Financial System Stability Assessment: Update

The Austrian authorities have been making great efforts since 2003 to enhance the quality of banking supervision and keep up-to-date with banking sector developments. Banks face a reputation risk arising from exposure to money laundering/financing of terrorism risk in both domestic and international activities. The authorities have already elaborated contingency plans for dealing with bank failures and other problem cases. Experience elsewhere suggests also that it can be valuable to set up a system that mandates a decision on required remedial action promptly after warning signs are detected.


The Austrian authorities have been making great efforts since 2003 to enhance the quality of banking supervision and keep up-to-date with banking sector developments. Banks face a reputation risk arising from exposure to money laundering/financing of terrorism risk in both domestic and international activities. The authorities have already elaborated contingency plans for dealing with bank failures and other problem cases. Experience elsewhere suggests also that it can be valuable to set up a system that mandates a decision on required remedial action promptly after warning signs are detected.

I. Introduction

1. This report updates and extends the findings of the 2003 FSAP, which found the Austrian banking sector to be generally sound.1 The expansion into CESE countries and some CIS countries helped boost the performance of the banking sector, offsetting low profitability in the home market. Supervision was based on strong institutions and a comprehensive and modern legal framework, consistent with European Union (EU) directives. However, the FSAP noted that integration of the system within the euro zone and the large and growing exposure to the CESE region gave rise to certain vulnerabilities.

2. Recommendations from the 2003 FSAP focused on measures to limit certain risks. Specifically, it was recommended that the authorities (i) support the bank consolidation process; (ii) continue to strengthen governance; (iii) address the special challenges created by the foreign currency borrowing by residents and the state-sponsored pension scheme, the Zukunftsvorsorge; (iv) reform the deposit insurance scheme; and (v) upgrade arrangements for dealing with systemic problems, should they arise, including by the formulation of contingency plans. Many of the recommendations were broadly implemented (Appendix I).

3. Since 2003, the soundness of the financial system has been helped by generally satisfactory macroeconomic performance (Table 1). While the economy remains closely integrated with those of Western Europe, corporations have benefited from strong exports to, and direct investment in, CESE countries. Going forward, a slowdown is likely in the context of current downside risks to the global economy.

Table 1.

Austria: Selected Economic Indicators

(In percent, except where indicated; projections from 2008Q1)

Total area

83,850 square kilometers

Total population (2006)

8.3 million

GDP per capita (2007)

US$ 44,966 (€ 32,800)

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Sources: Austrian authorities; Datastream; and IMF staff estimates and projections.

Contribution to GDP growth.

Payroll employment.

In percent of total labor force.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps. 2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.

2008 number is for April.

2008 number is for February.

4. The Austrian financial system remains bank-dominated (Table 2 and Appendix II). There are still about 850 banks, organized into various sub-sectors and tiers, but six institutions hold about half of total assets, three of which are foreign-owned. An unusual characteristic of the Austrian economy is the strong demand for foreign currency loans.2 The authorities have taken steps to raise awareness of exchange rate risk and enhance bank risk management of these loans, and as interest differentials have narrowed, the ratio of foreign currency to total loans has started to decline, and they are now almost all denominated in Swiss francs. Yet, the level is still high, especially for mortgage loans (Table 3).

Table 2.

Austria: Structure of the Financial System

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Source: OeNB.

Includes severance funds, investment companies, and real estate funds.

Foreign bank branches pursuant to Article 9 of Austrian Banking Act.

The changes in the total assets of the joint stock and savings banks partly reflect reclassification among sectors.

December 2006.

November 2007.

Table 3.

Austria: Banking Sector Financial Soundness Indicators:

(In percent; end of period)

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Source: OeNB.

Data as of end-2006.

Data as of 2007 Q3.

5. Almost all the large Austrian banking groups now have major subsidiaries in several CESE countries and some CIS countries. Often, these subsidiaries are large relative to the host countries’ financial systems. Austrian exposures to the CESE are far larger (relative to GDP) than those of its European peers: in 2006, the total assets of the six largest Austrian banks in the CESE region were equivalent to over 60 percent of GDP (a fifth of total banking assets or 3 times regulatory capital), and generated about 40 percent of banks’ profits. This total is roughly evenly divided between the CESE countries that joined the EU in 2004, and the remainder.

6. Some segments of the nonbank financial sector have experienced significant growth in recent years. Occupational pension fund assets, non-term life insurance, and Zukunftsvorsorge pension accounts have grown, but Austrians still rely substantially on state-provided pensions. Austrian insurers are active in the CESE region, in part in reaction to slow growth in the domestic non-life business. Austria’s investment funds market has expanded rapidly in recent years, and is ranked eighth in Europe in terms of assets under management. The stock of bonds outstanding and equity market capitalization have increased substantially since 2003, in part due to the expansion of many listed companies into CESE markets. The Vienna Stock Exchange (VSE) has various cooperation agreements with exchanges in CESE countries.

7. Managerial failings and/or fraud have led to a few episodes of difficulties in certain financial institutions.3 Common features of these cases include failure to reveal relevant material to internal auditors or supervisory boards, conflicts of interest, and the withholding of information from supervisors and the public. The cases do not appear to have persistently weakened confidence in the system, but in one case the authorities felt compelled to provide a guarantee to creditors, though it was not called upon.

II. The Banking Sector

A. Regulation, Supervision, and Enforcement

Reform of the supervisory architecture

8. The FMA is the integrated regulator and supervisor for the financial system. It was created in 2002 with the aim of enhancing supervision of cross-sector linkages and concentrating financial sector expertise under one roof. The OeNB until now has undertaken most of the on-site and some off-site bank supervision. The Federal Finance Ministry (BMF) retains responsibility for certain legislative matters. Coordination is promoted through a Financial Sector Committee. Larger banks host a so-called State Commissioner, who takes part in supervisory board meetings in order to monitor compliance with laws and regulations. In addition, the authorities rely upon external auditors, not only to certify data but also to check compliance with regulation. The banks in some sub-sectors have systems for mutual monitoring.

