide for specific measures related to banking groups, such as regarding ring-fencing the institution from the actions of parent companies, subsidiaries or other related entities.

### Practical steps within the current framework
- Within the current framework, steps can already be taken to reduce the potential cost of resolving the three nationalized banks:
  - Full due diligence is necessary 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.
  - Financial institutions that are not viable must be wound down in an orderly fashion, coordinated among other public entities as necessary.

*Source: _cr1415 - 11.      The new framework as described above could be further improved in several respects.*

### 25.      More broadly, the authorities should start preparing a full-fledged bank resolution

### More broadly, the authorities should start preparing a full-fledged bank resolution regime.

### Bank resolution regime: design and mandate
- Introduce the resolution regime as soon as the RRD is adopted.
- Ensure out-of-court bank resolution is possible by the resolution authority.
- Resolution authority should have at its disposal the full range of resolution tools based on leading practices in many jurisdictions, including the EU.
- Mandate of the resolution authority: clearly cast in terms of promoting financial stability through depositor protection and continuation of systemic financial functions, if any.
- Toolkit should include powers to deal efficiently and expeditiously with distressed assets to maintain business value.

### Role of Deposit Guarantee Schemes (DGS) in resolution
- DGS staff should be involved very early in the problem bank resolution process.
- Advance preparation is necessary to ensure prompt payment and reduce the risks of contagion, whether via:
  - Purchase and Assumption (P&A) transaction;
  - using a paying agent bank; or
  - implementing a direct insured deposit payout.
- The DGS should be permitted to use its funds to facilitate a P&A transaction without exceeding the amount that would have been expended to compensate insured depositors in a straight liquidation.
- The new legal framework should include depositor preference, either to depositors directly or—by way of subrogation—to the DGS.
- Two-tiered depositor preference is recommended: insured deposits enjoy a higher priority than uninsured deposits, which in turn have a higher priority than general creditors; recommended for Austria.

### Cross-border bank resolution arrangements
- Strengthen cross-border bank resolution arrangements with non-EU/EEA countries.
- The RRD, when in force, will cover cross-border bank resolution within the EU and EEA, albeit without a burden-sharing mechanism.
- Given Austrian banks’ very large cross-border exposures, authorities need initiatives to strengthen MoU-based cross-border arrangements for inter-agency supervisory cooperation.
- Proposals include bilateral or multilateral international agreements (for example between the CESEE cross-border stability group) and complementary changes in national law to ensure adequate information sharing.
- Authorities need to put in place burden-sharing mechanisms conducive to effective cross-border resolution.
- If mechanisms are non-binding legal instruments, contingency plans are required in case of non-compliance.

### Resolution authority: institutional choice and governance
- The FMA should become Austria’s bank resolution authority.
- Rationale: complementarities between corrective measures and early intervention under the FMA’s supervisory mandate and a future bank resolution mandate.
- To address conflicts of interest between supervisory and resolution powers, establish appropriate governance measures within the FMA.
- Functional separation of supervision and resolution could be established through different decision-making and reporting lines within the FMA.

### Legal protection of FMA bodies and staff (preparation for resolution role)
- Legal protection should be strengthened in preparation for the FMA’s role as a resolution authority because resolution activities are more intrusive and publicly scrutinized and involve large sums of public money.
- Specific recommendations:
  - set a monetary cap on the liability of the FMA’s bodies and staff vis–a–vis the Federation, and align the liability insurance for FMA’s bodies and staff with this cap;
  - put in place adequate safeguards, such as immunity, for FMA bodies and staff, to protect them against self-incrimination while assisting the Bundes Finanzprokuratur;
  - exclude from the Federation’s power to seek reimbursement from FMA bodies and staff those cases in which courts judged that supervised financial institutions were non-compliant with prudential rules;
  - ensure that strengthened legal protection for FMA’s bodies and staff is not weakened after the introduction of the SSM, in particular when they act on behalf of the SSM.
- Existing arrangements and instruments (summary of Box 3):
  - Federal Constitutional Law Article 23 establishes liability principles for the Federation and bodies/institutions established under public law.
  - The Federal Government assumes liability towards injured parties (Article 3.1 of the FMABG); the FMA and its employees “shall not be liable towards the injured party.”
  - The Federal Government may demand reimbursement from FMA bodies and employees if it paid damages (Article 3.3 of the FMABG); the Federal Government cannot seek reimbursement from the FMA.
  - Reimbursement by FMA bodies to the Federal Government is possible in cases of gross negligence (‘grobfahrlässig’) or intentional (‘vorsätzlich’) actions and for anything other than excusable failures (“entschuldbaren Fehlleistung”).
  - Indemnification and insurance:
    - Article 14.3 of the FMA Act prescribes that the FMA provide “appropriate legal protection of its employees entrusted with supervisory activities…”
    - The FMA has: (i) a liability insurance contract (Haftpflichtversicherung) covering the FMA, the Executive Board, the staff and other persons deemed bodies of the FMA; and (ii) a defense and recovery insurance contract (Rechtsschutzversicherung).
    - Liability insurance: insured amount encompasses a maximum of EUR 7.5 million yearly; the FMA does not bear any retained amount upon own risk (Selbstbehalt).
    - Defense and recovery insurance: maximum amount of EUR 225,000 yearly; no retained amount upon own risk is foreseen.
    - Insurance coverage excludes claims arising out of knowing violations of the law insofar as the knowing violation was ascertained by judgment, administrative ruling, acknowledgment or settlement.
    - The defense insurance covers costs for defense in penal proceedings and disciplinary proceedings; in case of a claim based upon an intentional crime, the insurance covers costs provisionally; in case of a final condemnation for intentional crime the insurance protection is retroactively inapplicable.

