Browse Profiles > Austria > Core Principles for Effective Banking Supervision
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Austria

Core Principles for Effective Banking Supervision

Summary
In accordance with the International Monetary Fund's (IMF) 2004 Report on the Observance of Standards and Codes, Austria has a high overall level of compliance with the Basel Core Principles. The report also noted that on-and-off-site inspections are of a high standard, and risk management practices are gaining importance. The 2004 ROSC did indicate that some legal changes were required in order for Austria to achieve full compliance. The report pointed to shortcomings regarding consolidated supervision, connected lending, risk management, and investment criteria. Furthermore, the report noted a need for increased transparency and disclosure in market discipline, as well as more detailed and specific prudential guidelines for banks in managing risks. The legal framework for banking supervision in Austria is mainly based on the 1993 Banking Act. The Financial Market Authority (FMA) is an independent, autonomous, and integrated financial supervisory authority for the Austrian financial sector. Citing the IMF's update of its original 2004 assessment, the FMA reported in a 2007 Press Release that the regulatory and supervisory framework in Austria was at a high level, and continues to improve. The FMA further noted that the financial market supervision reform, which entered into force on January 1, 2008, would contribute toward effective and efficient supervision.

    General Overview

    The International Monetary Fund (IMF) undertook a Financial System Stability Assessment (FSSA) of Austria and released its findings in a 2004 Report on the Observance of Standards and Codes (ROSC). The report concluded that "Austria has a high overall level of compliance with the Core Principles" (p. 26). It also noted that Austria has a high standard of supervision based on strong institutions, as well as a comprehensive and modern legal framework. The Austrian National Bank (Oesterreichische Nationalbank, or OeNB) reported in 2005 that a well-developed legal framework ensures the independence of the supervisory authority and fosters close cooperation with other supervisory authorities. Improvements were needed in the areas of consolidated supervision, connected lending, risk management, and investment criteria, according to the same report. According to the IMF's 2004 assessment, market discipline could benefit from increased transparency and disclosure. Due to important linkages between the banking and insurance sectors, a formal process was also needed within the supervisory authority -- the Financial Market Authority (Finanzmarktaufsicht, or FMA) -- to coordinate banking and insurance supervision with respect to conglomerates and risk transfer. The IMF report further noted that banking supervision relied heavily on the use of external auditors for on-site supervision. To summarize, the 2004 IMF assessment noted that although Austria exhibited high overall level of compliance with the BCPs, it still needed to make legal amendments in order for it to achieve full compliance. Citing the IMF's update of its original 2004 assessment, the FMA reported in a 2007 press release that the regulatory and supervisory framework in Austria was at a high level, and had continued to improve.
    The legal framework for banking supervision in Austria is mainly based on the 1993 Banking Act (Bankwesengesetz, or BWG). According to the IMF's 2004 report, the FMA is given a broad range of remedial measures under the BWG to deal with "problem" banks. The FMA was established in 2002 under the 2001 Financial Market Authority Act (Finanzmarktaufsichtsbehördengesetz, or FMABG) as an independent, autonomous and integrated financial supervisory authority, consolidating the supervisory agencies for banking, insurance, securities, and pension funds. Prior to the formation of the FMA, the banking, insurance, and pension funds sectors were under the supervision of the Federal Ministry of Finance (Bundesministerium für Finanzen, or BMF), and the Austrian Securities Authority (Bundeswertpapieraufsicht, or BWA) was responsible for securities supervision. An amendment to the Act (Finanzmarktaufsichtsänderungsgesetz, or FMA-ÄG) entered into force in 2005.
    The BMF website notes that the agency is responsible for supervising the legality of FMA's activities. Moreover, upon FMA's authorization, the OeNB has the legal authority to conduct on-site inspections of credit and market risk, to collect and process data, and to give expert opinions. The OeNB is also required to notify the FMA of any significant change in banks' risks or suspected violation of legal requirements. In its 2004 report, the IMF noted that cooperation among the FMA, the OeNB, and the BMF, which is coordinated by the Financial Market Committee, is "good" (p. 5). Furthermore, the report indicated that the FMA is quickly and effectively building its institutional capacity, although the IMF acknowledged, the organization is still young. According to a 2008 press release from the FMA, the financial market supervision reform came into force on January 1, 2008 with the aim of strengthening supervision in Austria. The reform clearly defines the relationship between the FMA and the OeNB, comprehensively increases staff for banking supervision and auditing, and provides for a comprehensive corporate governance package. The increase in staff numbers will generally allow banks and financial institutions to be audited more frequently and thoroughly.
    The banking sector in Austria is highly developed, capitalized, and profitable, and has been expanding rapidly, as stated in the IMF's 2007 Article IV Consultation report. Furthermore, according to the 2007 U.S. Department of Commerce (DoC) Country Commercial Guide report, Austria has an important network in many Central, Eastern and Southeastern Europe (CEE/SEE) countries, with banking groups holding sizeable investments in CEE/SEE banking markets. In 2005, per the same report, total assets of Austria's five largest banking groups amounted to about $648 billion, accounting for 71 percent of total bank assets.


