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Summary of Austria's Banking Oversight Technical Note

Core Content

This document is a Technical Note on banking oversight in Austria, prepared by the International Monetary Fund (IMF) as part of the Financial Sector Assessment Program (FSAP). It focuses on the supervision of less significant institutions (LSIs) and evaluates the regulatory and supervisory framework based on the Basel Committee on Banking Supervision's (BCBS) Core Principles for Effective Banking Supervision (BCP). The review also considers the 2013 Austria FSAP recommendations, the 2018 euro area (EA) FSAP findings, and the implementation of EU regulations and directives.

Main Topics Covered

• Market and Institutional Structure
• Supervisory Environment
• Strengths and Weaknesses in Supervision
• Institutional Reforms in Banking Oversight
• Key Recommendations

Market and Institutional Structure

A. Market Structure

• The Austrian banking sector is large, concentrated, and diverse.
• Total banking sector assets amount to EUR 986 billion, representing ~250% of GDP and ~75% of total financial system assets.
• The sector is dominated by three decentralized banking segments:
  • Sparkassen (led by Erste Group Bank AG),
  • Raiffeisen cooperative segment (led by Raiffeisen Bank International AG),
  • Volksbanken (VB) cooperative segment (led by VB Vienna).
• The banking system includes ~600 banks, with continued consolidation observed over recent years.
• Profitability pressures have driven mergers and acquisitions, particularly in the Raiffeisen and Volksbanken sectors.
• Austrian banks have improved capital levels (CET1 rose from 11.6% in 2013 to 15.4% in 2018) and credit quality (NPL ratios dropped from 8.6% to 2.6%), but remain highly exposed to CESEE countries.

B. Supervisory Environment

• Austria operates a dual supervisory system under the Single Supervisory Mechanism (SSM), with the FMA and OeNB sharing responsibilities.
• The FMA is the National Competent Authority (NCA) for banking supervision, while the OeNB oversees payment systems.
• The BMF is responsible for developing and implementing the legislative framework.
• The FMA and OeNB collaborate closely to ensure integrated supervision, with the FMA making decisions and the OeNB executing onsite inspections and offsite analysis.

Strengthening Supervision

A. Supervisory Approach, Techniques, and Tools

• The FMA has adopted EBA guidelines on NPL management, internal audit, and foreign currency lending.
• The ECB has issued Pillar 2 guidance for NPL provisioning, which applies to LSIs.
• The FMA has implemented guidelines for early intervention and internal procedures for decision-making and coordination.

B. Developments in Banking Regulation and Supervision

• The national transposition of EU directives, including CRD IV and BRRD, has improved bank governance and supervisory powers.
• The FMA has introduced minimum standards for foreign currency loans, emphasizing borrower income in the exposure currency.
• The FMA is not planning to extend ECB Pillar 2 expectations to LSIs.

C. Areas for Improvement

• Related-party transactions are not adequately monitored under the BWG.
• Major acquisitions lack a comprehensive framework for oversight.
• Internal governance deficiencies may not be detected until they impact bank results, requiring supervisory judgment.
• Operational independence of the FMA remains a concern due to industry representation on the Supervisory Board and BMF's influence over supervisory processes.

Key Recommendations

Timeframe Definitions:

• C - Continuous
• I - Immediate (within 1 year)
• NT - Near Term (1–3 years)
• MT - Medium Term (3–5 years)

Institutional Reforms

• In November 2018, the Austrian authorities proposed institutional reforms to consolidate banking supervision under the FMA.
• The reforms aimed to improve efficiency, reduce duplication, and enhance service orientation.
• However, due to political developments in May 2019, the reforms were officially abandoned.
• The FMA would have taken over onsite inspections and offsite analysis from the OeNB, but this did not materialize.
• The OeNB would retain responsibilities for macroprudential risk analysis and financial market stability.
• The FMA would be subject to BMF oversight, with the BMF retaining the right to gather information on all matters related to financial supervision.

Governance and Independence

• The FMA's Supervisory Board currently consists of 10 members, with 50% from BMF and 50% from OeNB.
• The reforms would reduce the board to 6 members, removing industry co-opted members.
• The FMA's independence remains a key concern, particularly due to the BMF's influence on supervisory decisions.

Conclusion

The FSAP review highlights progress in bank governance and supervisory tools, but also persistent weaknesses in related-party transactions, major acquisitions, and FMA independence. The FMA and OeNB continue to collaborate under the SSM, but coordination is essential to address systemic risks. The institutional reforms were abandoned, and the current governance structure remains unchanged. The IMF emphasizes the need for improved qualitative supervision and greater independence for the FMA.