### Deposit insurance in Austria: structure and shortcomings
- Structure:
  - Austria has five private guarantee schemes (DGS), organized by sub-sectors and supplemented by a government guarantee introduced after the 2008 global financial crisis.
  - Private schemes cover deposits up to €50,000 while the government guarantee covers deposits that exceed €50,000 and up to €100,000 (both per depositor per bank).
  - Each private scheme is administered by the respective bank association in the sector, and funded ex post; member banks from the affected sector are required to contribute only when a payout event occurs.
  - The government guarantee is also ex post funded.
- Private scheme payout mechanics:
  - Repayment of the first tranche of insured depositors accomplished via a three stage process:
    1. funding provided by contribution of banks in the affected sector based on the share of their covered deposits in the sector; contribution is capped at 1.5 percent of their risk-weighted assets (adjusted upward for the size of their trading book);
    2. if payout exceeds this ceiling, individual banks’ contribution from the other sectors calculated by the same formula;
    3. if a shortfall persists, the originally affected DGS may take up a loan or issue bonds to raise external funds, which may be guaranteed by the government.
  - Cost of repaying the second tranche of insured deposits (€50,000 – €100,000) is borne solely by the government.
- Experience and features:
  - Payouts by the private schemes are rare; there has been no payout since 2001.
  - No payout has ever occurred in the three cooperative sectors, possibly because their intra-sector Institutional Protection Schemes (IPS) provide financial and managerial assistance and favor intra-sector mergers to avoid bankruptcy.
  - To mitigate moral hazard, all sectors have early warning and intervention systems; financial assistance is accompanied by conditions, including (in some sectors) intervention in business policy and changing management.
- Shortcomings relative to best practice:
  - Private, fragmented, and ex post funded nature falls short of best practice.
  - Private schemes lack explicit policy objectives/mandates and mostly have powers granted by their member institutions.
  - Ex post funding may limit ability to meet full obligations during economic distress, potentially requiring large borrowing and extensive public support.

### Recommendations for the DGS and transition to a national scheme
- Use the forthcoming EU DGS Directive as an opportunity to move to a unified and prefunded national DGS to safeguard depositor confidence.
- Objectives of a national DGS: banks bear the cost of bank failures and help safeguard financial stability by allowing higher risk pooling, greater transparency, prompt payout, and simpler management of funds.
- Align the national DGS with the EU Directive in terms of:
  - quantities (through minimum coverage limits) and
  - prices, with premiums adjusted for risk as far as practicable, and a shortened length of time to payout.
- Specific actions recommended:
  - Form as soon as feasible a high-level working group including officials from the MOF, OeNB, FMA, and the various DGSs to decide how to transition to a simple, public ex-ante funded scheme, taking the EU Directive and the BCBS Core Principles for Effective Deposit Insurance Schemes (DICP) as minimum standards.
  - Create a single DGS scheme which should immediately start collecting premiums on a flat rate basis to begin building an ex ante fund; collecting even a nominal amount will provide operational experience and facilitate transition to Risk Based Premiums (RBP) later.
  - Determine the appropriate target DGS fund size for the Austrian banking system; consider the draft EU Directive target reserve level of 1.5 percent of eligible deposits as a minimum.
  - Establish an appropriate liquidity back-up arrangement with the MoF.
  - Make the single DGS an integral part of an effective bank resolution framework: DGS personnel should be involved in the advance preparation of bank resolution; the DGS should be specifically permitted to use its funds to facilitate a P&A transaction, capped at the amount of compensation to insured depositors in a straight liquidation.
  - Set the trigger for insured deposit reimbursement as license revocation when a problem bank enters the special bank resolution process.

*Source: Excerpt from IMF document _cr1415 (selected chapters on bank resolution and deposit insurance).*

### 35.      Central bank liquidity support is a key component of the financial safety net, and the

### Central bank liquidity support is a key component of the financial safety net, and the ongoing financial crisis has triggered important changes in the Eurosystem

