This Selected Issues paper for Austria looks at the fiscal burden facing Austria owing to aging, and the policy steps necessary to address it. It gives a short description of the Austrian pension, health care, and long-term care systems, and describes how aging will affect the costs of these systems. It then analyzes the development of age-related spending and the sustainability of general government finances under different scenarios, and quantifies the primary adjustment required to keep public finances on a sustainable path in the long term.

Abstract

This Selected Issues paper for Austria looks at the fiscal burden facing Austria owing to aging, and the policy steps necessary to address it. It gives a short description of the Austrian pension, health care, and long-term care systems, and describes how aging will affect the costs of these systems. It then analyzes the development of age-related spending and the sustainability of general government finances under different scenarios, and quantifies the primary adjustment required to keep public finances on a sustainable path in the long term.

II. A System on the Move: Internationalization and Adaptation in the Austrian Financial Sector8

A. Introduction

34. The ongoing changes in the Austrian financial system reflect evolution in financial services internationally as well as factors specific to Austria, the Euro area, and the neighboring Central and Eastern European Countries (CEECs). Since 1995, the openness of the Austrian financial system has increased significantly, Austrian households have demonstrated a greatly increased preference for alternatives to traditional bank savings, and the Austrian banking sector is in an ongoing process of consolidation and restructuring. At the same time that the financial system is being transformed by these forces, the regulatory and supervisory framework is also adapting. The legal foundation for prudential regulation and the supervisory structure have been modernized and strengthened, not only to respond to developments in the Austrian financial sector, but also to reflect ongoing developments in international best practices. In this connection, in particular, the regulatory and supervisory framework has been strongly influenced by the entry of Austria into the European Union in 1995 and the concomitant requirement to implement EU financial sector directives. These recent changes have laid the foundation for the financial sector to continue to meet the intermediation needs of Austria and to develop as a strong regional player. The next few years will be crucial in determining success as financial institutions strive to meet the continuing challenges of increasing competition domestically and abroad, and the new regulatory and supervisory framework is further refined and put into practical application.

35. This short paper highlights some important trends in the Austrian financial sector, in particular some that may be overshadowed by more visible developments. The expansion of Austrian banks into the neighboring CEECs is well known, but the increase in the percentage of international assets held by Austrian mutual funds and insurance companies has been even greater than the increase in banks’ international assets. At the same time, the acquisition of a controlling share in Bank Austria by Bayerische HypoVereinsbank meant that there has been a major increase in the share of Austrian bank assets controlled by foreign-owned institutions. The establishment in April 2002 of a new financial service regulator was the most visible step to revamp the framework for prudential oversight of the sector. Although less visible, but just as significant, were the recent major revisions to laws and regulations, the expansion of supervision activities and the devotion of increased resources to researching, identifying and monitoring financial stability which,. The next section of this paper provides a snapshot of the Austrian financial system today. It is followed by sections on the evolution of the domestic banking sector; international expansion; and a review of recent changes to the prudential framework and remaining supervisory challenges.

B. A Snapshot of the Austrian Financial System

36. The Austrian financial sector has traditionally been bank-dominated, and banks still account for the majority of intermediation (Table II-1). The position of the banks is even more dominant than suggested by the bank asset data since they control the majority of large mutual fund companies, and also have significant insurance subsidiaries and affiliates. However, the amount of intermediation undertaken by banks is somewhat overstated, due to the high proportion of loans and advances to credit institutions included in total assets (€ 172 billion, or 29 percent of total assets at end-2001). In large part, this reflects the tiered structure of the savings bank and cooperative sectors of the Austrian banking system, with individual banks placing liquidity reserves and managing positions through centralized providers of services. Erste Bank, for example, had at end-2001 about one-third of its total assets, and a similar volume of liabilities, comprised of interbank claims largely arising from its role as a centralized service provider to its 63 member savings banks.

Table II-1.

Austrian Financial Intermediaries, End-2001

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Source: OeNB.

37. Capital markets are quite small relative to the banking sector, and at the lower end of the range among the EU countries (Figures II-1 and II-2). Market capitalization of the Vienna Stock Exchange at end-2001 was € 27.5 billion, with turnover during the year amounting to € 16.3 billion. Bond markets are dominated by public sector and bank issues, with modest amounts of corporate issues outstanding (Table II-2). During 2001, a record year for Austrian corporate issues, € 700 million new bonds were placed.