9. Following the episodes of banking difficulties in the past few years, the authorities have amended legislation to shift more responsibility for the conduct of banking supervision to the OeNB. The main change was to give the OeNB sole responsibility for on-site supervision from January 2008. The FMA now determines, with the OeNB, the schedule of regular inspections (currently, major banks are to be inspected annually, and medium-sized banks every two years), and in addition, both agencies and the BMF are able to request follow-up or ad hoc inspections. For off-site supervision, a joint OeNB-FMA database is being established, but the OeNB is tasked with analysis. The FMA retains licensing and enforcement powers, and all responsibilities for NBFIs. In addition, measures were enacted to further strengthen governance and internal controls in financial institutions.4

10. The OeNB and the FMA will need to be fully and publicly committed to intense cooperation if the supervision under the new structure is to be effective and efficient. The close coordination of supervision and enforcement is especially important. The two institutions should acknowledge their joint responsibility for the effectiveness of the new system, which goes beyond the letter of their respective legal responsibilities. Furthermore, it is incumbent on their management to foster a culture of mutual trust, open communication, and common objectives.

11. The authorities are taking steps to make fully operational closer OeNB-FMA cooperation. Effectively the OeNB and the FMA are establishing joint teams to conduct oversight of individual banks. The planned common database is another important element. The two institutions will need to keep under review internal procedures to enhance the efficiency of cooperation.

12. One element of the recent reforms was to reduce the number of state commissioners, but the eventual abolition of this function should be considered. The state commissioners will now be appointed to attend the supervisory board meetings of banks with assets over €1 billion; the threshold had been €375 million. Yet, the practice adds to the public perception that the government is responsible for banks’ errors and wrong-doing (and eventual losses). Moreover, recent experience suggests that management can circumvent scrutiny by state commissioners when they want. Hence, the budget for state commissioners, though not large, could be better used to finance resources that are fully integrated into the prudential supervisory process.

13. Heavy reliance will continue to be placed on external auditors for supervisory work, yet the effectiveness of this system may be diminishing.5 Guidelines on external auditors’ reports and the FMA’s practice of meeting with external auditors, checking their reports, etc., reinforce the system. The banking act was recently amended to foster prompt reporting by external auditors. Nonetheless, experience elsewhere suggests that auditors are unlikely to report a problem to the supervisor until after a thorough investigation, thus hindering a prompt reaction. Furthermore, it is questionable whether most auditors have the capacity or incentive to verify a complex credit risk model and new client-facing conduct of business rules, for example. Therefore, the importance of direct inspection and monitoring by the authorities is growing (notably for the large banks), and correspondingly the tasks of auditors may have to become more differentiated.

Banking supervision and regulation

14. The Austrian authorities have made great efforts since 2003 to enhance the quality of banking supervision and keep up-to-date with banking sector developments. Legislation and regulations have been improved, and supervisory structures and practices have been enhanced. An important step was the prompt implementation of the EU Capital Requirement Directive, which has reinforced the move to risk-based supervision. A number of issues are worth stressing:

  • Monitoring and analysis will need to be kept up to date, for example, through the refinement of macro-scenario analysis for the exposures to CESE and CIS regions and greater use of market-based indicators (see below). The further intensification of on-site inspection should remain a priority. While much attention must be devoted to the large banks, the authorities recognize that smaller banks and especially those not overseen within a group structure should not be neglected.

  • Staff resources remain tight. Both the OeNB and the FMA will need to compete with the private sector for specialized expertise, to which end both compensation and career prospects must be attractive. It is also worth noting that direct supervisory costs are not high in Austria.

  • The authorities will need to develop further on-going cooperation with supervisors of countries in which Austrian banks are active, and those who are responsible for the parents of Austrian institutions. Coordinated or joint inspections—which have already been undertaken—are worth pursuing, as would greater efforts to undertake joint risk assessment followed by joint supervisory plans.

  • The authorities could also further assist their counterparts abroad in developing a consumer financial education campaign and issuing guidelines on foreign currency borrowing. The authorities have co-operated effectively with Austrian banks in this area.

  • Additional reforms may be worth considering to strengthen governance in banks. Certain “fit and proper” requirements might be applied to more members of the supervisory board, while allowing for the lower demands on board members in banks engaged in less complex business. However, regulatory measures may be especially important for smaller banks that are less subject to market discipline and public scrutiny, notably those that are not part of group structures. Hence, also the boards of small banks (and nonbank institutions) should include members with relevant expertise.6

  • Banks should be encouraged to rotate their external audit firms, and not just individual auditors, in order to limit the danger that external auditors become too beholden to their bank clients.7 The role of auditors in the Austrian supervisory system warrants strict practices, given the reliance that is placed on auditors for supervision-related purposes.

  • It may be necessary to review regulations governing financial groups, and in particular connections between a bank and nonbanks, especially where the latter are domiciled outside the EU. The FMA needs to be given the authority to object to or unwind the creation of group structures that impede effective supervision and corporate governance.

  • The authorities were able quickly to survey financial institutions for their on- and off-balance sheet exposures to financial vehicles affected by recent strains. The authorities should consider repeating such a survey from time to time to quantify these exposures and ensure that the associated risks are well-managed.

15. Banks (and other financial institutions) face a reputation risk arising from exposure to money laundering/financing of terrorism risk in both domestic and international activities. With regard to the latter especially, compliance with the international anti-money laundering/combating the financing of terrorism (AML/CFT) standard may be uneven across the region. Efficient implementation of sound preventive measures in Austria is needed to prevent foreign entities being used to channel illegal funds into the domestic financial system. An assessment of Austria compliance with the Financial Action Task Force FATF 40+9 Recommendations will be conducted by an IMF team in September 2008. Following finalization of the assessment report, an AML/CFT Report on Observance of Standards and Codes (ROSC) will be prepared and circulated to the Board for information.

Enforcement, corrective action, and intervention

16. Even with the best supervisory system, individual financial institutions may get into difficulties and fail.8 Attempting to preempt all failures by supervisory means would place an overwhelming regulatory burden on the industry and thus on clients, and stifle innovation. Hence, the regulatory and supervisory framework should, inter alia, facilitate orderly exit and the smooth management of stress situations.

17. The authorities have already elaborated contingency plans for dealing with bank failures and other problem cases. In the recent episodes in Austria, the authorities generally acted expeditiously once it became fully clear that an institution was under severe strain. As a member of the European System of Central Banks, the OeNB has mechanisms in place to monitor banking sector liquidity and provide extra liquidity if needed.

18. The FMA and the OeNB will need to cooperate especially closely in the enforcement of regulations and intervention, and they should publicly acknowledge their common commitment. The separation of supervision and enforcement powers can be cumbersome and is potentially dangerous. Experience elsewhere suggests that, when a controversial case arises, one institution may be blamed more than the other, and therefore necessary cooperation is disrupted. It is therefore suggested that both institutions explicitly acknowledge and explain that they are working for the seamless integration of all aspects of regulation, supervision and enforcement, and that any criticism should be directed at them jointly. They will also need to review procedures for dealing with problem cases to predetermine procedures and specific responsibilities (for example, for communication with the public).

