Austria: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix presents estimates of potential output and the output gap for Austria to identify the scope for sustainable noninflation growth and allow an assessment of the current stance of macroeconomic policies. The estimates of the cyclical fluctuations in Austria are compared with those of the other countries of the European Union to provide the basis for an assessment of the relative economic benefits and constraints for Austria in the context of its participation in European Monetary Union, both in the short and longer term.

Abstract

This Selected Issues paper and Statistical Appendix presents estimates of potential output and the output gap for Austria to identify the scope for sustainable noninflation growth and allow an assessment of the current stance of macroeconomic policies. The estimates of the cyclical fluctuations in Austria are compared with those of the other countries of the European Union to provide the basis for an assessment of the relative economic benefits and constraints for Austria in the context of its participation in European Monetary Union, both in the short and longer term.

IV. European and Global Integration: the Challenges for Austria’s Financial Sector1

A. Introduction

143. In the 1990s, European and global integration has spurred substantial growth in cross-border financial activities. The EU single market initiatives in banking and other financial services, which have led to more uniform regulation and entry requirements (e.g., the Single Passport2), have laid the groundwork for substantial integration of Europe’s financial markets. The introduction of the euro will undoubtedly strengthen these incentives toward integration and facilitate their realization, including the gravitation of securities trading to a few financial centers. Profound changes are not underway on the supply side alone. On the demand side, investors are becoming increasingly sophisticated and demand competitive rates of return as they may, at the same time, become less risk averse.

144. These European and international trends will have a significant impact on the financial system in Austria. Financial integration is likely to promote concentration in some segments of the financial system, and fragmentation and specialization in others. Domestic banks will be confronted with increased competition on two fronts: (i) from abroad, as foreign banks will use easier access to expand into the local market, (ii) but also within Austria, as direct financial markets will draw business from banking institutions. Faced with declining interest margins, banks will be forced to reshape and diversify their activities and focus more on efficiency and cost effectiveness. Universal banks will more and more have to compete with specialized international financial institutions. For equity markets, integration and electronic trading mean that stock trading of top corporations will increasingly be centralized at a few international centers, while a second tier of equity markets at the national level may be able to specialize in medium-sized and small corporations. As bond and money markets gain in depth and liquidity, disintermediation will certainly intensify and will attract more investment banking activities.

145. This paper will briefly describe the current structure of the Austrian financial sector and will outline some of the required adjustments for it to stay competitive. It will argue that Austria may in some respects be less well placed than some other European countries to meet financial integration head-on. Although Austrian banks have demonstrated their business acumen in Central and Eastern Europe to take advantage of international opportunities, some domestic weaknesses—mostly structural—would need to be overcome to help exploit potentially fruitful opportunities within Austria, Europe, and beyond.

  • Austria’s universal banks lag behind other countries in cost efficiency, although Austrian banks’ earnings capacity and efficiency have been improving in recent years. The Austrian banking system is one of the most overbanked with a very high branch density. Since bank financing predominates in the corporate sector, Austria has some of the smallest (relative to its economy’s size) debt and equity markets of EU countries.

  • In the past, state involvement permeated large segments of the banking sector, dividing it into political spheres of influence and affecting managerial behavior and perhaps holding back needed structural change. Recently, state involvement and political influence have been reduced, among other things by partial privatizations; however, the public sector remains the largest individual shareholder in some important banks.

  • Following recent large-scale bank mergers, a remodeling of the domestic banking structure is being implemented, but only slowly and gradually. Consolidation has barely advanced, and synergy effects and cost savings are only hesitantly being exploited.

  • Even the largest bank in Austria (Bank Austria) is probably not large enough to be a significant “European player” As the flip side of the coin, the potential efficiency gains may make the larger Austrian banks prone to takeovers by large foreign banks.

  • Debt and equity markets are narrow and small, and equity ownership is one of the lowest in Europe. Sources of venture capital for start-up companies are scarce. Markets would need to consolidate and could strengthen their positions by specializing in niche segments. Recent initiatives, such as the merger of the Vienna Stock Exchange and the Austrian Options and Futures Exchange (ÖTOB) and the cooperation agreement with the German Stock Exchange in Frankfurt (Deutsche Börse), should bolster the position of the Vienna Stock Exchange, but may not be enough.

146. On the upside, given the limited scope of the equity market, Austria has a large potential for promoting equity financing, which could provide more funding flexibility to companies and support risk-taking and innovation. A new stock market program (called fit) is designed to bring small and medium-sized companies to the exchange. ÖTOB’s emphasis on innovative derivative products based on Central and Eastern European financial instruments appears promising. The announced concentration of the German stock exchange’s Central and Eastern European trading activities in Vienna could help preserve the vision of Vienna as a financial center for the transition economies.