    The Principles

    1. (1) Clear responsibilities and objectives for each supervisory agency.

    According to the 2004 IMF Report on the Observance of Standards and Codes (ROSC), "there is a generally appropriate body of banking laws and regulations [and] both the FMA and OeNB enjoy operational independence and have mandates clearly defined in law, as well as legal provisions for coordination and information sharing" (p. 26). The FMA was established in 2002 as an independent, autonomous and integrated financial supervisory authority, consolidating the supervisory agencies for banking, insurance, securities, and pension funds. The BMF, as noted on its website, is responsible for supervising the legality of FMA's activities. Moreover, upon FMA's authorization, the OeNB has the legal authority to conduct on-site inspections of credit and market risk, to collect and process data, and to give expert opinions. The OeNB is also required to notify the FMA of any significant change in banks' risks or suspected violation of legal requirements. In its 2004 report, the IMF noted that cooperation among the FMA, the OeNB, and the BMF, which is coordinated by the Financial Market Committee, is "good" (p. 5). Furthermore, the report indicated that the FMA is quickly and effectively building its institutional capacity, although the IMF acknowledged, the organization is still young. According to a 2008 Press Release from the FMA, the financial market supervision reform which entered into force on January 1, 2008 clearly defines the relationship between the FMA and the OeNB. Despite the above descriptive information, there is little information publicly available addressing Austria's actual compliance with this principle.

    1.(2) Operational independence and adequate resources.

    As noted in the IMF's 2004 report, both the FMA and the OeNB "enjoy operational independence and have mandates clearly defined in law, as well as legal provisions for coordination and information sharing" (p. 26). Furthermore, according to BMF's website, the FMA is independent and has broad supervisory competencies due in great part to external financing. According to a 2008 press release from the FMA, the financial market supervision reform which entered into force on January 1, 2008 significantly increases staff for banking supervision, allowing banks and financial institutions to be audited on a more frequently and thorough basis. Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    1.(3) A suitable legal framework for authorization and ongoing supervision.

    According to the IMF's 2004 report, Austria has a high standard of supervision based on strong institutions, as well as a comprehensive and modern legal framework. The IMF report noted that "there is a generally appropriate body of banking laws and regulations" (p. 26) and both the FMA and the OeNB "have mandates clearly defined in law" (p. 26). Furthermore, the FMA was given a broad range of remedial measures under the BWG to deal with "problem" banks. Despite the information provided above, there is insufficient information publicly available as to Austria's compliance with this principle.

    1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

    Refer to Principle 1.3

    1.(5) Legal protection for supervisors.

    Although individual supervisors benefit from legal protection under the law when discharging their duties, the 2004 IMF report expressed concern about a court decision that made government, or possibly the supervisory authority, liable for all losses in bank failures. However, there is insufficient information publicly available as to Austria's compliance with this principle.

    1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

    According to the IMF's 2004 report, both the FMA and the OeNB had legal provisions for coordination and information sharing. According to a 2008 press release from the FMA, the financial market supervision reform which entered into force on January 1, 2008 clearly defines the relationship between the FMA and the OeNB, and significantly increases staff for banking supervision. However, there is insufficient information publicly available as to Austria's compliance with this principle.

    2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

    The licensing regime in Austria is well developed and appropriate, as noted in the IMF's 2004 report.

    3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

    The licensing regime in Austria is well developed and appropriate, as noted in the IMF's 2004 report.

    4. Authority to review and reject transfer of ownership.

    In its 2004 report, the IMF noted that the process to review transfer of ownership of significant shareholdings in banks in Austria is well developed and appropriate.