### Overview and assessment of ELA in Austria (OeNB)
- The crisis revived discussion on central bank lending and prompted a move from “constructive ambiguity” toward a more “rule-based and transparent” ELA framework to better balance financial stability and central bank financial autonomy.
- Due to ELA operations during the crisis, conditions for such operations have developed within the EU to ensure consistency with EU prohibitions on state aid and monetary financing.
- Complementary rules that would apply throughout the Eurosystem are being developed; the mission was informed by the authorities.
- The OeNB Act does not provide an explicit legal basis for ELA; instead, the OeNB relies on a provision authorizing it “to effect transactions” other than its ESCB tasks. These national transactions are executed on the responsibility and liability of the OeNB.
- In 2006, the OeNB adopted a policy prescribing that ELA should be provided:
  - (i) in exceptional cases when refinancing through Eurosystem monetary policy operations is not possible due to lack of eligible collateral for such operations;
  - (ii) to solvent banks;
  - (iii) against adequate collateral and with appropriate haircuts; and
  - (iv) only in the short term (with a possibility of renewal).
- The OeNB awaits a Eurosystem-wide rule-based arrangement for ELA by NCBs and does not intend to update its policy prior to the conclusion of this arrangement.
- Losses stemming from ELA operations are fully carried by NCBs; in accordance with ESCB procedures, the OeNB has to inform the ECB if ELA is above certain thresholds.
- The OeNB’s unconditional preferential right currently does not apply to minimal reserves held with the OeNB (Article 77(4) of the OeNB Act provides that “The preferential right accorded to the Oesterreichische Nationalbank shall not apply to deposits held with the Bank as minimum reserves.”).

### Key elements of an Emergency Liquidity Assistance (ELA) framework (Box 5)
- Common ELA policy features across central banks:
  - ELA granted with adequate collateral, only in exceptional circumstances, to a temporary illiquid but solvent institution with central bank holding discretionary power.
  - The solvency requirement implies that ELA does not include capital support.
  - ELA should be part of a safety net, supported by strong supervision and resolution frameworks, and private sector solutions should be explored first.
  - Close coordination with the bank supervisor and the MOF is required.
- Key principles to be agreed among government agencies and publicly disclosed:
  - Solvency requirements: ELA only to institutions judged technically solvent but temporarily illiquid; for non-bank financial institutions, the relevant supervisor should have principal responsibility for solvency assessments; viability of the troubled institution should be taken into account.
  - Eligible institutions: For banks, all licensed deposit taking financial institutions would be eligible; for NBFIs, authorities must decide on systemic-event triggering potential.
  - Adequate collateral: ELA granted with adequate collateral to protect the central bank’s balance sheet and to impose discipline on requestors.
  - Collateral policies: A broad range of assets meeting central bank criteria could be accepted; collateral must have sufficient credit-worthiness and be relatively easily handled; haircuts must be established taking account of credit, legal, and other operational risks; a schedule of eligible collateral should be developed and published.
  - Limits: The total amount of eligible collateral (with value adjusted for haircuts) that is at the borrower’s disposal constitutes a natural upper limit on access to ELA resources in addition to any other limits established by the central bank (possibly in consultation with the MOF).
  - Interest rates: Normally no less than the standing credit facility rate and designed to avoid mispricing or subsidizing liquidity assistance; in system-wide emergencies the rate could be set below the standing credit facility rate.
  - Loss coverage: The government should promptly indemnify the central bank for any ELA losses, contractually or by law.
  - Maturity: Usually short term but enough to address underlying liquidity problems; ELA can be renewable with appropriate supervisory conditions to prevent undue recurrent ELA.
  - Supervisory follow up: Institutions accessing ELA should be subject to intensified monitoring and required to prepare and implement plans reducing future ELA use.
  - Disclosure: Central banks should report, at least ex post, on actions to demonstrate consistency with principles and account for any use of public funds; timing of disclosure should consider market sensitivity.

### Recommendations to strengthen the OeNB’s ELA framework
- Strengthen the current ELA framework to better protect the OeNB’s balance sheet; key steps include:
  - While maintaining ELA discretion and OeNB autonomy, formalize the discussed ELA policies, possibly together with a cap on total outstanding ELA to prevent adverse fiscal consequences.
  - Ensure the OeNB’s unconditional preferential right also applies to minimal reserves held with the OeNB by deleting paragraph 4 of Article 77 of the OeNB Act.
  - Prescribe in the OeNB Act that a shortfall of capital should be promptly covered by the Federation with either a transfer of cash or marketable government securities, or alternatively provide that in case of losses that cannot be covered by the OeNB’s reserves and its statutory capital, future profits will not be transferred to the State until the OeNB’s statutory capital and the OeNB’s reserves have been replenished.
  - Conclude an agreement between the Federation and the OeNB to promptly indemnify the latter for losses stemming from ELA operations; alternatively, give the OeNB an ongoing statutory government guarantee for ELA operations.