B. Recent Developments and Prospective Challenges for Austrian Banks

147. On the basis of international comparisons, the Austrian banking system is facing the following challenges: there are too few banks of a European scale; branches are too numerous; and efficiency and profitability are too low. Partly in response to external competitive pressures, and partly owing to domestic political considerations, the Austrian banking system is in transition. Intensive merger activity among the largest banks has profoundly changed the domestic banking landscape. Public ownership in the banking sector is being scaled back as some large banks are being partially privatized and listed on the stock exchange. This transition will pose challenges, but in Austria’s stable macroeconomic environment, a sharp change in business practices (toward more risk-taking and ventures in less familiar financial areas) would not be likely. Nonetheless, further consolidation and improvements in efficiency can be expected given increasing competitive pressures, including from abroad. Particularly in light of EU integration in some market segments, the pace of retrenchment of excess capacity will likely have to be accelerated.

Banking structure and profitability

148. Banks play a pivotal role in the Austrian financial system, since bank-intermediated debt is the preferred instrument of corporate.finance.3 As a result, corporate debt ratios (at about three-quarters) are high by international standards. The volume of bank assets relative to GDP (equivalent to 238.4 percent of GDP in 1997) was close to the EU average, but smaller than in Germany (255.8 percent of GDP). By contrast, direct finance in financial markets is insignificant and financial markets are not well developed.

149. Austrian banks—being predominantly universal banks—offer a wide variety of banking, payment, and investment services. Nonetheless the sector is fragmented and the degree of concentration is relatively low for a small industrial country. Three groups of banks dominate, (i) savings banks, which have the largest market share (almost 31 percent of total bank assets), comprise not only relatively small banks but also some of the largest banks (including Bank Austria and Erste Bank); (ii) commercial banks (joint stock banks and private banks) hold 28½ percent of all bank assets; and (iii) the cooperative bank sector, with a 25 percent market share, is dominated by (mostly very small) rural credit cooperatives (Raiffeisenbanken) with a 20½ percent market share; industrial credit cooperatives (Volksbanken) have much less significance. The remainder of the banking sector (some 15 percent of bank assets) comprises special purpose banks, regional mortgage banks, and building societies (Figure IV-1 and Table IV-1).

Figure IV-1.
Figure IV-1.

Austria: Market Shares in the Banking Sector, 1997

(In percent of aggregate balance-sheet total)

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: Oesterreichische Nationalbank.
Table IV-1.

Austria: Key Ratios of the Banking System

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Source: Oesterreichische Nationalbank

Ratio of total capital to risk-weighted assets (BIS definition). The “core” capital ratio is in parentheses.

150. The pressure for reform and consolidation has in part been diminished by the close relationship of sections of the banking system with the public sector (Attems, 1995). Public ownership in banking has traditionally been an important feature of the Austrian banking system; it is a legacy of post-WWII reconstruction and the lack of sufficiently strong private investors at the time. As a result, even after recent privatization measures, a significant part of the banking system is still either directly publicly owned or backed by the public sector as a guarantor. Most of the savings banks are “owner-free” in the sense that their “owners/ backers” (Träger) are either a municipality or a foundation (see Box IV-1). Publicly “owned” savings banks are also backed by a public guarantee (Gewährträgerhaftung). In the cooperative banks, depositors are the shareholders, but in practice their level of influence on management is very limited. Due to their corporate governance structure, many savings banks and cooperative banks may be guided primarily by considerations other than profit maximization and cost efficiency. The savings bank sector and the industrial credit cooperative sector (Volksbanken) are organized as two-tier systems with Erste Bank and Oesterreichische Volksbank, respectively, as their central institutions that provide services to the local banks. By contrast, the Raiffeisen cooperative sector has a three-tier structure of local and regional institutions, and with Raiffeisen Zentralbank (RZB) as the central institution.

151. The many relatively small savings and cooperative banks focus primarily on (and have a strong position in) retail banking with private customers and small and medium-sized companies; they pride themselves on close contact with the local communities and small local companies. Any large-scale corporate lending or foreign exchange transaction is channeled through their central institutions.

152. The recent merger activity has, however, blurred distinctions, in particular the one between commercial banks and savings banks. The largest savings banks (Bank Austria and Erste Bank) have incorporated as joint stock companies and are managed as commercial banks.

153. Until recently, there was no Austrian bank of a scale sufficiently large to compete successfully in the euro area; Bank Austria’s market share was only 13 percent in 1996 (Table IV-2). After the merger with Creditanstalt in 1997, however, the market share doubled to 26 percent, slightly above the EU average of 21 percent, but still low for a small country like Austria. The top five banks in Austria account for less than half of the market (48¼ percent compared with the EU average of 52½ percent), whereas in other small EU countries the top-five market shares ranged from 59 percent in Belgium (in 1994) to 81 percent in the Netherlands and 86 percent in Sweden (in 1995).

Table IV-2.

Austria: The Largest Banks in Austria

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Source: Annual reports (various issues).