Figure II-1.
Figure II-1.

Par Value of Bonds Outstanding

(In percent of GDP, 1997)

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: European Central Bank.
Figure II-2.
Figure II-2.

Market Value of Equities

(In percent of GDP, 1997)

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: European Central Bank.
Table II-2.

Austrian Bonds Outstanding, End-2000

(In billions of euros)

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Source: OeNB.

38. The relatively small size of the Austrian capital markets reflects factors from both the supply of capital and the demand for debt. On the supply side, Austria has relatively few and small institutional investors. Given the generous state pension system, the modest size of private pension plans is not surprising (Figure II-3). Austrians save relatively small amounts through insurance holdings (Figure II-4), in part because Austria does not provide the tax incentives prevalent in some countries for insurance products, and in part because insurance products may be more important as part of individuals’ retirement savings in countries with less generous state pension plans. Moreover, Austrians may be encouraged by subsidized mortgage financing to favor investment in housing over other savings vehicles. On the demand side, the more favorable tax treatment of debt relative to equity seems likely to have encouraged the development of bank financing at the expense of the capital markets.9 Few and small institutional investors, coupled with a lower historical appetite of individual Austrian savers for equity investments (Figure II-5), and a corporate preference for debt over equity, all contribute to a bank-dominated financial system.

Figure II-3.
Figure II-3.

Financial Assets of Pension Funds, End-2000

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: OECD Institutional Investors Statistical Yearbook.1/ End-1999.2/ End-1998.
Figure II-4.
Figure II-4.

Financial Assets of Insurance Companies, End-2000

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: OECD Institutional Investors Statistical Yearbook.1/ End-1999.
Figure II-5.
Figure II-5.

Percent of Population Owning Shares, 2000

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: OeNB.

C. The Evolving Domestic Banking Sector

39. The Austrian banking system historically comprised a number of distinct sectors with unique ownership structures, targeted to serve specific markets (Table II-3). Over time, the distinctions between the sectors has become less significant. Most banks today offer a wide range of bank and non-bank financial services, but there are still some important differences in ownership structure, as well as considerations that may transcend the legal structures of the banks. Banks owned by a controlling shareholder or widely held (joint stock) banks were historically less important than banks with a cooperative or mutual structure, or controlled by foundations. These differences in ownership structures can result in banks having objectives—such as serving the needs of the community or maintaining high levels of individualized services—which may take precedence over profit maximization, provided that the banks are sufficiently profitable to support future growth. The large market shares of banks with objectives other than profit maximization is one reason why spreads and efficiency historically have been low in Austria. This has changed, in recent years, as innovative legal structures have been introduced to permit greater access to capital for the cooperative and savings bank sectors. The need to meet the income expectations of shareholders, in addition to providing the service levels expected by cooperative or mutual owners, is one of the forces that have led Austrian banks to look externally for growth and profitability.

Table II-3.

Austria: Banking System, End-2001

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Source: OeNB.

40. The number of Austrian banks has been declining steadily, with an average of over 30 banks exiting the market each year since 1980, largely through mergers. The decline in banking outlets has been less pronounced, with the current total representing a decline of about 200 from the 1996 peak. With about 5,400 bank branches serving a population of 8 million, Austria has one bank branch for each 1,480 people, one of the highest branch densities in the world.10 The 20 bank mergers that occurred in 2001 might appear to be a large number for a country of Austria’s size. However, with 600 Raiffeisen banks, over sixty savings banks, a similar number of Volksbanks, and many small private banks, Austria still has over 900 mostly small banks. While some economies and efficiencies are gained through the centralized provision of services in the tiered sectors, there is a cost to Austrian consumers in having small, locally-owned and controlled banks. To the extent consumers are prepared to pay higher costs for services—or owners are prepared top accept lower returns, there will be less pressure for rapid consolidation of the banking system. But, the desire to maintain the local ownership and control of the individual cooperative and savings banks and a high level of branch service is a constraint on further consolidation, making it likely that the pace of consolidation and concentration levels reached in Austria will be lower than in countries that lack a history of cooperative and mutually owned banks.