    5. Authority to review major acquisitions and investments.

    As stated in the 2004 IMF report, Austria lacked "a pre-notification requirement for major acquisitions and investments of credit institutions in entities other than credit institutions" (p. 27). The IMF report recommended strengthening provisions regarding the pre-notification of major or risky acquisitions by banks. It further advised involving the supervisory authority earlier in the decision-making process. Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

    The 2004 IMF report stated that there is a generally high level of compliance with prudential regulations and requirements. In its 2007 Financial Stability Report, the OeNB noted that the six largest Austrian banks had an aggregate capital adequacy ratio of 10.3% at the end of 2007, which was considerably higher than the Basel Accord minimum capital adequacy requirement of 8%. The OeNB report advised banks with large exposure to Central, Eastern, and Southeastern Europe to maintain appropriate capital levels to cover their total assets. However, neither assessment directly addresses Austria's compliance with this principle.

    7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

    The 2004 IMF report stated that there is a generally high level of compliance with prudential regulations and requirements. The supervisory regime could be strengthened by more detailed and specific prudential guidelines for banks in managing risks. However, the IMF assessment does not directly address Austria's compliance with this principle.

    8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

    Refer to Principle 7.

    9. Prudential limits and management information system on concentration of exposure.

    Refer to Principle 7.

    10. Arm's length rule and monitoring for connected lending.

    In its 2004 report, the IMF recommended conducting related-party transactions on market terms and conditions, and extending the definition of connected or related parties to include significant shareholders. It further advised requiring banks to establish a credit administration for transactions with related parties. The OeNB's 2005 report cited the IMF as recommending Austria to clarify the guidelines on the extension and management of loans to related parties. Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    11. Policies and procedures for country risk and transfer risk.

    Refer to Principle 7.

    12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

    Refer to Principle 7.

    13. Comprehensive risk management processes.

    The 2004 IMF report stated that there is "a generally high and increasing awareness of good risk management practices among Austrian banks" (p. 26). The supervisory regime could be strengthened by more detailed and specific prudential guidelines for banks in managing risks. Hence the IMF report recommended establishing clearer guidelines on the proper management of liquidity risk, interest rate risk, and operational risk. It further advised requiring capital to be held against risks in addition to credit and market risk. Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    14. Adequate internal controls.

    In its 2004 report, the IMF recommended specifying the minimum standards for internal processes and controls which banks and external auditors must meet. It further advised requiring internal audit functions to report to the supervisory board, rather than to the management board. This would entail amending the Joint Stock Companies Act (Aktiengesetz), as well as banking statutes. Furthermore, the Austrian Corporate Governance Code should be mandatory for credit institutions. The IMF report noted that substantial parts of the Code were already compulsory through the Aktiengesetz and the Act on Companies with Limited Liability (Gesetz über Gesellschaften mit beschränkter Haftung). According to a 2008 press release from the FMA, the financial market supervision reform which entered into force on January 1, 2008 provides for a comprehensive corporate governance package. However, there is insufficient information publicly available as to Austria's compliance with this principle.

    15. Strict "know-your-customer" rules and high ethical and professional standards.

    There is insufficient information publicly available that directly addresses Austria's compliance with this principle. However, the IMF in 2004 published a report that assessed Austria's compliance with the Financial Action Task Force (FATF) Recommendations. Per this report Austria has achieved a good level of compliance with the FATF's Recommendations for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). The AML/CFT provisions of the BWG entered into force in 1994, and apply to financial and credit institutions. The IMF assessment observed that the promulgation in April 2004 of AML/CFT guidelines for banks regarding internal controls and procedures, as well as suspicious transaction reporting (STR) requirements was an important tool, which could be used as a standard for on-site and off-site examinations. Furthermore, bank secrecy does not apply in cases when banks and other financial institutions are required to report suspected money laundering or financing of terrorism" (p. 42), as noted in the IMF's 2004 assessment. However, the IMF report noted that the number of STRs was relatively low due to the high level of suspicion required by the BWG for reporting (i.e. reasonable suspicion). The IMF report also observed that while the FMA's enforcement powers and sanctions were adequate, it lacked resources to conduct on-site inspections. The IMF hence encouraged the FMA to increase its resources and develop inspection manuals, and advised it to closely monitor the level of reporting, and take corrective actions if necessary.

