This note was prepared by David H. Scott, External Expert for the Monetary and Capital Markets Department.
Data is as of year-end 2018.
Erste Bank der oesterreichischen Sparkassen AG, based in Vienna.
The HVG owns one of the two FMA-recognized deposit guarantee schemes in Austria. See Section F of the Part 2 of this note.
Historically, the savings banks had a unique corporate structure (neither joint stock company or cooperative, and thus, essentially without owners) but many have converted to joint stock companies. They are largely governed (“steered” in local terms) by the HVG under the contractual arrangements of the IPS.
One RLB covers both Vienna and Lower Austria.
The Raiffeisen in two provinces have elected not to form an IPS, though the RLBs in those provinces are members of the Bundes-IPS.
VB Vienna conducts business in the ninth province.
An “association” under the CRR.
The Financial Stability Board of the G20 has designated some 30 banking groups as globally-systemically important banks, or G-SIBs.
Some of the Hypo banks are now fully privatized. Three remain controlled by the provinces.
Bonds secured by mortgages.
The provincial government guarantees have been phased out as a condition of EU membership.
All three are G-SIBs.
As of January 1, 2019, the six Austrian SIs include Erste Group Bank AG, Raiffeisen Bank International AG, BAWAG Group AG, Raiffeisenbankengruppe OÖ Verbund eGen, Volksbank Wien AG, and Sberbank Europe AG. The third largest bank, Bank Austria UniCredit, is a systemic subsidiary of UniCredit headquartered in Italy.
Banks are designated as HP-LSIs based on a joint ECB-FMA annual assessment. The designation implies more detailed reporting by the FMA to the ECB regarding its supervision of the bank and the preparation by the banks of full-scope recovery plans. See Section B, Recovery Planning and Early Intervention, in Part 2 of this note.
Act on Creation of a Resolution Entity.
Art. 162 BaSAG. This provision only applies to KA Finanz and immigon and cannot be used in any other circumstance.
Other wind-down assets and liabilities were packaged to be resold.
See Section C (Legal Regime for Bankruptcy and Resolution) of Part 2 of this note for a description of the FOLTF decision.
The so-called Valuation 2 as called for under the BRRD and BaSAG which is required to support, among others, specific decisions on the bail-in of different classes of creditors and, potentially, individual creditors within a class. See Section C of Part 2 of this Note.
Steps are being taken to ensure the ability to substantially shorten what was the lengthy period of time between the preliminary and final bail-in decision. See Section D (Resolution Planning) of Part 2 of this note.
The public support resulting in a 43 percent equity participation by the government in VBAG.
The transaction and certain prior government support led to the government having a 25 percent equity participation in Volksbanken Wien. Upon repayment of that support the equity participation will be extinguished.
The transaction also resulted in the merger of the 50 primary banks into the current Volksbanken sector structure.
Early repayment is not possible due to negative tax consequences for the creditors.
The SRB is the resolution authority for (i) SIs and banks in relation to which the ECB has decided to exercise directly all of the relevant supervisory powers; and (ii) other cross-border groups, where both the parent and at least one subsidiary bank are established in two different participating Member States of the BU.
The FMA also participates in SRB governance by means of its representation in SRB Extended Executive Sessions and Plenary Sessions.
For example, the three wind-down entities, or bridge institutions or asset management vehicles established in the future.
See Section F (Resolution Funding) in Part 2 of this note.
The resolution execution team is also responsible for monitoring resolution entities
See Section B (Recovery Planning and Early Intervention) and Section C (Legal Regime for Bankruptcy and Resolution) of Part 2 of this note for recommendations for ensuring adequate sharing of information.
Art. 3 (3).
Using the resolution tools in the BaSAG. See details in Section C (Legal Regime for Bankruptcy and Resolution) of Part 2 of this note.
The so-called Failing or Likely to Fail (FOLTF) determination described in Section C of Part 2 of this note.
Authorities inform that conflicts of interest have not risen in practice and that there are mitigating factors. The instances where the Board of the FMA takes decisions in its capacity as NCA and in its capacity as NRA are clearly regulated, and all draft decisions of the FMA as NRA have to be provided for review by the SRB before they are taken at the national level.