### Systemic crisis management: assessment and recommendations
- Need for specific legal and operational frameworks to address systemic crises swiftly; Parliament should adopt legislation—before a crisis—that authorizes the government to act promptly and under strict conditions, in cooperation with the FMA and OeNB, with ex post accountability to Parliament.
- Recent Austrian measures strengthening systemic crisis preparedness:
  - Role of the FMK: A Crisis Team under the FMK (experts from MOF, FMA, and OeNB) acts as the Austrian standing group in line with the MoU of 2008 on cooperation between financial supervisory authorities, central banks, and finance ministries of the EU.
  - Cross-Border Stability Group (CBSG): Established in 2011 with Bulgaria, Czech Republic, Hungary, Slovakia, and Slovenia; a crisis simulation exercise was conducted in 2012; FMK organizes regular CBSG meetings to identify emerging systemic risks.
  - FinStaG framework: Legal framework for government financial support, making available instruments for recapitalization; in November 2008 FIMBAG was established to hold government financial interests stemming from recapitalization operations; financial contracts including restructuring plans consistent with EU law were negotiated by the MOF and transferred to FIMBAG as the Federation’s trustee.
- Further steps to strengthen crisis management:
  - Increase the financial envelope under the FinStaG, and introduce in the Federal Organic Budget Act an explicit escape clause for financial crises.
  - Give the Federal Government standing statutory authorization to take appropriate action—in cooperation with the FMA and OeNB—to deal with financial crises, including solvency and liquidity support, and nationalization powers, with prompt, ex post accountability to parliament.
  - Clarify in the law the FMK’s responsibilities with respect to the Federal Government’s actions—financial and otherwise—to address financial crises.
  - Increase the frequency of CBSG meetings (to more than once a year) and mandate it with the preparation of a multilateral binding framework to ensure effective information exchange, crisis cooperation, and burden-sharing.
  - Create a cooperation mechanism with non-EU/EEA countries similar to the CBSG.

### FIMBAG and public capital support: assessment and recommendations
- FIMBAG has limited powers to ensure effective implementation of restructuring plans despite substantial public support provided by the government.
- Short-term measures:
  - Make FIMBAG responsible for overseeing implementation of restructuring plans and, where necessary, negotiating changes in these plans; this responsibility would include the power to replace management.
  - Strengthen the Ordinance detailing FinStaG recapitalizations along the lines of good principles for so-called “open bank assistance” (Box 6).
- For future recapitalizations:
  - Give FIMBAG a more prominent role in negotiating financial contracts and restructuring plans; this could require putting FIMBAG further at arm's length from the MOF.
  - As a subsidiary of ÖIAG, FIMBAG could be made accountable to its parent company ÖIAG, which in turn is accountable to the Federal Government.

### Open Bank Assistance (Box 6): principles and strict conditions
- OBA is generally discouraged; experience indicates OBA:
  - Can virtually never pass the “least cost” test;
  - Increases moral hazard;
  - Is susceptible to political pressures hampering good business decisions;
  - Could lead to psychological entrapment with escalating support and resolution costs.
- OBA should only be used during systemic crises when immediate action precludes orderly resolution, and even then should meet strict conditions:
  - Injection of private capital: New or existing shareholders must inject significant matching funds.
  - Burden sharing: Ensure ailing bank’s ownership interest is significantly diluted or eliminated.
  - Management competence: Require management changes where management contributed to deterioration.
  - Strict oversight: Financial assistance must be properly monitored and conditioned; recipient bank under special supervision with permanent examiners and supervisors empowered to monitor and approve transactions above thresholds.
  - Limits on compensation and dividends: Executive compensation should be limited and dividend payments suspended until support repaid.
  - Exit strategy: OBA must coincide with a business plan facilitating restoration of profitability and full repayment within a reasonable timeframe, and should incorporate elements of a Resolution Plan (Living Will) including potential segmentation and sale of business units.

*Source: IMF staff report excerpt on Austria — chapter on central bank liquidity support, ELA framework, systemic crisis management, and related recommendations.*

### Appendix I. EU Developments on Macroprudential Policies

### Appendix I. EU Developments on Macroprudential Policies

### Establishment and mandate of the ESRB and ESFS
- The European Systemic Risk Board (ESRB) was established in January 2011 following the 2009 De Larosiere Report, which resulted in the establishment of the European System of Financial Supervision (ESFS)—a network of national supervisors working in tandem with new European Supervisory Authorities (ESAs) and the ESRB.
- The ESRB is responsible for the macroprudential oversight of the financial systems and institutions within the EU to:
  - prevent or mitigate systemic risks;
  - avoid episodes of widespread financial distress;
  - contribute to a smooth functioning of the internal market; and
  - ensure a sustainable contribution of the financial sector to economic growth.
- The ESRB performs systemic risk assessments and submits warnings and policy recommendations to competent national authorities; for this purpose the ESRB depends on the ECB for analytical, statistical, logistical and administrative support.
- IMF (2013c) discusses the responsibilities—and constraints—of the ESRB.

### Consideration of a macroprudential mandate for the ECB
- The primary objective of the ESCB, of which the ECB is the center, is to maintain price stability (Article 2 of the ESCB/ECB Statute).
- The ESCB and ECB have supporting and advisory tasks with respect to financial policies and stability, but the ECB has no macroprudential mandate under existing statutes (Articles 3.3, 4, and 25.1 of the ESCB/ECB Statute).
- EU legislature is working on legislation to introduce a Single Supervisory Mechanism which would give the ECB supervisory responsibilities; these responsibilities would include a macroprudential mandate over banks—but not financial and mixed holding companies.
- Under the draft framework (Article 4a of the draft Regulation):
  - responsibility for macroprudential policy would in principle remain with national competent or designated authorities;
  - the ECB would be authorized (i) to impose capital buffers, including countercyclical buffers, higher than those established by competent national authorities and in addition to regular capital requirements, and (ii) to apply more stringent measures than those established by competent or designated national authorities aimed at addressing systemic risks;
  - EU member states would retain authority over macroprudential measures not provided for by EU law;
  - mutual consultation requirements would apply to the ECB and competent or designated national authorities.