For 1997, after merger with Creditanstalt.

For 1997, after merger with GiroCredit.

154. Foreign banks play a minor role. After Austria liberalized capital movements in 1991 and joined the European Economic Area in 1994 and the EU in 1995, many entry barriers were eliminated. Foreign banks increasingly entered the Austrian market, but they continued to focus on special market segments (such as trade finance), while remaining relatively insignificant in the traditional deposit and loan business. Their overall share in the balance sheet total of the banking sector is still limited (3 percent in 1995).4 Recently, foreign banks have bought sizable stakes in some large Austrian banks (the German publicly-owned Westdeutsche Landesbank and Bayerische Landesbank, for example, acquired a 9 percent stake in Bank Austria and a 46 percent stake in BAWAG, respectively). Conversely, Austrian banks have established relatively strong positions in Central and Eastern Europe, not only in investment banking but also in commercial banking activities (led by Bank Austria, Creditanstalt, and RZB). The RZB has established a particularly strong position in Central and Eastern Europe, Its seven subsidiaries in Bulgaria, the Czech Republic, Hungary, Croatia, Poland, Russia, and Slovakia have 63 branches and their balance sheet total rose by 38 percent to S 40 billion in 1997 (13 percent of RZB’s total assets). Austrian banks are among the most important market participants in stock exchanges in Central and Eastern Europe (Rothensteiner, 1997).

Ownership Structure of Savings Banks

Savings banks occupy a pivotal role in the Austrian banking system. Historically savings banks were established as a counterweight to private banks to provide access to banking services for low-income citizens. Savings banks in Austria are “owner-free” in the sense that their “owners/backers” (Träger) are either a municipality (Gemeinde) or a foundation (Verein). Those savings banks with backing from municipalities have a public guarantee (Gewährträgerhaftung) that is designed to augment the historically low level of equity in such banks. To raise additional equity, some savings banks have been converted into joint-stock companies, with the largest shareholder being a holding company managing the Träger’s stakes (so-called share management savings banks). Bank Austria, for example, is a joint-stock company in which the City of Vienna holds a significant stake; Erste Bank, by contrast, is a joint-stock savings bank backed by a foundation. At the end of 1996, there were 48 Gemeinde savings banks (of which 16 were joint-stock companies) and 29 Verein savings banks (with 9 joint-stock companies). Management is appointed by savings bank councils that consist of representatives from the respective Träger. A mutual assistance obligation within the saving sector underpins and, in practice, supersedes the public guarantee. Similar mutual assistance arrangements link Raiffeisen banks and Volksbanken.

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155. Due to the publicly owned and guaranteed or ownerless structure of most institutions, managerial incentives may have in the past been geared primarily toward expansion and dense branch networks rather than rate of return considerations and price competition.5 Past regulatory restrictions reinforced the incentives to compete in terms of geographical proximity (through a dense branch network) rather than price. Branch proliferation also had the effect of deterring entry by others, in particular foreign banks, into the retail segment.

156. All in all, competition in the banking sector appears to have been relatively low, particularly at the retail level, as evidenced by stable market shares within a fragmented banking structure and by ownership relations that may have discouraged price competition. Extensive public ownership typically also delays entry into and exit from the banking system (Prati and Schinasi, 1997). As a result, Austria is heavily overbanked. With 1,400 customers per banking outlet, it features one of the most extensive branch networks in the world (Figure IV-2).

Figure IV-2.
Figure IV-2.

Austria: Branch Density and Employment, 1987-96

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: Oesterreichische Nationalbank.1/ Redesignation from commercial banks to savings banks.

157. Another related manifestation of managerial incentives can be found in the relatively low profitability and high operating expenses of banking6 (Figure IV-3). Notwithstanding the decline in interest margins, which have narrowed by Vi percentage point between 1995 and 1997 (in the retail segment from 3¼ percentage points to 2¾ percentage points, and overall from 2.6 percentage points to 2.1 percentage points), Austrian banks still rely heavily on net interest income. The share of fee income, however, has been steadily rising as banks have reacted to the declining trend in interest margins.

Figure IV-3.
Figure IV-3.

Austria: Bank Profitability in International Comparison, 1986-1995

(In percent of balance sheet total)

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: OECD (1997).

158. Mooslechner (1995) found that the low profitability of Austrian banks during 1987-93—even relative to Germany—was mainly due to high operating expenses. And operating expense ratios have continued to rise subsequently. Overall, banks have been characterized by low production efficiency (measured by the ratio of operating expenses to assets, and assets per staff). There are indications that the efficiency of allocation is primarily hampered by an inefficient use of labor input. In addition to a higher labor intensity, banking services in Austria are provided with a higher capital intensity than in Germany. According to Mooslechner (1995), in the early 1990s personnel expenses per employee were 11 percent higher than in Germany, and administrative expenses per employee were 27 percent above those in Germany. These results seem to indicate ample scope for cost-cutting in the Austrian banking system and also provide evidence that the bank mergers in the early 1990s did not lead to significant cost reductions.