19. The authorities’ plans to conduct a crisis management exercise with partners in CESE countries are commendable, and should be extended. The first exercise is to be conducted with neighboring countries, but that could be followed by an exercise involving those further a field, including perhaps non-EU members. The exercises should be based on scenarios involving difficult choices in dealing with an insolvent bank(s).

20. Experience elsewhere suggests also that it can be valuable to set up a system that mandates a decision on required remedial action promptly after warning signs are detected. The authorities (and the various banking associations) monitor early warning indicators, and they have a history of taking enforcement action. The next step is to establish a series of explicit, and perhaps published, quantitative and qualitative triggers for remedial action.9 While flexibility is needed in the range of actions to be taken, such a commitment can help prevent undue forbearance and reinforce good incentives for financial institutions.10 Progress on early remedial action could help accelerate EU-level initiatives in this area.

21. The current deposit insurance schemes is adequate and in line with EU standards, but could be improved.11 At present, separate deposit insurance schemes are operated by each sub-sector of the banking system, and payouts are made in due course after a depositor of an affected bank applies for compensation. Yet, if a bank needs to be resolved, making insured deposits rapidly available would reduce liquidity costs to bank depositors and support confidence in the overall banking system. To this end, the deposit insurance schemes should develop the necessary information technology systems and legal provisions to identify insured deposits, so that payouts could be immediate in case of need. Consideration should be given to establishing procedures to transfer insured deposits and corresponding assets from an intervened bank to a sound bank, which, however, may require revision to the legal framework for bank resolution.

Government institutional liability for financial sector supervision

22. The effectiveness of financial sector regulations and their enforcement is being impaired by a very wide interpretation of government institutional liability for financial sector supervision (“Amtshaftung”). Currently, the authorities may be sued for even slight negligence in supervision and enforcement. There seems to be a public perception that the regulatory authorities should be able to prevent any bad outcome, such as instances of fraud or mismanagement. Many law suits for large sums have been filed against the authorities, and in some cases substantial payouts were mandated by the courts; individual officials have been threatened with suits. International standards require a higher level of legal protection of supervisors.

23. The result is moral hazard: investors will be less careful if they expect that they can get compensation by suing the government should the investment go bad. Legal provisions in this area appear to shift much commercial risk from economic agents to the authorities. The direct cost is borne by the Austrian taxpayer, and there is an indirect cost in terms of overall efficiency of the financial system. Furthermore, the administrative cost of dealing with these cases, especially in terms of supervisors’ time, has been significant. These costs may rise and vulnerability to legal action may increase as supervision becomes more risk-based, because the role of expert judgment will increase. Although the authorities have a history of taking enforcement measures despite the threat of legal action, the possibility of a “chilling effect” on their willingness to take action cannot be excluded.

24. Government institutional liability for financial sector supervision should, therefore, be defined more narrowly. Some steps in this direction have been taken (notably the 2005 Act that required that any suit be brought against the Federal government and not individual agencies), but more is needed. One possibility may be to amend laws to clarify that regulation and supervision are undertaken primarily in the general public interest. There should be explicit recognition that investors—most importantly shareholders, but also other creditors—bear the risks of their investment, including operational risks and counterparty risks. There needs to be general recognition that a bad outcome is not in itself evidence of negligence by the supervisor.

B. Stability

Performance and stability indicators

25. Banks have enjoyed rising profitability. The level of domestic bank profitability has risen, mainly because banks have improved performance through greater cost efficiency and the successful pursuit of fee income. However, domestic interest margins continue to be squeezed by intense competition. Profitability has held up in many CESE markets; as some sectors have matured, new, highly profitable activities such as retail lending have grown in importance.

26. Capital and leverage ratios have remained stable despite a rapid expansion in balance sheet size. Non-performing loan ratios are falling. For the system as a whole, expansion into CESE and CIS markets has diversified risk away from Austria, and those countries are themselves diverse in both macroeconomic and microeconomic risk factors.12 However, certain markets are important to individual banks. Moreover, there remains the risk that investors perceive CESE and much of the CIS as one investment class, and therefore the countries—and Austrian banks—may be vulnerable to contagion.

27. The banking sector as a whole exhibits adequate liquidity. Liquidity indicators have been broadly stable, at least through end-2007. The large banks either have a broad retail base themselves or have access to the retail base of the lower tiers of their sub-sectors, and expansion in CESE countries is not heavily dependent on short-term market funding (Box 1). Reportedly, the mortgage banks also have secured longer-term financing.

Financing Sources and Exposures to CESE Countries

The funding structure of Austrian banks appears to be stable (Figure 1). The same holds for their foreign subsidiaries, where local deposits contribute a rising share of funding, especially local currency funding (Figure 2). Interbank loans from parents account for 10 percent of total funding, with other types of lending from parents representing another 10 percent. The balance comprises mainly equity and debt issuances by the foreign subsidiary.

Figure 1.
Figure 1.

Austria: Funding Sources of the Banking System*

(In millions of euro)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: OeNB.* Figures obtained from unconsolidated balance sheet.
Figure 2.
Figure 2.

Austria: Funding Sources of Banks’ Foreign Subsidiaries*

(In millions of euro)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: OeNB; and IMF staff estimates.* Some data are derived from differences between consolidated and unconsolidated balance sheets.

Parents’ exposure to CESE countries, via lending to their foreign subsidiaries and direct loans into those countries, has remained relatively flat in absolute terms since 2005. Given the continuing rise in parents’ total assets, exposure has declined as a proportion of their assets.

However, strong growth in local lending to nonbanks by foreign subsidiaries has driven up the banking groups’ total exposure to emerging European countries. Subsidiaries’ rising investment in securities has also increased group exposures. Rising local deposits represents the main source of funding in most markets. Meanwhile, OeNB data suggest that direct lending by Austrian parents to non-subsidiaries in emerging Europe have remained relatively stable in aggregate, although there has reportedly been an increase in direct lending to larger corporates in some markets, in part in response to administrative measures taken by those countries authorities to slow credit growth.

28. The distribution of performance indicators across banks reveals strengths, but also potential longer-term concerns. The quartile distribution is dominated by the situation of the numerous smaller banks, while the sectoral aggregates reflect the weight of the large banks. Many small banks have much higher capital relative to assets, and correspondingly low return on equity. While that situation is not of immediate prudential concern, these banks would find it difficult to attract outside capital. Furthermore, there are a large number of smaller banks with relatively concentrated loan portfolios.