### CRD IV package and EU legislation on macroprudential measures
- The CRD IV package comprises a regulation and a directive:
  - the Capital Requirements Regulation (CRR) lays down prudential requirements for capital, liquidity and the credit risk for investment firms and credit institutions;
  - the Capital Requirements Directive (CRD) lays down rules on bankers' remuneration and bonuses, prudential supervision, corporate governance and capital buffers.
- Regulation and Directive references in the package include:
  - Regulation (EU) No 575/2013 of 26 June 2013; and
  - Directive 2013/36/EU of 26 June 2013.

### ESRB recommendations on national macroprudential frameworks
- Recommendation on the macroprudential mandate of national authorities (ESRB/2011/3):
  - Recognizes effectiveness of EU macroprudential policy depends on national frameworks because responsibility for measures necessary to maintain financial stability lies first within national frameworks.
  - Requires member states to designate an authority entrusted with the conduct of macroprudential policy and provides guiding principles on core elements of national macroprudential mandates.
  - Advocates clear objectives, tasks, and powers to overcome bias towards inaction, and recommends giving a leading role to central banks because of their expertise and existing financial stability responsibilities.
  - Requires macroprudential authorities to be given at a minimum operational independence—in particular from political bodies and from the financial industry—and that organizational and financial arrangements do not jeopardize the conduct of macroprudential policy.
  - Recommended measures should be in force no later than July 1, 2013.
- Recommendation on intermediate objectives and instruments of macroprudential policy (ESRB/2013/1):
  - Aims to take the necessary next step towards an operational macroprudential oversight.
  - Suggests an indicative list of instruments, including but not limited to those envisaged in the CRD IV package, which member states could assign to macroprudential authorities to pursue identified intermediate objectives.
  - Recommends macroprudential authorities develop an overall policy strategy on the application of macroprudential instruments to foster decision making, communication and accountability.
  - Recommended intermediate objectives and instruments need to be in place no later than end-2014; the recommended policy strategy end-2015.

### ESRB indicative macroprudential instruments by intermediate objective (from ESRB/2013/1)
- To mitigate and prevent excessive credit growth and leverage:
  - Counter-cyclical capital buffer
  - Sectoral capital requirements (including intra-financial system)
  - Macro-prudential leverage ratio
  - Loan-to-value requirements (LTV)
  - Loan-to-income/debt (service)-to-income requirements (LTI)
- To mitigate and prevent excessive maturity mismatch and market illiquidity:
  - Macro-prudential adjustment to liquidity ratio (e.g. liquidity coverage ratio)
  - Macro-prudential restrictions on funding sources (e.g. net stable funding ratio)
  - Macro-prudential unweighted limit to less stable funding (e.g. loan-to-deposit ratio)
  - Margin and haircut requirements
- To limit direct and indirect exposure concentration:
  - Large exposure restrictions
  - CCP clearing requirement
- To limit the systemic impact of misaligned incentives with a view to reducing moral hazard:
  - SIFI capital surcharges
- To strengthen the resilience of financial infrastructures:
  - Margin and haircut requirements on CCP clearing
  - Increased disclosure
  - Structural systemic risk buffer

*Source: _cr1415 - Appendix I. EU Developments on Macroprudential Policies*

### Box 8. Risk-based Premiums

### Box 8. Risk-based Premiums

### Options to preserve cooperative intra-sectoral governance incentives
- Option 1: Provide a discount on the DGS contribution premiums specifically for banks under cooperative structures, in the form of proposed lower risk premium.
  - Key questions: at what level to set that discount to fairly compensate for intra-sectoral governance; what are the minimum elements, strength, and scope of intra-sectoral governance.
- Option 2: Do not provide any cooperative discount per se, but allow supervisory risk scoring to determine the risk premium and assess whether strongly linked sectors (e.g.: the Volksbanken, Raiffeisen and Sparkassen sectors) demonstrate lower risk scores than other banks on a stand-alone basis.
  - Merit: allows a case-by-case discount if a lower risk assessment yields a lower risk premium.
  - Ancillary benefit: heightened consolidated sector supervision could reduce the number of small individual units under supervision, which is presently very large (700+).

### Public awareness, communications, and operational preparedness
- The single, public DGS should develop and maintain a comprehensive website providing:
  - Information regarding the conditions and coverage of deposit insurance (including prominent identification of instruments that are not covered).
  - Progress on any payouts in process.
  - Other industry information and links to appropriate websites.
- Member financial institutions requirements:
  - Display membership certificates at all offices of operation, with compliance periodically audited.
  - Openly make readily available material provided by DGS explaining the terms and conditions of deposit insurance.
- In an insured event:
  - The DGS must publish information explaining the reimbursement process in one or more newspapers of general circulation.
- Payout time objective:
  - Draft EU Directive reduces payout time to seven days.
  - Objection noted from Austrian DGSs that seven days is too short; assessment: with single customer view (SCV), adequate advance preparation, and proper legal framework, seven days is perfectly reasonable.
  - Comparative practice: in the US a bank is usually closed on a Friday, the FDIC executes a Purchase and Assumption (P&A) transaction and failed bank depositors’ funds are available on the following Monday; even if there is no acquirer, FDIC can usually make payout within 3 or 4 days.