41. The sectoral groupings in the Austrian banking sector remain important for understanding both the tiered banking structure (Table II-4) and the mutual support provided by the legally independent banks within each sector. Deposit insurance is provided on a sectoral basis, with banks being legally required to belong to the deposit insurance scheme for their sector, and being assessed after the fact on a formula based on their size for any required deposit insurance payments. This contingent liability for individual banks, potential loss exposure of the “apex” banks (Erste Bank, RZB and OeVAG), plus the reputational risks to the survivors of a failure within the sector all provide incentives to be proactive in dealing with weak member banks, for example by arranging mergers with stronger partners. These incentives have been further strengthened with the recent adoption in the savings bank and Raiffeisen sectors of mutual guarantee agreements that make the individual member banks jointly and severally liable for the deposits of all banks in the sector.

Table II-4.

Austria: Savings and Cooperative Banking Sectors

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42. The largest of the joint stock and private banks is Bank für Arbeit und Wirtschaft AG (BAWAG) which, after its acquisition of the state-owned Österreichische Postsparkasse (PSK) in 2000, became the third largest banking group in Austria. The eight state mortgage banks, seven of which have guarantees from the governments of their respective Länder, provide a range of banking services in addition to their core mortgage financing businesses. Building societies channel subsidized savings into mortgage financing, and there are several special purpose banks, the largest of which is Kontrollbank. Kontrollbank, owned by the major Austrian banking groups, provides export financing supported by sovereign guarantees and provides loans collateralized by receivables guaranteed under the Export Guarantee Act. It also acts as the clearing house for the Vienna Stock Exchange and is the central securities depository and settlement agency.

43. With the completion of the privatization of PSK, government shareholding in the banking system has been reduced to about 0.1 percent of total bank equity. However, there are strong links between the provinces and the regional mortgage banks, with seven of the eight having the benefit of guarantees from their respective Land. Also, municipalities originally sponsored many of the savings banks, and the foundation (a limited liability company without shareholders) used to control banks may in some cases provide for significant local government influence.

44. As in many other developed countries, Austrian banks have seen increasing competition for savings from mutual funds and other savings vehicles. While the growth in Austrian mutual funds has recently slowed, total mutual fund assets are now equivalent to about 45 percent of total bank liabilities to customers (excluding interbank), or almost 85 percent of total bank savings deposits (Figure II-6). Banks control the majority of Austrian mutual funds, so they are generally able to retain the customer relationship when consumers opt for a mutual fund investment rather than a savings deposit. However, the increasing preference for non-bank savings vehicles may put additional pressures on banks’ cost of funds by reducing the relative size of the pool of low-interest savings accounts.

Figure II-6.
Figure II-6.

Austria: Bank Savings Deposits and Mutual Fund Assets

(In billions of euros)

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: OeNB.

45. Austrian banks typically have narrow margins and high non-interest expenses, although aggregate data for the system obscures significant variations among the sectors (Tables II-5, II-6). The savings bank sector, although it has the lowest net interest income, also has the lowest level of non-interest expense, so savings banks net income is close to the average for the banking system. Austria’s banking system has consistently ranked near the bottom of the EU in earnings (Figure II-7). The low earning capacity of the Austrian banks limits the ability to build capital through retained earnings and lessens resilience to credit losses.

Table II-5.

Austria: Banks Net Interest Income

(In percent of total assets)

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Table II-6.

Austria: Banks Non-Interest Income

(In percent of total assets)

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Source: OeNB.
Figure II-7.
Figure II-7.

Credit Institutions Average Return on Assets, 1997-2000

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: Eurostat.

46. High levels of capitalization and conservative provisioning would tend to mitigate the lack of resilience from low earnings. All Austrian banks reported compliance with capital adequacy requirements at end-2001, with the banking system as a whole having regulatory capital equal to 14.6 percent of risk-weighted assets. Asset quality and provisioning information is currently only available annually from bank supervisory reports completed by the bank’s external auditors.11 Nevertheless, the limited data available indicates that Austrian banks typically have established provisions in excess of 120 percent of non-performing loans.

D. International Focus

47. The expansion of Austrian banks into the CEECs is an important facet of the internationalization of the Austrian financial sector. This has been well documented,12 but the focus on bank expansion in CEECs may obscure the more general trend of the increasing international orientation of the Austrian financial sector as a whole. While foreign assets relative to total assets of the banking system increased from about 21 percent in 1995 to over 26 percent at end-2001, the increases since 1995 in foreign holdings by Austrian mutual funds from 30 to 58 percent of total assets and insurance companies from 4 to 25 percent are more dramatic (Figure II-8). The increase in international holdings potentially benefits Austrian investors through diversification and returns that may exceed those available in domestic markets.