    According to the 2007 U.S. DoS report, "during the first nine months of 2006, the [Austrian Financial Intelligence Unit] received 521 suspicious transaction reports from banks and fielded requests for information from Interpol, Europol, members of the Egmont Group, and other authorities. This represents an increase from the 467 suspicious transactions reported in 2005." This increase in STRs according to the same report is the result of increased awareness and reporting of money laundering activity.

    16. Effective supervisory system consisting of on-site and off-site supervision.

    In its 2004 report, the IMF noted that on-site and off-site inspections are of a high standard in Austria. Moreover, despite a lack of legal provisions, risk analysis of on-site supervision had improved. The IMF report recommended increasing the frequency of on-site inspections, in particular for larger credit institutions, through the planned increase in supervisory resources. It further advised clearly dividing the on-site work of both the FMA and OeNB to enhance supervisory collaboration.

    17. Regular contact with bank management and understanding of bank's operations.

    There is insufficient information publicly available addressing Austria's compliance with this principle.

    18. Analytical reports and statistical returns on solo and consolidated basis.

    According to the 2007 U.S. DoC report, listed companies are required to publish quarterly reports. However, there is insufficient information publicly available addressing Austria's compliance with this principle.

    19. Independent validation of supervisory information through on-site examination or external auditors.

    As stated in the IMF's 2004 assessment, external auditors' annual reports on banking supervision contributes significantly to the supervisory framework in Austria. However, the plan for the FMA and OeNB to conduct the on-site examination of one large bank each quarter was deemed inadequate. The IMF report recommended increasing resources to "permit examination of all systemically important banks on a one-to two-year cycle in addition to the external auditor's annual report" (p. 27). Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    20. Ability to supervise on a consolidated basis.

    According to the IMF's 2004 report, the FMA was in need of a formal process "to coordinate banking and insurance supervision with respect to conglomerates, and to systematically assess the risks to banking groups from nonbank activities" (p. 28). The IMF report noted that the FMA had created an Integrated Supervision Department in January 2004 to address issues related to financial conglomerates and risk transfers. Responding to the IMF's 2004 report, Austrian authorities stated that Austria was in the process of transposing the EC Directive on Financial Conglomerates into legislation, effective January 1, 2005. However, there is little further information publicly available as to whether this transposition did occur.

    21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

    As stated in the IMF's 2004 report, "accounting standards established by the Austrian commercial code are consistent with the European Union accounting directives. The larger banks, and also many of the larger commercial companies, have voluntarily adopted International Accounting Standards (IAS) for their consolidated statements" (p. 26). However, the IMF report recommended improving the implementation of accounting standards by auditors. As of January 1, 2005 all listed European companies, including Austrian companies, were required to prepare consolidated accounts following the International Financial Reporting Standards endorsed by the EU. Nonetheless, there is insufficient information publicly available as to Austria's compliance with this principle.

    22. Adequate supervisory measures to ensure timely corrective action.

    As stated in the IMF's 2004 report, "a broad range of remedial powers is provided by law to the FMA, including explicit requirements to take prompt action in serious cases such as insolvency" (p. 22). Nonetheless, the report indicated that in cases that are significant but less obvious, "the legal system puts a high burden of proof on the supervisor" (p. 22). This in turn, according to the report, might delay the process till the supervisor has at its disposal the necessary evidence. However, the IMF report acknowledges that such delays are not observed in practice. Despite the above information, there is little information publicly available addressing Austria's actual compliance with this principle.

    23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

    Austria has a sound framework for home and host country supervision, as noted in the IMF's 2004 assessment. Per the same report, in addition to conducting periodic on-site examinations abroad, Austria established an explicit evaluation program to assess the risks to Austrian banks from their foreign establishments. According to the IMF's 2007 Article IV Consultation report, actions have been taken by the authorities to further improve monitoring of Austrian banks' activities in CEE/SEE countries.

    24. International exchange of information with other supervisors.

    According to the IMF's 2004 assessment, Austria concluded Memoranda of Understanding (MoUs) with many foreign supervisory authorities. As stated in the IMF's 2007 Article IV Consultation report, the effective supervision of cross-border banking groups has improved through the enhanced cooperation between home and host supervisors in CEE/SEE countries, although shortcoming remained. Austria has signed a MoU on cooperation between supervisory authorities with Germany, the Czech Republic, Hungary, Slovakia and Slovenia. Austria has also concluded MoUs with France, Italy, the United Kingdom, the Netherlands, Croatia, Bulgaria, and Romania, as noted in the IMF's 2007 report on Selected Issues. Furthermore, Austria is in the process of negotiating MoUs with Malta, Poland, and Cyprus. Despite the information provided above, there is insufficient information publicly available as to Austria's compliance with this principle.