### Involvement of DGS in resolution and Purchase and Assumption (P&A)
- Recommendation: personnel from the proposed DGS be involved very early in the problem bank resolution process to make advance preparation for a P&A transaction or payout.
  - Advance preparation and a special bank insolvency regime are paramount for effective bank resolution.
  - Advance preparation lessens potential for contagion.
- Legal and funding authority:
  - Both the Banking Act and the new deposit insurance law should provide for the DGS to make funds available to insured depositors via a P&A transaction, but not to exceed the amount that would have been expended to compensate insured depositors in a straight liquidation.

### Box 9 — Brief Explanation of a Purchase and Assumption (P&A) Transaction
- Description and benefits:
  - A financially healthier bank purchases certain “good” assets and assumes insured deposit liabilities of a failed bank.
  - With proper legal framework and advance preparation, a P&A can be accomplished quickly (usually over a weekend).
  - Potential to maintain banking services in under-served communities.
  - Virtually always less costly than liquidation; assets passed at book value represent 100 percent recovery for the liquidation estate.
  - When several bidders exist, the failed bank’s franchise value can be captured, benefiting creditors and reducing the final cost of the failure.
- Mechanics:
  - Certain assets and insured deposits are transferred to an assuming bank at book value; assets help offset deposit liabilities transferred to the assuming bank.
  - If there are not enough “good” assets to balance insured deposits, the DPF must advance cash to balance the transaction—assets must equal liabilities.
  - The real cost of not employing a P&A can be costly to a deposit insurance reserve fund.
- Contractual and operational details to include (inter alia):
  - Assuming Bank (AB) must pay contract rate of interest on deposits for a specified time (FDIC requires 14 days), after which it may adjust the interest rate.
  - Depositors have the right to withdraw their deposits without penalty.
  - Assets purchased at book value (usually performing consumer and mortgage loans).
  - Fixed assets (bank premises, furniture, fixtures and equipment) can be purchased at book value, but shall be adjusted to fair market value ex post, following legitimate appraisals.
  - Any bid amount (premium) that AB agrees to pay is stipulated in the P&A.
  - Adjustments for errors and omissions in constructing the pro forma balance sheet, asset purchases (e.g., adjustment for fixed assets from book value to fair market value) shall be paid by either party during a Settlement period (not to exceed 180 days).

### Legislative harmonization and depositor preference
- Harmonization:
  - Amendments to the Banking Act and the anticipated new DGS must ensure harmonization regarding bank resolution—there should be one and only one trigger for insured deposit reimbursement: license revocation.
- Two-tiered depositor preference (as under discussion at the European level):
  - (i) eligible deposits up to and including €100,000; and
  - (ii) eligible deposits over €100,000.
  - Implementing depositor preference helps curtail problems inherent in the “no creditor worse off” quandary and eases implementation of a P&A as the preferred resolution tool.
  - The second tier—deposits in excess of €100,000—can provide an opportunity for clients to offset uninsured deposits against outstanding loans.
  - Best practice: the DGS, as subrogee to repaid insured depositors, should enjoy a higher priority in the liquidation proceeding than uninsured depositors, unsecured creditors, subordinated debt holders and shareholders.

### Open Bank Assistance (OBA) concern
- Major weakness noted in draft EU DGS Directive: possibility for a DGS to expend funds to save a bank before failure (OBA).
  - OBA violates the principle that bank resolutions should meet a least cost test; OBA is open-ended and virtually impossible to quantify.
  - If a DGS provides OBA, it is likely to feel trapped to provide ever more funding to “protect its investment.”
  - OBA is virtually never a good idea except in systemic circumstances when time constraints prevent design of a less costly resolution.