159. Starting in 1991 with a first wave of mergers,7 the banking system has undergone a reorganization process (Box IV-2. Mergers and Privatization). Public sector ownership has diminished8 and profit considerations have gained in significance in wider parts of the sector, also as the result of a growing number of large savings banks (including Bank Austria and Erste Bank) incorporating as joint-stock companies. The reorganization has blurred the traditional patterns of political affiliation of banks and has created three large banking groups that are dominating the banking system—the Bank Austria/Creditanstalt, the savings bank sector led by Erste Bank, and the Raiffeisen sector led by the Raiffeisen Zentralbank.

160. Despite the mergers, though, the consolidation and restructuring process in the banking sector, particularly cutbacks in branches and staff, has thus far been slow and gradual. It has not yet resulted in a noticeable reduction in the number of branches or higher efficiency. In fact, some mergers—most prominently the take-over of Creditanstalt by Bank Austria—have obtained political approval only contingent on the explicit commitment to keep the two banks operating as separate entities within Austria and to cut staff only through normal attrition (Randa, 1997). Moreover, in May 1998, banks and bank employee unions reached an agreement to ensure that the introduction of the euro will not cause layoffs.

Mergers and Privatization

In 1991, after the Länderbank encountered financial difficulties, it was merged with Zentralsparkasse to form the new Bank Austria Bank Austria became the largest bank in Austria, ahead of Creditanstalt. In 1994, Bank Austria’s main shareholder, the City of Vienna Holding Company (Anteilsverwaltung Zentralsparkasse, AVZ) acquired the majority at GiroCredit (the central institute of the savings bank sector and the third largest bank). This was the first time that an acquisition had crossed the boundaries of political spheres of influence in banking, with GiroCredit having traditionally been in the “black” camp.

Some consolidation has also occurred among regional banks. In mid-1997, the Raiffeisen Landesbank Niederösterreich and the Raiffeisen Landesbank Wien merged. A different strategy is being pursued by three regional banks, which are listed on the stock exchange. The Bank für Oberösterreich und Salzburg (Oberbank), the Bank für Kärnten und Steiermark (BKS), and the Bank für Tirol and Vorarlberg (BTV) have been cooperating very closely and they are considered one combined bank, the Three Bank Group, now the sixth largest bank in Austria.

In early 1997, the federal government sold its stake in Creditanstalt (CA) (69.4 percent of voting rights, 48.6 percent of shares) to Bank Austria (BA) for S 17.2 billion. A subsequent exchange of Creditanstalt shares for Bank Austria shares increased Bank Austria’s voting right share to 98 percent In the domestic banking market, both banks will continue to operate under separate corporate identities, while their investment banking operations and their activities abroad will be merged.

The federal government’s stake in Bank Austria (15.4 percent of shares) has been unwound since mid-1997. A 6 percent share was sold on the stock exchange in small amounts, whereas in February 1998 the remaining stake was sold through a tender offer to Dresdner Kleinwort Benson to be placed widely. As of end-February 1998, the public sector stake in Bank Austria consisted of the AVZ’s 37.9 percent of voting rights (26.5 percent of shares).

As part of the political agreement on the acquisition of CA by B A, the City of Vienna Holding Company had to sell its 56.1 percent stake in GiroCredit to Erste SparCasse for S 8.2 billion. This transaction increased Erste’s share in GiroCredit to 82 percent and led to a full integration of GiroCredit into the newly established Erste Bank, which thereby became the second largest bank in Austria. The savings bank foundation, Anteilsverwaltung Sparkasse, remains the largest shareholder in Erste Bank with a 43.4 percent stake; savings banks own 9.4 percent, while the remainder is widely held.

The postal savings bank, Postsparkasse (PSK), is fully owned by the federal government During the next two years, it is planned to privatize 49 percent of the share capital. The principal contenders appear to be the Raiffeisen sector and the Bank für Arbeit und Wirtschaft (BAWAG), which is owned by the Austrian Federation of Trade Unions (52.7 percent) and Germany’s Bayerische Landesbank (45.7 percent).

Prospective challenges

161. In many European countries, including Austria, regulatory frameworks and institutional arrangements (which also comprise ownership structures) seem to have fostered a cooperative attitude among banks and have supported traditions of tacit understandings among banks, e.g., on deposit and loan conditions (Vives, 1992). In Austria, these implicit arrangements were bolstered by the influence of the major political parties, which has, however, markedly diminished as a result of mergers, privatizations, and more open hiring rules for the management of publicly owned banks.