29. Banking system soundness is supported by the balance sheet strength of the domestic non-financial sector; the main outstanding concern is the foreign exchange exposure of some borrowers. (Table 4). Household indebtedness relative to income is comparatively low, and corporate leverage has been falling. Real estate prices have been much steadier than in many European countries. Consistent data on the financial position of the corporate and household sectors in markets abroad where Austrian banks operate were not available.

Table 4.

Austria: Non-Financial Soundness Indicators:

(In percent)

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Source: OeNB.

Break in series in 2005.


30. The recent financial markets turmoil does not appear to have had a major impact on Austrian banks. The FMA and OeNB acted expeditiously in compiling information on banks’ exposures to affected asset classes and off-balance sheet risks (including special investment vehicles, asset-backed commercial paper and sub-prime mortgages), which turned out to be modest; write-downs reported to date were easily absorbed in strong 2007 profits. Banks have not made extra use of central bank financing. Furthermore, one major bank was recently able to raise additional capital to support its expansion in CESE, and demand for private placement of securities and Pfandbriefe (a form of covered bond) has reportedly held up relatively well. Hence, the impact of higher funding costs will be phased in, and currently does not appear to be more severe than what was seen in past tightening cycles.

Market-based indicators

31. Market-based indicators, which the authorities have begun to monitor, suggest that the exposure of Austrian banks to CESE and CIS countries is perceived as generating higher returns but also higher risks. However, the broader exposure brings also diversification benefits. The major Austrian banks have posted strong positive stock price performances in recent years, although they have been affected by the recent turmoil in global financial markets (Figures 3 and 4). On a risk-adjusted basis—using the Sharpe ratio—the stock price returns have been in line with those of other European banks (Figures 5 and 6).13 The series for different banks display periods of low correlation, suggesting that investors distinguish among different domestic and CESE country exposures.

Figure 3.
Figure 3.

Austrian Banks’ Stock Performance 1/

(October 1, 2006 = 100)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Bloomberg.1/ BACA and Volksbank stock prices are excluded due to their illiquidity in the Austrian stock market.
Figure 4.
Figure 4.

Major European Banks’ Stock Performance

(October 1, 2006 = 100)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Bloomberg.
Figure 5.
Figure 5.

Austrian Banks’ Sharpe Ratios

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Sources: Bloomberg; and IMF staff calculations.
Figure 6.
Figure 6.

Major European Banks’ Sharpe Ratios

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Sources: Bloomberg; and IMF staff calculations.

32. The credit default swap (CDS) spreads of Austrian banks are normally somewhat wider than those of large diversified European banks, indicating that the former are perceived to have greater credit risk. Since the beginning of 2008, Austrian banks’ CDS spreads have widened further, as have those of major European comparator banks, as investor concerns began to focus on the risk of recession rather than the condition of the interbank market and sub-prime related losses, but there have been no high spikes (Figures 7 and 8).

Figure 7.
Figure 7.

Austrian Banks’ CDS Spreads

(In basis points)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Moody’s KMV Creditedge.Note: CDS spreads are expected default frequency-implied spreads.
Figure 8.
Figure 8.

Major European Banks’ CDS Spreads

(In basis points)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Moody’s KMV Creditedge.Note: CDS spreads are expected default frequency-implied spreads.

Stress test results

33. A battery of stress tests was undertaken by the authorities and major banks in cooperation with the FSAP team (Appendix III). Two macroeconomic stress scenarios center around shocks coming from CESE and a global downturn that causes a prolonged domestic recession. The scenarios are more severe than anything witnessed in the posttransition period in CESE and CIS countries, or in Austria’s post-war economic history. The assumed realization of market risks and liquidity shocks would represent extreme events in mature markets, and are comparable to those undertaken in FSAPs for other European countries.

34. Stress tests show that the main sources of risks for Austrian banks are credit risk stemming from exposures to CESE and CIS countries, indirect credit risk associated with foreign currency lending, and other credit risk from domestic lending. The scenarios generated substantial strain on the banks, resulting in very low, or in some cases, negative return on equity, although capital buffers generally remained intact (Figure 9).14 The largest impact followed from losses in CESE and the CIS, but only in a few cases would the losses affect capital given the baseline level of profitability. All of the large banks stayed well above the 8 percent minimum capital requirements under stress. A number of smaller banks would fall short of the minimum capital requirements under the macroeconomic scenarios. Still, these banks only represent only a small percentage of total banking assets, and many of these banks would likely benefit from support within their sub-sector of the banking system (see Box 2, Appendix II), forestalling systemic effects. The estimated indirect credit risk related to exchange rate movements confirms the resilience of the system, although the overall impact and that on some of the large banks is considerable.

Figure 9.
Figure 9.

Austria: Estimated Credit Losses under Macroeconomic Stress 1/

(Quarterly impact averaged across the six largest banks in percentage point of capital)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: OeNB and banks’ calculations.1/ Loss estimates based on “top-down” methodology.

35. Additional stress tests suggested that market risks are generally modest, with the banks taking only small active positions. Liquidity stress tests indicate that the large banks would likely not see major strains in the event of a general squeeze on sources of liquidity, over and above the effect on profits of generally higher market price for liquidity in the unsecured market.

36. The stress test results are subject to model risk and other caveats. Given the favorable macroeconomic developments over the last years in Austria, CESE countries, and the CIS, credit risk indicators based on data from this period are likely to underestimate risks. Although the CESE scenario is considered severe but plausible, for certain countries one cannot exclude a sharper adjustment in current account deficits, possibly accompanied by large swings in CESE currencies versus the Euro and major balance sheet effects. Further, a severe downturn might result in contagion among the countries in CESE and the CIS, and consequently a larger spillover to Austria than seen historically. Moreover, the global downturn and CESE scenarios may be related and could occur simultaneously. However, the stress tests used a number of conservative assumptions (for example, on loss given default rates) to help counterbalance these caveats, and sensitivity analyses around the baseline stress scenarios were undertaken; the results appear to be robust.

37. The authorities are working to make their stress tests more sophisticated. In particular:

  • The authorities need to monitor and promote the development of modeling capacity in the large banks, especially with respect to the linkages between macroeconomic scenarios and microeconomic behavior, such as probabilities of default;

  • The authorities should continue to develop their own stress testing capacity, focusing on the links between credit quality and macroeconomic performance in the markets where Austrian banks are active, second-round feedback effects on Austria, noninterest income, and funding costs;

  • The authorities (and banks) need to continue to refine estimates of indirect credit risk stemming from exchange rate movements in assessing exposures; and

  • Supervisors should remain alert to banks’ concentrated exposure to the CESE and CIS region, and intensify further cross-border cooperation in stress testing and supervision generally.