See details in Section F (Deposit Protection) of Part 2 of this note.
Under proposed financial supervision reforms, REFBA would be transferred to the FMA BRD.
In recent time, most notably to support the disposition of the wind-down entities.
In particular the valuation required under the BaSAG in order to support decisions on the use of the resolution tools, so-called Valuation 2.
The Executive Board of a bridge institution in particular likely would be working under the instruction of the FMA Board as NRA in carrying out the restructuring of the resolved institution set in the adopted resolution scheme, and as such would be agents deserving protection per the Key Attributes (Essential Criteria 2.6 of the Key Attributes Assessment Methodology).
The Crisis Management Division within DG MS IV.
The BRRD was promulgated in May 2014.
This is in accordance with EBA guidance on simplified obligations and the ECB’s Joint Standard on Recovery Planning.
More specifically, institutions that are not in category 1 and have consolidated total assets up to €5 billion with cross-border business not exceeding 30 percent of total assets and interbank business not exceeding 50 percent of total assets.
As noted, SIs are required to prepare full-scope plans as well.
And any subsidiaries of other IPS members where relevant.
The IPS plan must contain a description of the escalation process, indicators and recovery measures at the level of the individual IPS members and should quantify the recovery measures and the effects of the stress scenarios for a typical IPS member.
The BSD does in fact do this in the case of the Liquidity Coverage Ratio, for example, where the minimum threshold is 110 percent and the minimum regulatory requirement is 100 percent.
The identification of “material deficiencies” triggers a timebound process to ensure the deficiency is remedied in short order.
The criteria address the (i) completeness; (ii) quality (particularly in terms of the range and detail of identified recovery options); and (iii) credibility (especially the likelihood of being able to implement identified recovery options successfully) of the plans.
Certain uses of intervention powers by the FMA must be communicated to the ECB.
The BRRD definition of “resolution” is narrower than that used in the KAs. Under the BRRD, resolution is the application of one or more of the four default resolution tools. The KAs identify 12 powers, including, notably, the closure and orderly wind-down (liquidation) of a failing firm, which the BRRD considers to be outside of resolution.
A petition for bank bankruptcy can only be made by FMA.
The legal regime also provides for special receivership procedure as an alternative to bankruptcy for which the FMA can petition the court. A necessary requirement for the receivership procedure is that it must be likely that the bank’s problems can be remedied by a court appointed receiver. The FMA does not envision using this option.
See more on the creditor hierarchy below.
See Section F (Deposit Protection) of Part 2 of this note.
To the extent the DGS is not able to recover its payout costs from the proceeds of liquidation.
The authorities indicate that this would be in line with developments in the European Union.
The Key Attributes.
Or other public entity and, potentially, bailed-in creditors.
Or, alternatively, an equity position in a company holding those assets and liabilities.
Including to zero value (i.e., write-off).
And, potentially, to help capitalize a bridge institution.
The decision is the sole discretion of the BRD and FMA Board as NRA.
The FOLTF determination is subject to guidance published by the EBA in 2015.
As noted, the lack of differentiation for ultimate decision-making at the FMA Board for the FMA’s responsibilities as NCA and NRA undermines the effectiveness of this safeguard.
As required under the Key Attributes.
Potentially, as instructed by the SRB for banks under its remit.
Resolution actions directed by the SRB are not subject to challenge to the Appeals Panel.
In terms of the financial consequences for shareholders and holders of other capital instruments.
These tools are optional under the BRRD. The government also elected to transpose the BRRD provisions for precautionary recapitalization.
Subject to prior approval by EC DG-Comp in line with the EU State Aid framework.
The so-called Valuation 3.
BRD staff serve as sub-coordinators of the 11 IRTs. Sub-coordinators seek to align all work undertaken within the IRTs for Austrian banks and groups.
Six of which are SIs.
The SRB may express its views on the resolution plans themselves and on MREL requirements.
As noted, the use of resolution tools must meet a series of tests, including that of being in the public interest.
Credible in the sense that the authorities have the necessary legal and operational capacity to implement the plan.
Feasible in the sense that the plan can be implemented without causing substantial disruption to the financial system.
Resolution planning for a HP-LSI is under the remit of the SRB.