162. The introduction of the euro is likely to make banking markets more contestable, thus creating more pressure on existing banks (Prati and Schinasi, 1997). Stemming from the tradition of political spheres of influence, a key challenge for the Austrian banking sector will be to manage the transition from a sector that has been characterized by practices that are more bureaucratic than entrepreneurial to a system exposed to more intense competition, both from within and from abroad. Such a transition poses risks as experience in other countries, including the Nordic countries, has demonstrated (Drees and Pazarbasioglu, 1998). A shift toward more competition and a switch in managerial incentives to profit orientation tends to make parts of the banking system infrastructure redundant and reveals excess capacities. In particular, a dense branch network, high staffing levels, and general overcapacity in banking, built up under relatively sheltered conditions of the past, will likely become unsustainable in the future. This, in turn, may prompt—in the new environment of strong competition, greater profit orientation, and more demanding customers—a rush for market share by banks in the attempt to create business for their extensive capacities. Such expansionary strategies have proven to be typically accompanied by more risk taking and by venturing into new business areas where small banks in particular have little experience.

163. To address this challenge, it will be essential to find a way to adjust the banking capacity in an orderly fashion. Estimates indicate that about 500 branches would need to be closed in order to converge to the EU average. Through innovative forms of structuring differentiated branch networks, where relatively numerous service centers offer standardized services, while more advice-(and labor-) intensive services are supplied through specialized (and much less numerous) banking centers, this consolidation process may be brought about with fewer disruptions. To what extent another wave of mergers, especially of local banks, would bring about the needed retrenchment in the sector remains an open question. Recent experience seems to suggest that mergers have thus far not implied fewer branches and substantial reductions in personnel (see also Tichy, 1993).

164. The appropriate retrenchment process will also depend in part on how two competing trends that follow from more openness and financial integration (namely concentration vs. specialization) will play out. The pressure to specialize may be exerted from U.S. and U.K. financial institutions that will increasingly invade continental markets, which are dominated, especially in German-speaking countries, by the notion of Allfinanz, which implies an extension and bundling of banking, investment, and insurance services.9 Specialization will be felt primarily in wholesale investment banking activities, whereas a broadening of the array of financial services is most likely to affect the way retail banking is conducted.

165. Even though initially competitive pressures stemming from the introduction of the euro and from international integration will affect primarily the wholesale segment of banking markets, gradually competition and cost pressures will also be felt at the retail level. This will also mean that the competitive pressures currently focused on the centers will increasingly reach the regions as well (Berndt, 1997). Smaller savings and cooperative banks will have to find (and implement) appropriate cooperation arrangements, sharing back-office operations, or mergers. The ownerless structure of many of these institutions and municipal ownership of the majority of savings banks could, however, stifle efficient restructuring among small and medium-sized banks.

166. For the largest banks in Austria, the challenges are of a different nature. Their concerns rest on the question of how to gain the “critical mass” perceived to be necessary to survive as a “European player.” Large banks are concerned that the common currency could mean a loss of business with large corporations. In the wholesale market, Austrian banks are threatened with losing business on at least two fronts: (i) to foreign banks and (ii) to financial markets as the result of disintermediation. Large corporations (and Austrian subsidiaries of foreign companies) will no longer need access to primary funds in Austrian schillings and are thus likely to pull business from Austrian banks and concentrate their cash management in large global (or European) banks.

167. The generally expected decline in standard banking business will be driven to a large extent by disintermediation (Tichy, 1993). The predominance of bank finance makes the Austrian banking system particularly vulnerable to growing disintermediation. As European financial markets integrate, deepen and become more easily accessible by corporations, direct market financing is likely to become more cost-effective for companies above a certain size. The nature of modern production, which tends to be less capital-intensive and thus less suitable to collateralized debt financing, also favors tapping financial markets directly. Disintermediation will also go hand-in-hand with—and will be boosted by—prospective changes in corporate governance of nonfinancial firms, which point toward more equity orientation and the emergence of a market for corporate control (Mooslechner, 1997). Notwithstanding the future improvements in debt and equity markets in Austria, there are, however, limits to direct finance in markets, since informational imperfections and market incompleteness will continue to provide a raison d’être for banks with local expertise for some time to come. Nonetheless, it appears inevitable that equity and bond markets will gain a larger role in the bank-centered financial systems of continental Europe. The open question for banks is whether they can participate in this new trend.

C. Recent Developments and Prospective Challenges for Debt and Equity Markets

168. Smaller financial markets are threatened by bigger financial centers. In particular, in the wake of the introduction of the euro, it is widely expected that large financial centers will attract most of the trading business on debt and equity markets. Vienna’s starting position is relatively weak since Austria’s financial markets are small. But there are various strategies to counter the threat and to retain some business, mostly the part that is not related to the largest corporations. The most promising strategy appears to be to improve the structure of the markets to retain most of the trading in Austrian equities and, at the same time, to focus on derivative products on Central and Eastern European financial assets. This strategy, though not without risks, will receive a boost from the announced cooperation with the German Stock Exchange in Frankfurt (Deutsche Börse).