Figure II-8.
Figure II-8.

Austria: Foreign Assets of Financial Intermediaries

Citation: IMF Staff Country Reports 2002, 183; 10.5089/9781451802283.002.A002

Source: OeNB.

48. There are many factors that have influenced the increasing outward focus of the Austrian financial sector. For the pension, insurance, and mutual fund sectors, the very small size of the Austrian capital markets virtually forces an outward orientation as assets grow. The free float of shares on the Vienna Stock Exchange amounts to only about 40 percent of market capitalization, meaning that there is only about € 11 billion in shares available for purchase. Coupled with the small size of the bond market, this means that Austrian institutional investors, while small by European standards, have a demand for capital markets instruments that outstrips domestic supply.

49. The mature nature of the Austrian banking markets caused banks to look outward for growth opportunities and improved profitability. Austrian markets have been characterized by relatively narrow margins and high operating costs. Coupled with a stable macro environment and low levels of loan losses, the result has been a banking system with a history of adequate but not exceptional profitability. Due to Austrian banks’ small size and only middling efficiency, expansion into the EU was not practical. The neighboring CEECs, however, provided an opportunity for Austrian banks to capitalize on their geographic proximity, historical links, and greater banking sophistication. The small size of the banking systems in the transition economies meant that Austrian banks have been able to acquire or build significant market shares with relatively small investments (Table II-7).

Table II-7.

Share of Majority Austrian Owned Banks in CEEC Markets, End-June 2001

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Source: OeNB.

50. Returns from the Austrian banks’ CEEC investments, both on an absolute and risk-adjusted basis, have so far have exceeded returns from domestic business. Not only are margins higher, but loan loss experience has been lower, due in part to state-support through guarantees or put options provided in several cases where Austrian banks purchased CEEC banks through privatization. This state support is limited to loans existing at the time of privatization, so future loan loss experience will be increasingly dependent on the ability to manage the credit risk of subsidiaries in countries where the legal and accounting infrastructure remains less well developed than in the Austrian home market. So far, a conservative approach characterized by slow loan growth has helped to keep loan losses low. Total assets of Austrian banks in the CEECs were € 59 billion at end-2001, amounting to about 10 percent of total Austrian banking assets. Profits attributable to the CEECs ranged from 25 to 63 percent for the various banking groups, and amounted to about one-third of the profit of the Austrian banking system.

51. The expansion strategies of the Austrian banking groups are not identical, but in general there is a focus on building a strong retail and commercial banking franchise in the CEECs. The expectation is that continued financial deepening will increase banking assets in the CEECs from an average of less than 60 percent of GDP today towards the EU average of around 245 percent. Austrian banks expect that they will be able to hold or increase their market share as this growth takes place. The presumption is that their early entry will provide them an advantage over other international banks that may be attracted later, as these banking markets become more developed. Currently, two Austrian banks rank in the top ten foreign banks in eastern and central Europe, and the CEEC investments of Bayerische HypoVereinsbank of Germany are managed through its Austrian subsidiary, Bank Austria (Table II-8).

Table II-8.

Regional Market Share of Foreign Banks in East and Central Europe

(In percent of regional banking assets)

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Source: The Banker, November 2001.

52. Foreign participation in the Austrian financial sector has been increasing at the same time as Austrian institutions have been looking outward (Table II-9). Most of the foreign-controlled banks in Austria are small. They accounted for less than 3 percent of total banking system assets prior to the acquisition of a controlling interest in Bank Austria by Germany’s HypoVereinsbank, which increased the foreign-owned share of banking system assets to the current level of approximately 26 percent.13 In addition, German banks have strategic investments in two of the large Austrian banking groups (OeVAG—Deutsche Zentral-Genossenschaftsbank; BAWAG—Bayerische Landesbank), and at end-2000, 167 foreign credit institutions were active in Austria on the basis of the EU freedom of services provisions.

Table II-9.

Austria: Number of Foreign Credit Institutions

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E. Regulation and Supervision

53. The legal foundation and practice of supervision in Austria has been evolving rapidly to respond to developments in the financial sector, to implement the EU financial sector directives, and to introduce ongoing improvements in international best practice. Banking legislation has been completely revamped, there is a new focus on cooperation with supervisors internationally, and greater coordination has been required among national supervisors to address conglomeration and distribution networks that cross traditional boundaries between different types of financial institution.