III. Insurance and Pensions

Performance and trends

38. Financial soundness and performance indicators for the insurance and pension sectors have generally strengthened in the past several years (Table 5). Given the relative size of the sectors and the main risks they face, these sectors do not represent a major stability concern. The distribution of soundness indicators is less dispersed than that found for banks (Figure 10).

Table 5.

Austria: Insurance Sector Financial Soundness Indicators:

(In percent)

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Source: FMA, and staff estimates.

Not applicable to life business.

Hedge funds, structured products and derivatives.

Figure 10.
Figure 10.

Austria: Distribution of Insurance Sector Indicators for Individual Companies

(2006; in percent)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: FMA.

39. An aging population and recent pension reforms are likely to increase demand for a variety of long-term saving vehicles (Table 6). Financial innovation and government initiatives have contributed to the availability and importance of more advanced (and complex) savings vehicles.

Table 6.

Austria: Long-Term Savings Instruments

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Source: OeNB and FMA.

Technical provisions from the liabilities side.

Regulatory issues

40. These trends favor steps to introduce more flexible savings instruments and enhance competition among providers, while maintaining strong consumer protection and education. Competition and efficiency could be supported by ensuring that government policies are neutral across types of savings vehicles, in particular, regarding taxes (including deductibility from taxable income, stamp duties, withholding taxes and the treatment of provisioning); subsidies; and other regulations surrounding instruments (e.g., regarding the redemption of accumulated assets for retirement as a lump-sum or annuity). Also, the mandatory full guarantee of principle for all Zukunftsvorsorge funds should be reconsidered, even if some safety net may be desirable on social grounds; with appropriate provision of information, an individual should be able to make the choice that fits him/her best.

41. The FMA has continued to strengthen insurance and pension sector regulation and supervision. The 2003 assessment found that that the regulatory framework and its implementation were generally of a high standard and effective. Since then, many of the specific recommendations have been implemented, for example, by conducting more frequent on-site inspections and more sophisticated monitoring, including through stress testing. Measures have been taken to strengthen corporate governance, internal controls, and the role of actuaries. More risk-based investment rules have been introduced, and preparations are under way to meet Solvency II requirements. The FMA participates actively in relevant EU committees, and has implemented EU insurance and pension sector regulations, including those for intermediaries. It also cooperates with insurance supervisors in CESE countries, for example, through joint inspections.

42. The authorities are aware of the need to ensure that the regulatory framework keeps up with developments in the industry. A number of areas deserve continued attention:

  • Supervisory resources, and especially expertise, need to be enhanced, notably because of the extra demands associated with Solvency II. The expansion of the supply of well-trained actuaries, which is a constraint on the industry, deserves to be supported further in cooperation with companies and universities.

  • The FMA should extend its stress testing of insurance companies’ and pension funds’ liabilities, and should investigate the use of market-based soundness indicators. The FMA is appropriately planning to conduct more on-site inspections, especially in Austrian companies’ subsidiaries abroad.

  • The FMA should keep under review methods of supervising asset allocation by insurance and pension companies (such as their use of model-based approaches). As asset stocks grow and companies become more familiar with alternative investments, this task will become more demanding.

  • The authorities need to ensure the provision of full information to private investors on potential returns, risks, and fees. Disclosure requirements may have to be adjusted as needed to support informed decisions. This is also key to fostering sound competition.

43. Current investment restrictions on the Zukunftsvorsorge funds should be reviewed. The scheme now requires that 40 percent of contributions be invested in European Economic Area stock markets that have low market capitalization relative to GDP. The limitation constrains diversification to larger, more liquid markets, and thus potentially worsens the risk-return ratio. Portfolio allocation regulations should be based on prudential and investor protection considerations, rather than aim to promote particular markets.

44. As the second and third pension pillars mature, companies and funds will have more long-term liabilities without opportunities to fully match them with low-risk long-term domestic assets. Hence, it will be even more important to allow for appropriate diversification across geographical regions and asset classes.15

IV. Securities Markets

Regulatory issues

45. There has been substantial progress in securities market oversight and in implementing the recommendations of the 2003 assessment. A major factor has been Austria’s prompt implementation of several EU Directives.16 The FMA maintains a high level of day-to-day supervisory effectiveness despite resource constraints.

46. Some recommendations have not been fully implemented:

  • The most serious issue is human resources. The number of staff supervising investment firms, the securities business of banks, pension funds and insurance companies, markets and exchanges has increased, but not sufficiently to keep up with the substantially increased level of obligations and responsibilities imposed on the FMA and Austria’s financial services industry by the new European legislation.

  • Administrative fines, while raised, remain low by European standards and in terms of their deterrent value.

  • The issue of government liability appears to have grown in importance for securities regulation since 2003 (see above). Recent cases of failure of investment firms have provoked numerous law suits against the authorities.

  • There have been improvements in international cooperation and the provision of assistance to foreign regulators, most recently with the November 2007 passage of the securities law, which provides the FMA with new powers to exchange information concerning persons conducting unauthorized financial business. The FMA intends in the course of 2008 to reopen negotiations on becoming a full signatory of the IOSCO Multilateral Memorandum of Understanding.

47. MiFID, which came into force on November 1, 2007, aims to promote integration, competition and harmonized investor protection in European securities markets. These goals are to be achieved by:

  • An enhanced passport for investment firms. In particular, MiFID is likely to intensify cross-border competition among investment firms, regulated markets (RM), Multilateral Trading Facilities (MTF), and “systematic internalizers” and other dealers.

  • Best execution, a key investor protection rule. This may provide opportunities for exchanges, including the VSE, to attract more bond trading—currently over-the-counter—to its platforms when the client is a retail investor.

The VSE in the region

48. The VSE provides services to CESE exchanges, but has yet to invest its capital there (with the exception of Budapest). The VSE is currently involved in the construction and ongoing calculation of local market indices and joint-venture data vending for numerous CESE stock exchanges.17 It has also developed regional indices which are licensed by investment banks, and used to create financial instruments which enable investors to obtain low cost and efficient exposure to the region and sub-regions. The indices are constructed to international standards and are limited to the most liquid stocks in the relevant market. Thus, the risk of any index being manipulated (causing reputational damage to the VSE) is therefore judged as being low.