Recent developments

169. As in other countries with universal banking systems, bank-intermediated debt finance (rather than equity, commercial paper, or bond financing) has been the preferred source of capital.10 The historically large role of public ownership of industry (albeit much diminished in recent years) and the sizable segment of largely self-financed small and medium-sized companies (mostly family-owned) also contributed to the limited scope of equity markets. The demand for private equity financing was to some extent crowded out by the traditionally large, though declining, volume of subsidized credit (Attems, 1995; and Helmenstein, 1998).

170. As a result, capital markets in Austria have traditionally been small. The market capitalization of the Vienna stock market (18 percent of GDP in 1997, up from 14 percent in 1995) is one of the lowest in the EU (Figure IV-4). In part due to the narrow base of active institutional investors, liquidity has been viewed as lacking (Rothensteiner, 1997). The relatively small turnover (relative to capitalization) indicates large closely held equity stakes. Only 4 percent of private households owned shares at end-1995—not much changed from 1990—compared with 5½ percent in Germany and 17½ percent in the United Kingdom. The surge in stock prices that characterized many other European stock markets during the past three years has been more muted in Austria (Figure IV-5). The lagging performance has been attributed in part to the sectoral composition of the Austrian stock index, in which dynamic sectors such as the pharmaceutical and automobile industries are underrepresented, and a lack of liquidity.

Figure IV-4.
Figure IV-4.

Austria: The Austrian Equity Market

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: Oesterreichische Nationalbank (1997).
Figure IV-5.
Figure IV-5.

Austria: The Austrian Equity Market

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source; IMF, International Financial Statistics.

171. The absence of a deep and liquid market for equity capital (and the correspondingly heavy reliance on debt finance) has led to relatively low corporate equity ratios. In fact, the average equity ratio declined from 27 percent in 1955 to 22½ percent in 1990, which was even lower than the average ratio in Germany (26 percent). More and more, however, it is recognized that low equity ratios may impede the capacity to cope with risk and may be an obstacle to innovation, apart from being problematic during cyclical downturns.

172. The bond market (with an outstanding volume equivalent to 64.4 percent of GDP in 1997) is more important than the equity market.11 But most of the debt traded is issued by financial institutions and public authorities (Figure IV-6). Debt issued by private corporations is exceedingly small.

Figure IV-6.
Figure IV-6.

Austria: The Bond Market, 1997

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: Oesterreichische Nationalbank (1998 a).

173. In 1991, the Austrian Options and Futures Exchange (ÖTOB) was established. Since its inception, the volume of contracts (measured by the notional value) traded on the exchange has surged to more than S 900 billion (equivalent to 38 percent of GDP) in 1995 (Figure IV-7). In 1997, the Vienna Stock Exchange and ÖTOB merged and converted from being run by the semi-public Stock Exchange Chamber into a joint-stock company (Wiener Börse AG) with the intent to maximize synergies while preserving the momentum of the innovative Options and Futures Exchange.

Figure IV-7.
Figure IV-7.

Austria: Volume of Contracts Traded on OeTOB, 1992-97

(In billions of schillings)

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A004

Source: Oesterreichische Nationalbank (1998 b).

174. With the opening of Central and Eastern Europe, Vienna as a financial center was expected to benefit from its first-mover advantage, owing to its close historical and cultural ties to the region. But while Austrian banks established a considerable presence in Central and Eastern Europe, the stock exchange is viewed as having not fully seized the opportunities (Rothensteiner, 1997). By contrast, the Austrian Options and Futures Exchange took the initiative by developing stock price indexes for the Czech Republic, Hungary, Poland, and Slovakia in 1996. It began trading options and futures contracts on these stock indexes as well as on ÖTOB’s Central European Clearing House and Exchange Index (CECE index) in 1997. The standardized options and futures contracts, which are denominated in U.S. dollars, are primarily targeted at the hedging demand of international (mainly institutional) investors. The Austrian banks are supplying these products and support liquidity in the market segment; given their strong presence in Central and Eastern Europe, they are well placed for this task.

Prospects for debt and equity markets

175. There is growing awareness that the depth, liquidity, and efficiency of debt and equity markets are becoming increasingly important competitive factors crucial for promoting economic growth and innovation. As investment in human capital, training, and R&D becomes more significant, equity financing will gain advantages over debt financing. The limited ability of such investment to serve as collateral and the higher risk involved in new technology are likely to complicate debt financing, while arguing in favor of equity financing. Similarly, the diminished role of large capital-intensive industrial conglomerates and the emergence of dynamic small new firms call for an enhanced role for venture capital. It is therefore considered important to facilitate access to the stock market for smaller and medium-sized companies, and for newly established firms. As other such markets in Europe, the Vienna stock exchange has responded by opening a new market segment for smaller companies (called fit), and venture capital funds (such as the Finanzierungsgarantiegesell-schaft (FGG)) have been set up.