54. The most visible change in supervision and regulation is the establishment, effective April 1, 2002, of a single financial supervisory agency, the Financial Market Authority (FMA) (Box II-1). Previously, the Ministry of Finance (MoF) had responsibility for bank supervision, as well as the oversight of insurance and pension funds, and the OeNB contributed to financial supervision through a program of on-site bank examinations and off-site analysis as well as the collection of prudential returns and other banking statistics. One concern with this arrangement was the lack of independence from government, since, despite the involvement of the independent central bank, final responsibility for supervision issues rested with the Ministry.

Austria: The Financial Market Authority

Background: The Austrian government announced in February 2000 the intention to create an independent bank supervisory authority. Previously, the supervisory apparatus lacked independence, as responsibility for bank supervision rested formally with the MoF. The OeNB undertook on-site examinations and analysis, and provided input and advice to the MoF. Various options, including making the OeNB responsible for banking supervision, had been discussed, but the government ultimately opted for a unified supervisory agency responsible for insurance, pensions, capital markets, and banking.

Legal Basis: The Financial Market Supervision Act (FMABG) was approved by parliament in the summer of 2001. However, the Austrian Constitutional Court’s December 2001 ruling that the basis for legal independence of the Austrian Securities Authority (ASA) was contrary to the constitution invalidated the FMABG, since a similar legal structure had been planned for the FMA. With the consent of two-thirds of parliament, a constitutional provision was passed to establish the FMA as a public entity with legal independence. The necessary amendment to the FMABG was passed in March 2002, and the FMA began operations on April 1, 2002.

Governance and funding: The FMA is managed by an Executive Board consisting of two members, one nominated by the MoF, and one nominated by the OeNB. The Supervisory Board is responsible for the governance of FMA and oversight of management. The OeNB nominates three of the six voting members of the Supervisory Board appointed by the MoF, including the Deputy Chairman. There are two non-voting members representing the Austrian Economic Chamber (Wirtschaftskammer Österreich). The FMA obtains 10 percent of its budget from the federal government and the balance from direct charges to regulated institutions.

Coordination with the OeNB and MoF: The Financial Market Committee, established to foster cooperation among the institutions with broad responsibility for stability, will meet at least quarterly in an advisory role. The FMA, OeNB and MoF each appoint a member and a deputy to this committee. Formal cooperation and coordination between the FMA and OeNB is established in the FMABG. Among other things, the OeNB must be consulted in matters of licensing and formal supervisory action. The OeNB will continue to collect monthly returns and quarterly reports from banks and maintain the central credit register, will continue to conduct on-site examinations in the area of market and credit risk, and may be requested by the FMA to conduct on-site examinations covering other areas.

Structure: The FMA is organized into four departments: (i) banking supervision; (ii) insurance and pension funds supervision; (iii) securities supervision; and (iv) legal, services and internal control. There are currently about 100 staff, largely transferred from the MoF and ASA, with plans to recruit an additional 50 staff over the next 6 to 12 months. The biggest need is recruitment and training of bank examiners and analysts.

55. Creation of a supervisory agency with legal independence is a welcome step in complying with international best practice. However, the real challenge is to ensure that the legal framework is effectively implemented, resulting in prudent and efficient supervision of the financial sector. The new FMA has to deal with significant transitional issues as it incorporates staff transferred from the MoF and securities supervisor, and recruits and develops the necessary expertise in banking supervision. Experience elsewhere indicates that it will be a significant challenge to develop a common culture and capitalize on the potential of a single agency to effectively supervise financial conglomerates.

56. Ongoing revisions to the Banking Act and regulations and continuous improvements in the practice of supervision, while garnering less public attention than the FMA, have been important in implementing EU standards for the financial sector and preparing for the expected revisions to the Basel Capital Accord. The Banking Act as revised through 2001 contains extensive prudential requirements with respect to market risks and internal models. The supervisory focus is increasingly on the identification and measurement of risks and the potential risk-sensitivity of credit institutions.