EBA guidelines /EBA RTS/ Commission Delegated Regulation (EU) 2019/348.
While these banks generally are not deemed to provide critical functions, the BRD considers that in time of broader financial instability or system wide events, a significant DGS pay-out event could lead to a substantial level of uncertainty by depositors and therefore potentially increase the level of instability. In such a case the use of resolution tools could be more likely to ensure and foster financial market stability than the use of bankruptcy proceedings.
As the volume of DGS resources grows via regular contributions from members, the number of banks in this category will fall. There were 33 banks in this category in the 2018 planning cycle.
In simplest terms, losses from any entities in the group would be passed up to the parent, which would, if those losses (or its own losses) impaired its viability, be put into resolution and recapitalized via bail-in.
In simplest terms again, should losses in the subsidiary in that jurisdiction impair its viability, it would be put into resolution and recapitalized via bail-in within the jurisdiction. Losses would be passed to the parent in Austria only to the extent of the parent’s equity investment (assumed to be written-off) and any write-down or write-off of bailed-in debt of the subsidiary that the parent held. Other loss absorption and/or sources of recapitalization funds would come from other creditors of the subsidiary, for example the holders of debt it issued in the local market.
Eligible (potentially bail-inable) debt instruments include subordinated debt, senior nonpreferred debt (a relatively new class of liability that only one Austrian bank has yet issued), and senior debt. Other eligible liabilities include uncovered (uninsured) corporate deposits of greater than one-year maturity, though not those of corporates that qualify as small and medium enterprises (SMEs), whose uncovered deposits have preference to other corporates’ uncovered deposits and are not eligible as MREL.
The target for three SIs is a function of the total loss-absorbing capital requirement applicable to G-SIBs.
The FMA Board, as NRA, adopted a policy in November 2018 to guide MREL setting in banks under its remit.
Solo-level requirements reportedly will not differ substantially from the consolidated requirements.
In other words, there is no requirement to hold additional MREL.
As a significant number and amount of uncovered deposits are potentially subject to bail-in (even if they do not count toward meeting MREL requirements), the so-called subordination requirement would specify an amount of MREL that is contractually subordinated to such deposits, and thus subject to full bail-in prior to the bail-in of depositors. This would have the effect of potentially substantially reducing the number of counterparties subject to bail-in (facilitating the operational implementation of bail-in) and reducing the need to bail-in depositors (with its attendant negative political and economic ramifications).
Using guidelines adopted by the SRB in 2018.
As defined in the BaSAG, the BRRD and the SRMR.
The BaSAG, the BRRD and the SRMR set out procedures for formally notifying banks of “substantive impediments,” for ensuring that the banks take steps to remove or mitigate them, or if this is not achieved, for the SRB/BRD to impose on the banks alternative measures to address the impediments.
This is reportedly the status in all BU jurisdictions.
Or other extraordinary official support.
For example, its policies on eligible alternative collateral, valuation procedures, information requirements and haircuts, and documentation requirements to support perfecting liens on collateral.
See Section E (Resolution Funding) in Part 2 of this note for recommendations regarding the OeNB’s ELA Framework.
For instance, to maximize value for all creditors, to maintain financial stability, or for reasons of operational practicality. For example, bailing-in a large number of corporate deposits may be operationally challenging.
See Section E (Resolution Funding) in Part 2 of this note.
As well as other business activities that have close legal, financial and operational interlinkages with the transferred critical functions and the related critical shared services.
The so-called Valuation 1.
As required under the Key Attributes. The BRRD and BaSAG allow for a provisional valuation by the supervisory (or resolution) authorities to be the basis for the FOLTF determination. This would be normal practice is most jurisdictions, where the courts defer to the expertise of the supervisors when asserting that a bank is no longer viable.
In extraordinary circumstances, financing may be required for loss absorption (i.e., to restore capital to zero).
See Section F (Deposit Protection) in Part 2 of this note.
This includes the ability to make capital contributions, issue guarantees, make loans and purchase assets.
The LFA is the standard bridge financing agreement entered into by BU participating states. It allows the SRB to draw the funds without any further authorization or agreement of the Austrian government or legislature.