176. Besides providing risk capital, equity markets serve to strengthen (and constitute a market for) ownership control. Economies that have reached a certain level of development cannot be expected to be efficient in the long run without developed markets for ownership control (Mooslechner, 1997). The importance of financial markets will also grow as investors become more conscious of rate of return considerations and switch to more sophisticated financial instruments (largely bypassing bank-issued instruments), and as retail investors have to provide on their own for part of their retirement because the public pension system is expected to come under increasing strain and may have to be made less generous.12

177. With the introduction of the euro and further inroads by electronic trading, the significance of the location of markets will likely diminish, and this will exert strong competitive pressure on national debt and equity markets. Trade in equities and bonds issued by larger corporations will likely migrate to the largest financial centers, such as London or Frankfurt, and will form a euro-wide equity market. Besides this first tier of markets for top corporations, smaller markets may find opportunities in becoming niche players in a second tier specializing at the national level in smaller, less well-known companies. In fact this reasoning helped spawn the New Markets in France, Germany, and also in Austria.

178. How can Vienna as a financial center position itself in this environment? In principle, financial centers can differentiate themselves through the efficiency of regulation, product competence, and the degree of liquidity (Helmenstein, 1998). As to regulation, the Viennese markets have made considerable progress (Box IV-3). The new Stock Exchange Act of 1993 (Börsegesetz) improved the legal framework (e.g., by making insider trading illegal), and an independent market supervisory agency was established in 1997. Recognizing that market-based financial systems require reliable information and accounting systems, laws that would permit corporate accounts based on IAS or U.S. GAAP standards are being drafted.

179. As to product competency, two—not mutually exclusive—strategies could be considered: (i) to establish Vienna as a trading center of Central and Eastern European stocks and (ii) to specialize in derivative products based on transition economy (underlying) financial assets. Despite its economic and cultural proximity, Vienna’s chances of becoming the regional center for stock trading look less promising since transactions costs and the efficiency of trading in transition economies are converging to Western European standards (Helmen-stein, 1997). By contrast, pitching Vienna as a financial center for intelligent derivative products on Central and Eastern European assets could be more promising since it exploits Austria’s relative advantages in regional know-how and expertise, the density of regulation, and the existing set of products offered by ÖTOB.

Key Regulatory Reforms

The Banking Act (Bankwesengesetz), 1994, incorporated EU banking directives in preparation for Austria’s accession to the EU, including the directives on own funds, solvency ratios, and banks’ annual accounts. The act also strengthened the cooperation between the Ministry of Finance and the Oesterreichische Nationalbank in banking supervision.

The First Amendment to the Banking Act, 1996, implemented inter alia EU directives on large loan exposures, deposit guarantees, and the supervision on a consolidated basis.

The Second Amendment to the Banking Act, 1997, adopted the EU’s directive on investment services and on capital adequacy to cover market risks that arise from securities trading and foreign exchange transactions.

The Amendment to the Stock Exchange Act (Börsegesetz-Novelle), 1993, outlawed insider trading, introduced a Standard Compliance Code for banks, insurance companies, and other financial institutions, and strengthened investor protection.

The Amendment to the Stock Exchange Act (Börsegesetz-Novelle), 1997, established the legal basis for the privatization of the Vienna Stock Exchange and its conversion into a joint-stock company.

The Securities Supervision Act (Wertpapieraufsichtsgesetz), 1997, created an independent securities supervisory agency.

An information system, Hermes, was introduced in 1996 for the prompt dissemination of price-sensitive information by companies listed on the stock exchange.

A fully automated trading system, EQOS, has been in operation since mid-1996; it includes screen-based trading with automatic execution, using an open public orderbook, which is supplemented by market maker quotes.

The tax reform in 1994 abolished the stock exchange turnover tax on dealer transactions and the wealth tax.

180. The recently announced cooperation agreement with the German Stock Exchange in Frankfurt (Deutsche Börse) is an important step in alleviating concerns that Vienna could lose trade in stocks and bonds of large corporations to Frankfurt and see more of its trading volume in Central and Eastern European stocks and derivatives move to larger financial centers.13 According to the agreement, all Austrian stocks will be traded exclusively in Vienna Austrian stocks currently traded in Frankfurt will be delisted there. The Deutsche Börse and the Vienna Stock Exchange will establish in Vienna a Central and Eastern European stock exchange that would handle all trading in transition economy stocks and derivatives. Austria’s role as a key financial center for trade in Central and Eastern European stocks, options, and futures would thus be ensured, at least for the time being. Another major element of the agreement envisages the adoption of the new German electronic trading system Xetra in the second half of 1999 (in replacement of EQOS, the Austrian automated trading system) and the introduction of market makers to enhance liquidity. The use of Xetra is expected to cut transactions costs in half and thus bring costs in Vienna (currently a high 1.25 percent of transaction value) in line with other centers.14

181. Building on recent progress in market structure and regulation, which introduced the new supervisory agency, strengthened the role of institutional investors by allowing pension funds, and improved price transparency and information flow, the cooperation with the German stock exchange will secure Vienna’s position not only as the key market for Austrian financial assets but also in terms of expanding its market potential in Central and Eastern Europe. In order to invest more easily in Central and Eastern European assets, many institutional investors of the EU (such as insurance companies) require a listing at a regulated market within the EU.