    25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

    Austria has a sound framework for home and host country supervision as noted in the IMF's 2004 assessment.

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    Sources of Assessment

    International Monetary Fund, "Austria: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Securities Regulation, Insurance Regulation, and Anti-Money Laundering and Combating the Financing of Terrorism," Country Report No. 04/238, Washington, D.C.: IMF, August 2004. Available from International Monetary Fund website. Accessed on January 25, 2008. (IMF 2004)

    Financial Market Authority, "Press Release - IMF Presents a Favorable FSAP Follow-up Report on the Austrian Financial Market," December 2007. Available from Financial Market Authority website. Accessed on February 14, 2008. (FMA 2007a)

    Oesterreichische Nationalbank, "The Implementation of the Basel Core Principles in Selected Countries from the Perspective of the International Monetary Fund," Focus 2/05, OeNB, February 2005. Available from Oesterreichische Nationalbank website. Accessed on January 25, 2008. (OeNB 2005)

    Relevant Organizations

    Austrian National Bank - Oesterreichische Nationalbank (OeNB)

    Federal Criminal Police Office - Bundeskriminalamt (BKA)

    Federal Ministry of Finance - Bundesministerium für Finanzen (BMF)

    Financial Market Authority - Finanzmarktaufsicht (FMA)

    Interior Ministry - Bundesministerium für Inneres (BMI)



    Relevant Legislation/Regulation

    Banking Act No. 532/1993, 1993 -- Bankwesengesetz Nr. 532/1993, 1993

    Basel II Amendments of Austrian Banking Act No. 141/2006, 2006 -- Änderung des Bankwesengesetzes Nr. 141/2006, 2006 (in German only)

    Act on Companies with Limited Liability, 1906--- Gesetz über Gesellschaften mit beschränkter Haftung, 1906

    Joint Stock Companies Act, 1965 (last amended 2001) -- Aktiengesetz, 1965 (in German only)

    Financial Market Authority Act, 2001 (last amended 2006) -- Finanzmarktaufsichtsbehördengesetz, 2001

    Financial Market Authority Amendment Act, 2005 -- Finanzmarktaufsichtsänderungsgesetz, 2005 (in German only)

    National Bank Act, 1984 (last amended 1987) -- Nationalbankgesetz, 1984 (in German only)

    Code of Corporate Governance (last amended June 2007)

    EU Financial Conglomerates Directive No. 2002/87/EC, 2002

    European Union Capital Requirements Directives 2006/48/EC and 2006/49/EC, 2006



    Supplementary Sources

    Federal Ministry of Finance website. Accessed on January 25, 2008. (MoF website)

    Financial Market Authority, "2006 Annual Report," 2007. Available from Financial Market Authority website. Accessed on January 25, 2008. (FMA 2007b)

    Financial Market Authority, "Press Release - Reform of Financial Market Supervision Enters into Force," January 2008. Available from Financial Market Authority website. Accessed on January 31, 2008. (FMA 2008)

    International Monetary Fund, "Austria: Selected Issues," Country Report No. 07/143, Washington, D.C.: IMF, April 2007. Available from International Monetary Fund website. Accessed on January 25, 2008. (IMF 2007a)

    International Monetary Fund, "Austria: 2007 Article IV Consultation - Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria," Country Report No. 07/145, Washington, D.C.: IMF, April 2007. Available from International Monetary Fund website. Accessed on January 25, 2008. (IMF 2007b)

    Oesterreichische Nationalbank, "Financial Stability Report 14," Vienna: OeNB, December 2007. Available from Oesterreichische Nationalbank website. Accessed on January 28, 2008. (OeNB 2007)

    U.S. Department of Commerce, "Doing Business in Austria: A Country Commercial Guide for U.S. Companies," U.S. & Foreign Commercial Service and U.S. Department of State, February 2007. Available from U.S. Department of Commerce website. Accessed on January 25, 2008. (U.S. DoC 2007)

    U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs, "International Narcotics Control Strategy Report 2007," March 2007. Available from U.S. Department of State website. Accessed on January 10, 2008. (U.S. DoS 2007)
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