### Appendix III — Core Principles for Effective Deposit Insurance Systems: selected summaries (Principles 1–11)
- Principle 1—Public policy objectives:
  - Principal objectives: contribute to stability of the financial system and protect depositors.
  - Current DGSs lack specific public policy objectives.
  - Recommended objectives: (i) protect small depositors; and (ii) help promote financial stability by making prompt reimbursement to insured depositors in the event of a bank failure.
- Principle 2—Mitigating Moral Hazard:
  - Moral hazard should be mitigated by design features and other safety-net elements.
  - Presently mitigated primarily by monitoring by other banks in the scheme.
  - Strong and effective supervision, along with risk-based premiums can help mitigate moral hazard in a new ex ante funded scheme.
- Principle 3—Mandate:
  - Deposit insurer’s mandate should be clearly and formally specified and consistent with public policy objectives.
  - Mandates are unclear currently.
  - A new scheme could be hybrid: since FMA should be the resolution authority going forward, the new scheme should primarily be a paybox; effective early warning systems can aid FMA’s supervisory and resolution functions.
- Principle 4—Powers:
  - Deposit insurer should have powers necessary to fulfill its mandate, including financing reimbursements, entering into contracts, setting budgets and accessing timely and accurate information.
  - Current schemes mostly have powers granted by member institutions, while some are stated in law.
  - A public scheme could have more formal powers to demand information of members, enter into contracts, set budgets and investment policy, etc.
- Principle 5—Governance:
  - Deposit insurer should be operationally independent, transparent, accountable, and insulated from undue political and industry influence.
  - The five DGS are independent of government agencies, but captive to their membership.
  - A public scheme (independent agency or a unit within OeNB or FMA) should be operationally autonomous, have separate finances and financial statements, dedicated staffing, etc.
- Principle 6—Relationships with other safety-net participants:
  - A framework for close coordination and information sharing should be formalized.
  - Current DGSs enjoy some cooperation and information sharing with OeNB and FMA (subject to confidentiality agreements); they are also to be the conduit of MOF payments of insured deposits from €50,000 - €100,000.
  - A new scheme should have adequate information sharing and participation in on-site inspections to prepare for resolution and insured depositor repayment.
- Principle 7—Cross-border issues:
  - Relevant information should be exchanged between deposit insurers in different jurisdictions, subject to confidentiality.
  - DGSs have little to no interaction with foreign DISs or supervisory authorities.
  - A public scheme could act from an official governmental capacity in establishing such relationships.
- Principle 8—Compulsory membership:
  - Membership should be compulsory for all financial institutions accepting deposits to avoid adverse selection.
  - Membership is compulsory for all financial institutions in the particular DGS of its sector; compulsory membership should continue under any new scheme.
- Principle 9—Coverage:
  - Coverage should be clearly defined; level of coverage should be limited but credible and quickly determined.
  - Currently, the DGSs provide coverage for individuals and SMEs up to €50,000. The MOF covers the same types of deposits from €50,000 - €100,000.
  - A new scheme following the EU Directive would cover all non-financial institution deposits up to €100,000 (excluding insider and related deposits).
- Principle 10—Transition from blanket guarantee:
  - Transition should be as rapid as circumstances permit; retaining blanket guarantees too long fosters moral hazard.
  - Austria had blanket coverage from late 2008 to end 2009 and transitioned back to explicit limited protection with an increase from €20,000 - €100,000 with little ill effect.
- Principle 11—Funding:
  - Deposit insurance systems should have all funding mechanisms necessary to ensure prompt reimbursement, including means of obtaining supplementary back-up funding for liquidity.
  - Primary responsibility for paying the cost of deposit insurance should be borne by banks.
  - For systems utilizing risk-adjusted differential premium systems, the criteria used should be transparent to all participants.
  - Current DGSs are all ex post funded, with member banks’ contributions capped at [text truncated in source].

*Source: _cr1415 - Box 8. Risk-based Premiums*

### 1.5 percent of their risk weighted assets

### _cr1415 - 1.5 percent of their risk weighted assets

### Ex post versus ex ante funding and overall assessment
- Ex post funded schemes are described as procyclical, weaken the capital position of remaining member institutions in periods of distress, and often shift the burden to the public purse (i.e., note MOF coverage as described above).
- Ex post schemes are stated to violate both DICPs and Key Attributes for Effective Resolution, which require that the banking industry should bear the cost of bank failures.
- Recommendation: A new ex ante funded scheme will deal with (at least in part) the deficiency noted above; authorities should carefully analyze the optimal target reserve fund level.
- Operational recommendation: Necessary resources should be in place to administer the risk-adjusted differential premium system appropriately.
- Transitional recommendation: Since the draft EU Directive calls for risk-based premiums (a difficult system to implement), it would be advisable for the current DGSs to either begin imposing flat rate premiums or at least simulate such assessments to gain experience.
- Permitted/prohibited uses for DGS ex ante funding: DGS ex ante funding should specifically be permitted to facilitate a P&A transaction (not to exceed what would have been expended in a payout); and prohibited from being used for open bank assistance.

### Principle 12 — Public awareness
- Legal requirement: Austria’s Banking Act requires the DGSs to provide depositors with basic information regarding deposit protection.
- Current practice: The DGSs maintain limited websites with information on where and how to claim a deposit in the event of a bank failure.
- Recommendation: A new scheme should require banks to provide depositors with the terms and conditions of depositor protection, particularly regarding instruments that are not covered.
- Recommendation: Create a comprehensive website with more financial industry and consumer protection information (links), FAQs, and in the event of a bank failure provide simple, specific, yet comprehensive information regarding deposit access.

### Principle 13 — Legal protection
- Principle: Deposit insurer and individuals working for it should be protected against lawsuits for decisions/actions taken in “good faith” while discharging their mandates; individuals must follow conflict-of-interest rules and codes of conduct; legal protection should be defined in legislation and administrative procedures and cover legal costs under appropriate circumstances.
- Current assessment: It is unknown, but highly doubtful, whether current DGS employees enjoy legal protection against lawsuits for decisions and actions taken in “good faith”.
- Recommendation: A new scheme should provide such protection and also cover the legal costs in such cases.