182. Skepticism about the future role of national financial centers in the euro area is justified. Although the outlook for Vienna as a regional center has brightened with its cooperation agreement with Frankfurt, challenges remain: pressures to compete internationally and to innovate will certainly intensify. The structure, regulation, and the set of financial instruments being offered will need to be continuously adjusted to the rapidly changing international environment. It should be recognized that strengthening Vienna as a financial center will also provide a boost to the competitiveness of the investment banking activities of Austria’s universal banks and could complement their traditional banking activities.

STATISTICAL APPENDIX

Table A1.

Austria: GDP and Expenditure Components

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Source: Austrian Institute of Economic Research (WIFO).

At constant 1983 prices.

Preliminary estimates.

Net of V.A.T

Change as a percentage of GDP in previous year.

Table A2.

Austria: Contribution to Real GDP Growth

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Source: Austrian Institute of Economic Research (WIFO).

Preliminary estimates.

Change as a percentage of GDP in previous year (at constant 1983 prices).

Net of V.A.T.

Table A3.

Austria: National Income and its Distribution

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Source: Austrian Institute of Economic Research (WIFO).

Preliminary estimates.

In percent of net personal disposable income.

Net personal disposable income deflated by private consumption deflator (constant 1983 prices).

Table A4.

Austria: Gross Domestic Product by Sector

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Source: Austrian Institute of Economic Research (WIFO).

At constant 1983 prices.

Preliminary estimates

Table A5.

Austria: Labor Market

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Source: Austrian Institute of Economic Research (WIFO).

Preliminary estimates.

Population of age 16 to 64.

Based on Eurostat.

In percent of working age population.

In percent of total labor force.

Table A6.

Austria: Prices, Wages, and Productivity

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Source: Austrian Institute of Economic Research (WIFO).

Preliminary estimates.

Series discontinued in 1996.

Mining and manufacturing, excluding small-scale industries.

Building and civil engineering.

Table A7.

Austria: Federal Budget—Administrative Basis

(In billions of schillings)

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Source: Ministry of Finance.

Mineral oil and tobacco taxes.

Mainly contributions to unemployment insurance and to the fund for family allowances.

Including S 83 billion from accrued revenues from the sale of the usufruct of ASFINAG.

Including contribution to salaries of teachers employed by the states.

Pensions of federal civil servants and contribution to pensions of teachers employed by the states.

Including investment expenditure on defense.

Mainly to the general pension system (ASVG; schilling 68.1 billion is the 1996 expected outturn).

Including agriculture.

Including transfers to other levels of government and including reserve operations by federal funds.

Including commissions and management fees and provision for interest on zero-coupon bonds; also including interest on swap transactions.

Including reserve operations except federal funds.

Adjusted for double counting, excluding swap transactions.

1998’s change over 1997 expected outturn.

Revenue and expenditure in connection with public debt and cash bridging credits.

Table A8.

Austria: Federal Budget—Cash Basis 1/

(In billions of schillings)

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Source: Ministry of Finance.

Adjusted for double counting.

Mineral oil and tobacco taxes.

Mainly contributions to unemployment insurance and to the fund for family allowances.

Including contribution to salaries of teachers employed by the states.

Pensions of federal civil servants and contribution to pensions of teachers employed by the states.

Including investment expenditure on defense.

Mainly to the general pension system (ASVG; schilling 68.7 billion is the 1997 expected outturn).

Including agriculture.

Including transfers to other levels of government; from 1995, also including transfers to the EU.

Including commissions and management fees and provision for interest on zero-coupon bonds; excluding interest on swap transactions.

Taxes after revenue sharing as a percent of GDP.

Table A9.

Austria: Financing of the Federal Deficit

(In billions of schillings)

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Source: Ministry of Finance.

Expected outturn.

Decrease: -.

Increase: -.

Profit: -.

Table A10.

Austria: Debt and Debt Service of the Federal Government

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Source: Ministry of Finance.

Schilling (“domestic debt”) and foreign currency (“foreign debt”) denominated debt. The value of foreign debt is adjusted for changes in exchange rates.

On a cash basis.

Tax revenues after revenue sharing.

For 1988 and after, this ratio is not comparable with previous years owing to changes in accounting practice.

Expected outturn.

Budget.

Budget proposal.