49. The VSE has enjoyed a first-mover advantage in the region and controls a critical mass of liquidity in Austrian shares, but faces increasing competition. In particular, MiFID is likely to intensify cross-border competition between regulated markets, Multilateral Trading Facilities (MTF), and “systematic internalizers” and other dealers. The VSE has been very profitable, with a return on equity of 73.2 percent in 2006, which is more than twice that of major European exchanges.18 Even a significant reduction in revenues would not threaten its viability; the VSE has reduced trading fees somewhat in recent years, enhanced the efficiency of its trading platforms, and has been innovative in introducing new trading mechanisms. These measures suggest that the management is aware of the prospect of more competition.

50. Further structural evolution and probably consolidation of exchanges can be expected; regulators will need to adapt to these market-driven changes. Since 2006, the majority of trading on the VSE by value has been executed by foreign members, including remote members. A London-based MTF has announced that it will include Austrian stocks on its trading platform in 2008, and others will almost certainly follow. Potential fragmentation of trading in Austrian stocks will increase the importance of cooperation and information exchange among national regulators through mechanisms developed by the Committee of European Securities Regulators, and bilaterally.

Appendix I: Implementation of the Recommendations of the 2003 FSAP

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Appendix II: Structure of the Financial System

51. The financial system is characterized by the dominant position of the banking sector. At over 300 percent of GDP, total banking sector assets are far larger than those of insurance companies and pension funds, and account for more than about ¾ of total financial sector assets (Table 2). Banks also own the collective investment scheme providers and other financial institutions. In recent years, investments in these financial institutions (mainly in the form of mutual funds) have grown rapidly, but are still a relatively small share of GDP. In an international comparison, Austrian banks’ domestic credit remains in line with its European peers (Figure 11). Stock market capitalization (about 60 percent of GDP) is still low relative to other major European countries, and other securities in the market consist largely of government paper and bank issuances, including mortgage bonds. The insurance sector is well developed, but the both density and penetration for life-insurance is well below the EU- 15 average, while non-life insurance density and penetration are in line with the EU-15.

Figure 11.
Figure 11.

Austria: Domestic Credit

(In percent of GDP; 2006)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: IMF, IFS.

52. The banking sector, while undergoing consolidation, remains fragmented, with a multi-sector and generally tiered structure deriving from historical differences in lines of business and ownership. There are seven sub-sectors of banks: joint stock and private banks or commercial banks (Aktienbanken); savings banks (Sparkassen); rural credit cooperatives (Raiffeisenbanken); industrial credit cooperatives (Volksbanken); provincial or state mortgage banks (Landeshypothekenbanken); building societies or savings and loans associations (Bausparkassen); and special purpose banks (Sonderbanken). Although the vast majority of banks now effectively operate as universal banks, significant differences remain across the sub-sectors in terms of organizational and ownership structures. Three of the subsectors—the savings banks, Raiffeisen banks and Volksbanken—have tiered structures, with apex or central institutions at the top-most tier providing centralized services such as liquidity management and risk assessment to the other institutions in the sector.

53. There is a trend towards integration of banks, primarily within the sub-sectors. The formalization of cross-guarantees for liabilities in the tiered sub-sectors has reinforced this trend (Box 2). However, despite some decline in the number of banks, Austria still has high bank and branch density, with about 850 banks and about one bank branch for each 2,000 people (Figure 12). Bank and branch densities remain among the highest in Europe, and on par with densely-branched countries such as Germany and Italy (Figure 13). Coupled with the system-wide shared ATM network, which enhances the ability of customers to use banks outside their geographic region, competition is quite stiff in most aspects of domestic banking business.

Sub-Sectoral Support Arrangements

Raiffeisen Sector

Solidarity Association (Solidaritatsverein der Raiffeisen-Geldorganisation): Individual Raiffeisen banks, Raiffeisen regional banks, and the apex organization RZB provide mutual assistance to protect the interests of creditors and ensure the continued existence of a troubled institution. Financial assistance is voluntary, and where provided, is accompanied by conditions such as changing management to remedy the underlying cause of the financial problem.

Raiffeisen Cross Guarantee System (Raiffeisen-Kundengarantiegemeinschaft Österreich): Voluntary membership in regional customer guarantee associations (except Carinthia which has no such association), which in turn participate with the other regional guarantee associations (except the Salzburg regional association, which is not a member of the RKO) and RZB. Members are legally bound to commit up to a limit determined by formula, to cover 100 percent of deposits and securities issued by a member bank.

Savings Bank Sector

Cross Guarantee System (Haftungsverbund): Voluntary membership which commits participating savings banks to be jointly and severally liable for all deposits and liabilities of member banks, up to a limit established by a formula. Member banks are required to provide support for other member banks facing financial distress, which could include provision of liquidity, granting of loans, provision of guarantees, capital injections as well as intervention in business policy and changes in management. The provisions are implemented by a company that is empowered to establish and monitor risk management policies and systems for member banks, and to intervene and make executive management decisions in a troubled savings bank. The cross guarantee system includes Erste Bank, the savings banks in which it has a significant equity holding, and other savings banks.

Volksbank Sector

Volksbanken Community Fund (Volksbanken-Gemeinschaftsfonds): Funded by all Volksbank credit cooperatives, providing a guarantee for all deposits. All Volksbanken are part of a centralized quarterly reporting system and group internal audit, and have common risk classification and management systems.

Contingent Capital Fund (Volksbanken-Beteiligungsgesellschaft): Provides capital to a Volksbank that is unable to access other equity, as needed. When provided, such assistance is accompanied by conditions or technical assistance intended to remedy the underlying problem in the bank.

Figure 12.
Figure 12.

Austria: Bank Branch Density, 1997–2006

(In number of branches per person)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Sources: European Central Bank; and IMF, IFS.
Figure 13.
Figure 13.

Europe: Bank Branch Density Across Selected Countries

(In number of branches per person)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Sources: European Central Bank; and IMF, IFS.

54. Notwithstanding the narrowing interest rate margins in recent years, profitability has gradually improved and return on assets was among the highest in the EU-15 in 2006. This development has gone hand in hand with major improvements in efficiency, as reflected by decreasing cost-to-income ratios (Table 3). Although most banks are small, economies of scale and efficiencies are gained through the centralized provision and development of products and services in the tiered sectors. Still, these cost-to-income ratios remain somewhat above the average of Austria’s European peers, partly reflecting the structure of the banking sector.