### Principle 14 — Dealing with parties at fault in a bank failure
- Principle: Deposit insurer or other relevant authority should have the power to seek legal redress against those at fault in a bank failure.
- Current assessment: It is unknown, but highly doubtful, whether current DGSs have the ability to pursue those at fault other than civil lawsuits and perhaps cooperation with law enforcement.
- Recommendation: A new DGS should be able to aggressively pursue individuals or firms to recover restitution; criminal activities should be pursued when possible and the DGS should aggressively cooperate with law enforcement agencies.

### Principle 15 — Early detection and timely intervention and resolution
- Principle: Deposit insurer should be part of a safety-net framework that provides early detection and timely intervention and resolution; determinations should be made early on the basis of well-defined criteria by participants with operational independence and power to act.
- Current practice: The current DGSs all have EWSs (some more sophisticated and effective than others); some have intervention powers (which stop short of license revocation).
- Concern: It seems a dubious practice for supervisory authorities to share confidential, market sensitive information with private DGSs.
- Recommendation: The FMA, in cooperation with OeNB, should bear responsibility for early detection and timely intervention when the new Banking Intervention and Restructuring Act comes into force.
- Recommendation: The new DGS should be involved early and given access to information in advance to effect timely insured deposit repayment.

### Principle 16 — Effective resolution processes
- Principle: Effective failure-resolution processes should facilitate ability of the deposit insurer to reimburse depositors promptly and equitably; minimize resolution costs and market disruption; maximize recoveries; reinforce discipline through legal actions; and provide authority to preserve critical banking functions (e.g., acquisition of assets and assumption of liabilities to maintain depositor access and clearing and settlement).
- Current framework: Austria’s court-based bankruptcy framework makes bank resolution cumbersome; there is no special bank resolution regime yet.
- Recommendation: Effective bank resolution requires a special bank resolution regime (SRR); courts should not be able to reverse FMA’s decision to revoke a bank’s license.
- Legislative guidance: Amendments to the BA must be harmonized with anticipated new EU legislation, particularly regarding the trigger for insured deposit reimbursement (i.e., there should be one and only one—license revocation).
- Priority and P&A facilitation: Legislation should enshrine depositor preference (preferably two-tiered as currently under discussion at the EU level) so that the “no creditor worse off” issue does not inhibit using a P&A as a resolution tool.
- DGS operational constraints: Open bank assistance should be prohibited except in systemic situations and even then the government should take the lead, not the DGS. If DGS funds are used, it should only be at government direction and with a government guarantee.

### Principle 17 — Reimbursing depositors
- Principle: Deposit insurance system should give depositors prompt access to insured funds; deposit insurer should be notified sufficiently in advance and provided access to depositor information; depositors should have a legal right to reimbursement up to the coverage limit and should know payment triggers, time frames, and coverage limits.
- Current triggers for insured deposit repayment (four triggers):
  - (i) when bankruptcy proceedings are initiated;
  - (ii) the bank is put into receivership;
  - (iii) when the supervisory authorities order a payment stoppage; and,
  - (iv) when the home authorities have declared deposit unavailability at the parent level.
- Current three-stage repayment process when an insured event occurs:
  - (i) banks in the sector to which the failed bank belong are required to contribute in an amount not to exceed 1.5 percent of their risk-weighted assets (adjusted for trading book positions);
  - (ii) if that amount is insufficient to reimburse depositors (to the € 50,000 level), then banks in the other sectors are required to contribute based on a similar formula; and,
  - (iii) if these amounts are still not enough to reimburse insured depositors to the € 50,000 level, then the DGS representing the sector to which the failed bank belonged are required to take up a loan or float debt to comprise the deficit amount.
- Additional arrangements: The DGSs also are to administer payment of deposits that are guaranteed by MOF (from €50,000 - €100,000).
- Statutory time frame: The Banking Act provides for reimbursement within twenty working days.
- Operational gaps: No DGS has contingency plans for advance preparation for prompt payment of insured depositors, instead relying on an ex post application process which will severely delay payment.
- Perception of EU proposal: All consider the 7 day repayment requirement, currently under discussion at the EU level, as too short.
- Operational recommendations: The new DGS should work in partnership with supervisory authorities, be involved early in the resolution process, stress advance preparation, implement single customer view (SCV), frequently test computations of insured deposits (sorting and aggregating accounts held in the same ownership capacity, coding excluded deposits), and in coordination with supervisory authorities issue press releases and website information regarding how and where deposits will be repaid.

### Principle 18 — Recoveries
- Principle: Deposit insurer should share in proceeds of recoveries from the estate of the failed bank; management of assets and recovery process should be guided by commercial considerations and economic merits.
- Current status: Although the DGSs seem to enjoy a subrogation status for claims in bank bankruptcies, the DGSs are in the same priority class as general creditors, since Austrian bank liquidations are conducted under company insolvency law.
- Recommendation: With recommended changes to the resolution legislation, depositor preference should be introduced. This would give the new DGS, as subrogee to repaid insured depositors, a higher priority in liquidation proceedings than uninsured depositors (who, under a two-tiered depositor preference system, would have a higher priority than other creditors), unsecured creditors, subordinated debt holders and shareholders.

*IMF staff report excerpt: AUSTRIA*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1415.pdf_