The individual national compartments of the SRF are being mutualized over time. The mutualized portion of the SRF is available for use in any BU jurisdiction.
A second constraint is that the amount provided by the SRF is limited to five percent of a bank in resolution’s total liabilities and own funds.
IMF Country Report No. 18/232. Euro Area Policies: Technical Note—Bank Resolution and Crisis Management, July 2018
The ECB’s Governing Council may object to OeNB ELA if it finds the ELA conflicts with the objectives and tasks of the ESCB or constitutes monetary financing of bank support. The established procedures for ex post and ex ante notification of ELA to the Governing Council by national central banks are specified in the ELA Agreement. Any ELA outstanding would be reviewed by the Governing Council regularly.
The usage of such swap lines is, however, subject to approval of the central bank providing foreign liquidity, and therefore foreign currency liquidity provision through the swap lines cannot be assumed.
Any such support would need to be consistent with State Aid rules.
In addition, as noted, the government transposed the precautionary recapitalization provisions that provide flexibility in providing government capital to support to a bank deemed to have a capital shortfall in a European stress test.
Specifically: (i) private joint stock banks; (ii) the Raiffeisen (cooperative and joint stock) banks; (iii) the mortgage (Hypo) banks (banks originally owned by the provinces with the right to issue covered bonds; and (iv) the Volksbanks (cooperative and joint stock banks).
Minor shareholdings are held by the Austrian Federal Economic Chamber, part of the Austrian Chamber of Commerce, and the four trade associations which represent the different banking sectors of the ESA member banks.
See Financial Sector Landscape in the Background section of this note.
One director from each of the four banking sectors.
For those banks that are members of an IPS, depositors potentially enjoy 100 percent deposit protection, as the IPS will seek to resolve a potential failure of one of its members without any loss to depositors.
Deposits held by personal pension schemes and occupational pension schemes of small or medium-sized enterprises are covered.
As noted, P&A transactions whereby covered deposits are transferred to an acquiring bank, along with certain assets of the failing bank, are not provided for.
In addition, if a bank ceases making payments, the FMA has five days in which to make a determination that in turn triggers a payout.
The government did not adopt a higher target for the DGSs or require them to achieve the target level at an earlier date, though both are national options under the DGSD.
Similarly, the government did not adopt a higher contingent contribution coefficient, which is a national option.
The Working Committee chair rotates between both DGSs annually.
Fee-paid lines of credit from third-party banks are also being discussed but are viewed as a second-best option, given their likely high cost.
The guarantee would be particularly relevant in case of borrowing from third parties.
The IPSs seek to resolve liquidity, capital, and other problems in their member institutions, without the need for additional intervention by the BSD, or action by the BRD of the DGSs. Their actions in this respect are supervised by the BSD.
The IPS arrangements can achieve an outcome similar to a P&A transaction, by for example supporting the acquisition of a failing member by another member of the IPS.
In case resolution tools other than bail-in are employed, the DGSs are liable for the amount of losses that covered depositors would have suffered in proportion to the losses suffered by creditors in the same creditor hierarchy class.
See: Resolution Funding: Who Pays When Financial Institutions Fail?; Oana Croitoru, Marc Dobler, and Johan Molin at: https://www.imf.org/en/Publications/TNM/Issues/2018/08/16/Resolution-Funding-Who-Pays-When-Financial-Institutions-Fail-46124
Known as ORION.
Taking into account the institutional evolution of the BRD, the crisis management guidance issued by the SRB, and other relevant developments and guidance.
The institutional architecture for the BU was largely designed with resolution of individual banks and banking groups in mind. For example, the required interactions between the FMA, the OeNB, the SRB, and the EC on the adoption of a resolution scheme contemplate the failure of an individual bank or group. In part for this reason, most of the existing coordination arrangements within and between the FMA and the OeNB are designed to deal with individual banks or groups. Contingency plans are the means by which to address also a systemwide crisis involving simultaneous distress and potential failure of multiple banks and other financial institutions. Such plans must include and involve the MOF.
Not unlike banks’ recovery plans.
Other testing does take place. The FMA and the OeNB, along with certain banks, engaged in an exercise in April 2019, which simulated a cyberattack on several banks.