55. A key explanation for Austrian banks’ strong profitability is their expansion abroad. In the early 1990s, Austrian banks were among the first to enter the CESE markets. Expansion by Austrian banks into the CESE started in Hungary and (then) Czechoslovakia, and continued from there to virtually the whole region. Today, Austrian banks play a major role in many CESE countries and some members of the CIS. In several cases, these subsidiaries are large compared the host countries’ financial systems and are of systemic importance.

56. At the same time, the holdings in the CESE are important for the Austrian banks. They represent a significant part of total assets and contribute significantly to overall profitability. In 2006, total assets in CESE accounted for about 20 percent of Austrian banks’ consolidated assets and activities there contributed almost 40 percent of their total profits. Thus, return on assets has been much higher for the operations in the CESE than it is in the domestic market. Measured as share of GDP, Austrian exposures to the CESE are far larger than those of its European peers (Figure 14). Austrian banks’ activities in the region are geographically distributed across many countries and their exposures are therefore quite diversified (Figure 15). Some of the largest exposures are to Austria’s immediate neighbors and EU member countries. However, at the individual bank level, some banks’ exposures are more concentrated.

Figure 14.
Figure 14.

Europe: Banks’ Consolidated Foreign Exposure to Emerging Europe

(In percent of GDP, 2006)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Bank for International Settlements.
Figure 15.
Figure 15.

Austria: Composition of Banks’ Consolidated Foreign Claims

(Percentage shares of cross-border claims and local claims of Austrian banks’ foreign offices, September 2007)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Bank for International Settlements.

57. The high level of foreign currency denominated loans made by Austrian banks to domestic customers is a phenomenon unique to Austria in Western Europe. The extension of such loans has primarily been through the tiered banking sectors, and started with some banks in the western region. After a period of rapid growth, the amount of outstanding foreign currency loans as a share of total loans has recently started to fall, although the level remains high (Figure 16). As of June, 2007, foreign currency loans to domestic nonbanks accounted for about 17 percent of total loans, corresponding to about 18 percent of GDP.

Figure 16.
Figure 16.

Austria: Foreign Currency Loans to Domestic NonBanks

(In percent of total loans)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: OeNB.

58. Safety net arrangements include a deposit insurance framework and systemic liquidity arrangements that have been agreed for Eurosystem members (Box 3). In part due to the existence of the sectoral support arrangements, only the deposit insurance scheme in the joint stock banks sector has had to make payouts in the past decade.

59. Within Europe, Austria is ranked eighth in terms of assets under management in the investment funds market, ahead of countries such as Switzerland, Sweden and the Netherlands (Figure 17). Assets under management in Austria have grown sharply since the mid-1990s, to reach €172 billion as at the end of October 2007; the size of the sector has more than doubled since 2000 (Figure 18). There are currently 24 investment management companies managing these assets, with the top 3 companies accounting for 57 percent of the market share as at end-October 2007.

Safety Net and Systemic Liquidity

Deposit insurance

The system of deposit insurance for banks is compulsory and organized by sub-sector, with five separate schemes, each of which meets the minimum EU standards. Each scheme is administered by the respective trade association in the sector and operates shared early warning systems. The funding of the compulsory schemes is ex post and member banks from the affected sector are required to contribute only when a guarantee event occurs. Contributions are based on the proportion of the covered deposits in each sector, subject to an annual ceiling depending on the risk-weighted assets of the contributing bank. Payouts in excess of the ceiling spill over to the other sectors, and if the shortfall persists, the originally affected sector can issue bonds to raise external funds. The federal government has the legal right, but not the obligation, to guarantee such bonds. To date, there has been no occasion on which these second or third layers of the deposit insurance framework has been accessed. Note that deposit insurance payouts would be triggered only after the sub-sectoral support arrangements have been exhausted (Box 2).

Systemic liquidity arrangements

Liquidity management is carried out through the Eurosystem, to which the OeNB belongs. Mechanisms are in place to provide emergency lender of last resort (LOLR) assistance to an illiquid but solvent institution should that prove necessary. The Eurosystem has established two principles for LOLR assistance: first, the provision of such assistance is primarily a national responsibility. Second, any potential liquidity impact deriving from the provision of emergency liquidity assistance would have to be managed in a way consistent with the maintenance of the unified monetary policy stance. The OeNB lends to banks only against collateral, but has flexibility in the collateral that it would be prepared to accept. Beyond that, the Austrian authorities consider that it would not be appropriate to predetermine and publicly announce detailed rules for the provision of temporary liquidity in the event of a systemic liquidity crisis both because of potential moral hazard and also because the particular circumstances giving rise to a problem can vary.

Figure 17.
Figure 17.

Europe: Size of Investment Fund Markets by Country, as at End-June, 2007,

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: EFAMA.
Figure 18.
Figure 18.

Austria: AUM of Investment Funds, as at End-October, 2007

(In billions of euro)

Citation: IMF Staff Country Reports 2008, 190; 10.5089/9781451802429.002.A001

Source: Austrian Association of Investment Fund Management Companies.

60. Social security pensions account for over 90 percent of current pension benefits in Austria. Due to emerging pressures from an ageing population, the system was reformed in 2003 and 2005, creating stronger incentives for individuals to stay economically active and save for retirement in second and third pillar schemes. The second pillar occupational pension funds were introduced in the early 1990s, and assets under administration by these funds have grown sharply since then (Table 6).19 A group life insurance scheme as an alternative to occupational pension funds has also been introduced.

61. For the third pillar, life insurance products are the most important savings vehicle with an increasing share in unit-linked products. In addition, a state-sponsored pension scheme (Zukunftsvorsorge) was introduced in 2003, and is offered through life insurance and investment fund companies. The scheme has been popular and growth has been rapid, although the total amount of assets is still low.20 There are also special pension investment retail funds with some tax advantages, but they have not gained traction. This could be explained, at least in part, by the fact that the accumulated assets have to be paid out as annuities instead of as a lump-sum, which is widely preferred by Austrian beneficiaries.

62. The structure of the domestic insurance sector has remained stable. At end-2006, there were 52 companies, of which 33 engaged wholly or mainly in life business, and around 60 small mutual associations; there are no independent reinsurance companies presently. Many individual companies are members of groups associated with a bank, and two are linked to major insurers from another European country. Several foreign companies have branches in Austria, and Austrian companies have subsidiaries abroad, notably in CESE countries, where growth has been strong; the number of these subsidiaries rose from 58 in 2004 to 95 in 2007, and they contributed about 24 percent of the premia written in 2006 for the relevant groups. Total insurance sector assets amounted to €82 billion as at end-2006. Solvency ratios have trended slowly upwards, profitability has been adequate (helped by dividends from subsidiaries in CESE countries), and operational efficiency has improved. Recently there has been no natural catastrophe as severe as the flood in 2002, although Austria is prone to certain other idiosyncratic natural events, such as building damage from heavy snowfall.