57. The OeNB has been increasing the number of staff devoted to on-site examinations, and with the additional resources the FMA will bring to bear, it is expected that all banks will be inspected periodically. Previous supervisory practice placed greater reliance on external audits and off-site analysis, with the OeNB typically conducting routine examinations of a small number—perhaps five percent of all banks—in a given year. The OeNB has the authority under the Banking Act to undertake special or targeted examinations, and in 2001 made on-site visits to 92 banks to focus on specific issues. Targeted examinations continue to be an important supervisory tool, but regular on-site reviews of banks’ application of their policies and procedures—particularly with respect to risk management and internal controls—is an important part of moving towards a risk-focused supervisory approach. While all banks do not need to be examined every year, ensuring that all banks will be examined periodically, and at the same time using risk profiles to determine which banks require more frequent or more intensive supervisory oversight, should strengthen the ability to detect and deal with any emerging problems on a timely basis.

58. A review of prudential reporting requirements in 2000 concluded that the statistical information available to banking supervisors did not fully meet the requirements for comprehensive off-site analysis. In conjunction with the banking industry, the OeNB has been developing revised requirements to expand the coverage and/or increase the frequency of reporting on key risks. Effective from the beginning of 2002, banks are required to report quarterly on asset quality and provisioning, while previously the supervisors had relied on the annual supervisory reports of external auditors for this information. A quarterly requirement for solo and group large exposure reporting has also been introduced, and by end-2002 it is expected that the requirement for regular reporting of interest rate and maturity risk will be in place. A new directive for supervision of conglomerates is in preparation. As a single regulator, the FMA should be well placed to supervise groups on both a solo and consolidated basis, but there is currently no legal foundation for the supervision of conglomerates.

59. Revisions to the Banking Act have been implemented to address concerns about potential abuse of anonymous bearer passbooks. Previously, it was possible to open a passbook anonymously and conduct transactions with only a password as identification. Passbooks can no longer be opened without appropriate identification of the customer and, effective June 2002, it will no longer be possible to make anonymous deposits or withdrawals. OeNB’s self-assessment is that Austria is now fully compliant with all the Financial Action Task Force (FATF) recommendations.

60. The OeNB and MoF have been focusing on developing greater knowledge of the supervisory apparatus in the CEEC countries, and-to facilitate information exchange—memoranda of understanding have been concluded with the supervisiory authorities in the Czech Republic, Hungary, and Slovenia, and are being negotiated with Slovakia and Poland. The OeNB will begin its first on-site examinations at foreign establishments of Austrian banks in the third quarter of 2002. The OeNB has identified and monitors on an ongoing basis the country risk exposure of Austrian banking groups. More broadly, the OeNB has undertaken a wide range of financial stability-related research projects, and has since June 2001 published a semi-annual Financial Stability Report.

61. Austria’s limited experience with bank failures (four since 1998) has generally been concentrated in smaller joint stock and private banks. This is likely due to the prevalence of collective action within the cooperative and savings bank sectors to resolve weak banks without formal action on the part of the supervisor. The Banking Law and FMABG provide the supervisory authority with a full range of tools and sanctions for dealing with problem banks, but in the past, bank owners have sometimes been able to use the legal system to stay or overturn supervisory actions. This has led to delays, both because of the need to attempt to ensure an air-tight legal case prior to taking action, and because of lengthy appeals by banks against actions that have been taken. The legal system imposes some unavoidable constraints, but there is an expectation that over time the FMA may be able to move away from a strict legalistic approach, enabling faster action to be taken if problems are detected.

8

Prepared by Michael Andrews, MAE.

9

Interest payments are tax deductible, while dividends are paid from a company’s after-tax income, and are in turn subject to income tax in the hands of the investor (double taxation).

10

The comparable figures for Germany and Switzerland, two other highly-banked countries, are one branch for each 1,725 and 1,854 persons respectively.

11

More detailed and timely data on asset quality will be available for 2002 following the implementation of a quarterly reporting requirement.

12

See the Austrian National Bank’s Financial Marked Stability Report Number 1 (June 2001) and Number 2 (December 2001) and the 2000 Selected Issues chapter “Challenges of European Financial Integration: The Case of Austria.”

13

OeNB data for end-2001 indicates that foreign controlled subsidiaries and branches in Austria had a market share of 19.7 percent. Creditanstalt, a subsidiary of Bank Austria (controlled by Bayerische HypoVereinsbank of Germany), was still classified by the OeNB as a domestic bank at end-2001 pending final legal integration into the Bank Austria structure. Adding the 6 percent market share of Creditanstalt, which was reclassified by the OeNB as a foreign bank in 2002, results in a foreign bank market share of 25.7 percent at end-2001.

Austria: Selected Issues
Author: International Monetary Fund