Appendix III: Stress Testing Coverage and Results

63. This appendix describes the coverage of the stress tests, the methodology used and the outcomes of stress tests carried out on the Austrian financial system as part of the Austria FSAP Update. The shocks and macroeconomic scenario considered in the tests were set by the FSAP team and the OeNB, and can be considered to be severe but plausible. All macroeconomic stress tests, as well as the single factor market risk stress tests are based on end-June 2007 data.


64. The stress tests center on the six largest Austrian banks: Erste Bank der oesterreichischen Sparkassen (Erste), Bank Austria Creditanstalt (BA-Ca), Raiffeisen Zentralbank Österreich (RZB), Österreichische Volksbank (OeVAG), Bawag/Postsparkasse (Bawag), and Hypo Alpe-Adria-Bank International (HAA).21 In addition, top-down stress tests are performed on supervisory data of all Austrian banks. Insurance companies are not included in the stress tests.

65. The stress tests cover all major portfolios of the institutions. Specifically, both the trading as well as the banking books are included in the exercise. The stress tests are performed on a group level, i.e., including CESE and CIS subsidiaries, for the relevant macroeconomic scenario and the market risk tests.


66. The stress testing exercise aims to include all major risks from macroeconomic sources faced by the banks. These consist of two multi-factor macroeconomic scenario stress tests; several single-factor tests for market risks, in the form of shocks to interest rates, equity prices, exchange rates, and the implied volatility of options; an assessment of indirect credit risk stemming from exchange rate movements through foreign currency lending; and an assessment of liquidity risks. Specifically, the two three-year macroeconomic scenarios center around

  • a confidence crisis in CESE, which results in roughly a halving of the current account deficits in the countries involved over the period of one year (while currency pegs are assumed to remain intact), with severe real effects of up to a nine percent decrease in the level of GDP in 2008 in Romania and Bulgaria (which implies the slowest annual growth since the 1997-1998 crisis); and

  • a global economic downturn, which results in domestic GDP growth declining to 2.8, −0.4, and -0.1 percent for the years 2007–2009 (which is a more prolonged recession than any other in Austria since the second world war).

67. A range of market risk shocks were defined: shocks to the (euro) interest rate curve (+/- 200 basis points, 200 basis points steepening), foreign and domestic equity indices (both -35 percent), euro exchange rates (+/- 15 percent), and implied volatilities (+200 basis points, -100 basis points). In addition, indirect credit risk stemming from exchange rate movements and shortfall in performance of loan repayment vehicles (-10 percent CHF/EUR rate, -15 percent performance of repayment vehicles) was analyzed. Liquidity stress testing involved a qualitative assessment of compliance with BIS principles for the Assessment of Liquidity Management in Banking Organizations, and a quantitative scenario. Credit spread risk is not assessed due to the very limited exposure of banks to this risk and the concomitant lack of tools to perform such assessments. Operational risk is also not assessed.


68. The stress testing approach used in the bottom-up (BU) exercise builds on the expertise of the individual banks and the OeNB to ensure consistency across institutions. The tests on credit and market risks were performed using the institution’s own internal risk models. To enhance consistency, the OeNB provided the banks with estimates for relative changes in the probabilities of default (PDs) and loan loss provisions (LLPs) under the macroeconomic scenarios.22 Banks used these changes in PDs and LLPs to estimate the impact on their portfolio. In addition, the OeNB provided the banks with a profile for a decline in profits before credit losses under the macroeconomic scenarios.23 Banks reported the results in millions of euro additional losses.

69. The short-term vulnerability assessments of liquidity focus on the six large banks. It consists of a questionnaire, and a BU market-crisis scenario, in which the liquidity of assets are shocked. The focus of this scenario is on effects on liquidity after 30, 60, and 90 days. In addition, top-down liquidity assessments using off-site supervisory data were performed. These analyses consisted of four sensitivity tests and one scenario that combined a severe disruption of the money and credit markets with an idiosyncratic shock for each bank.

70. The top-down (TD) stress tests depend solely on the OeNB modeling of supervisory data. Similar to the BU approach, the TD approach consists of tests of the market and credit portfolios of the banks. In addition, the TD approach allows for an analysis of the entire Austrian banking system based on supervisory data. An analysis of contagion was done TD for the global downturn scenario, using a model of the Austrian interbank market based on supervisory filings. Results were obtained in millions of Euro.

71. Although the methodologies of both the BU and the TD approaches are fairly sophisticated, caveats apply. The principal caveats are explained in the main text, but others are worth mentioning here. First, favorable macroeconomic and structural developments have placed Austrian banks at a good starting point for the tests; the starting point may deteriorate over time as the cycle turns and CESE markets mature. Second, the stress testing models lack an interaction or feedback component between the different financial institutions in the stress tests. Third, modeling capacity differs across banks, potentially introducing another source of model risk. Specifically for the TD stress tests, important caveats relate to data limitations, which the stress tests aim to address by various conservative modeling assumptions. The most important of these were assumptions on loss given default (LGD), the incorporation of subsidiaries, and the ratings of individual corporates that are rated differently by different banks. These conservative assumptions to a large extent explain the generally bigger impact under the TD analysis compared to the BU analysis.


Macroeconomic scenarios

72. Credit risk losses are substantial under the CESE scenario, but would not wipe out aggregate profits (Table 7 and Figure 19).24 Total losses for the largest six banks over a three year horizon amount to some € 10 billion in the TD results and € 6.3 billion in the BU results. This compares to some € 41.4 billion in total regulatory capital, and € 1.6 billion in quarterly profits at mid-2007 (i.e., projected profits before credit losses would amount to a total of some € 17 billion over three years).

Table 7.

Austria: Impact of the CESE Scenario on the Six Largest Banks:

(Average additional credit losses in millions of Euro, unless otherwise indicated)

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Source: OeNB and banks’ calculations.

Estimated credit losses, RoE, profits, and capital for 2007Q2 in a normal, non-stressed, environment.

Expressed as percent of 2007Q2 regulatory capital, i.e., assuming zero profits.

Figure 19.