2015 Bank Capital Report: Austria

Author: | Published: 11 May 2015
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1. Bank supervision


The Austrian Financial Market Authority (FMA) and the Austrian National Bank (OeNB) are responsible for supervising credit institutions. As of November 4 2014, the European Central Bank (ECB) assumed direct supervision over major Austrian credit institutions in line with the Single Supervisory Mechanism (SSM). The banks classified as non-significant are supervised by the national authorities under the supervision of the ECB.

However, the cooperation of the Austrian authorities with the ECB and the SSM's joint supervisory teams has yet to evolve.

2. Bank recovery/bail-in


The Bank Recovery and Resolution Directive (BRRD) has been implemented in Austria through the Austrian Banking Recovering and Resolution Act (BaSAG), which entered into force on January 1 2015. The resolution process of Heta (formerly Hypo Alpe Adria) is the first to take place in Austria under this regime.

BaSAG has also implemented the BRRD bail-in tools in section 85 subsection BaSAG. Before the BRRD implementation, Austrian law did not provide for a unilateral bail-in tool.

Under this regime, the FMA formed a new authority – the National Resolution Authority (NRA) – within the FMA for banking resolution. The European resolution authority, the SRB, will subsequently take on large parts of the FMA's responsibility as from 2016 at the latest.

As of January 1 2016, it is expected that credit institutions will need to meet minimum requirements for own funds and eligible liabilities (MREL) to ensure the feasibility of a bail-in.

3.Buffers


Capital conservation buffer
follows the CRD IV framework (see section 23 in connection with section 103q point 11 Austrian Banking Act – BWG).

Phase-in begins:
January 1 2016 – 0.625%
January 1 2017 – 1.25%
January 1 2018 – 1.875%
January 1 2019 – 2.5%

Countercyclical buffers follow the CRD IV framework (see section 23a in connection with 103q point 11 BWG).

Phase-in begins:
January 1 2016 – 0.625%
January 1 2017 – 1.25%
January 1 2018 – 1.875%
January 1 2019 – 2.5% (although the FMA can set a higher amount if required).

The FMA will publish the countercyclical buffer rate used to calculate the institution-specific buffer on a quarterly basis on its website.

Domestic Sifi buffer

In Austria, domestic Sifis are referred to as systemically important institutions (SIIs). These may be required to hold an individual SII buffer of up to 2% as of January 1 2016 (see section 23c paragraph 5 BWG).The buffer is subject to a joint review by the FMA and the OeNB on at least an annual basis (as set out in article 131 paragraph 6 lit b CRD IV).

Global Sifi buffer

Global Sifis are referred to as global systemically important institutions (G-SII) in Austria. The G-SII buffer will be phased-in from January 1 2016 and will be set between 1% and 3.5% on an individual basis (see section 23b BWG and article 131 paragraph 9 CRD IV).

In 2016, G-SIIs only need to fulfil 25% of their individual G-SII buffer requirement. The percentage increases to 50% in 2017, 75% in 2018 and 100% from 2019 (see section 103q point 12 BWG).

Systemic risk buffer

The systemic risk buffer of at least 1% is already applicable. It is not capped, although the EC and other EU authorities need to be involved in the decision-making process if the FMA intends to raise the buffer above 3%.

4. Call options


Austria has not issued any rules with regard to regulatory or tax calls in addition to the CRR.

5. Coupon payment


Beyond the CRR and leaving aside resolution measures, the BWG empowers the FMA to limit an Austrian institution's discretion to pay coupons/dividends on own funds instruments. The FMA may exercise this power if it has doubts as to the institution's ability to permanently comply with certain regulatory requirements, in particular with liquidity and capital requirements. This might, for instance, be the case if a large decrease of the own funds ratio occurs, even though the institution might still comply with combined buffer requirements.

If the FMA exercises these powers, discretionary payments and distributions may be limited to the institution's annual net income. Austrian law does not provide for clear guidance on how the maximum distributable amount (MDA) is calculated in this context.

6. Credit default swap contracts


Austria has not issued any rules with regards to the use of credit default swaps or other tools to mitigate credit risk in addition to the CRR.

7. Disclosure


CRR disclosure rules apply, including obligations to disclose information in relation to compliance with countercyclical capital buffer requirements. The FMA will disclose G-SII buffers and information on systemic risk buffers, if imposed on an institution.

Institutions are obliged to publish their CET1 ratios, both on a solo and group basis (see section 65 BWG and section 64 paragraph 1 point 16 BWG).

8. Leverage ratio


There are no plans to implement leverage provisions on top of the requirements under the CRR.

The issuance of additional tier 1 capital (AT1) has an impact on the leverage ratio, even though in general only marginally, as AT1 counts towards the ratio's nominator and denominator, unless other equity positions are replaced.

The liquidity ratio requirements will be introduced on October 1 2015 in accordance with the following phasing-in (article 460 CRR together with article 38 of the Commission Delegated Regulations with regard to liquidity coverage requirements):

60% of the liquidity coverage requirements as from October 1 2015,
70% as from January 1 2016,
80% as from January 1 2017,
100% as from January 1 2018.

Credit institutions will calculate the liquidity coverage ratio according to the following formula (as set out in article 4 of the Commission Delegated Regulations):

Liquidity buffer/net liquidity outflows over a 30 calendar day stress period = LCR (%)

The term 'liquidity buffer' will have the same meaning as the BCBS's definition of high quality liquid assets (HQLA). A more detailed description is also included in article 7 of the Commission Delegated Regulations.

9. Loss absorption features


Loss absorbency features of AT1 and tier 2 instruments follow the CRR. To this end, only AT1 provides for going-concern loss absorption. Both AT1 and tier 2 provide for gone-concern loss absorption, as they qualify as subordinated debt.

With the BaSAG, shareholders and holders of other instruments of ownership, including AT1 and tier 2 instruments, will be the first stakeholders to contribute to the resolution by means of a mandatory write-down/cancellation/conversion of their instruments, taking account of the ranking of these instruments in insolvency proceedings.

The 'no creditor worse-off than under normal insolvency proceedings' principle will apply (see section 107 paragraph 2 BaSAG).

10. Minimum capital


Austria follows the CRR requirements, which are (see section 22 BWG and article 92 CRR):

Minimum CET1 ratio

January 1 2013 – 3.5%
January 1 2014 – 4%
January 1 2015 – 4.5%

Minimum tier 1 ratio

January 1 2013 – 4.5%
January 1 2014 – 5.5%
January 1 2015 – 6%

Minimum total capital

ongoing 8%

11. Pillar 2

Capital

The FMA has not issued guidance on additional pillar 2 capital requirements.

Supervisory

Austrian law provides guidance on pillar 2 requirements. It focuses on the joint responsibility of the management board, general risk management requirements, organisational duties, documentation, resources, and outsourcing. The rules are, in some cases, stricter than the CRD IV framework, for instance the provisions governing variable remuneration.

Local law provisions under pillar 2 focus on notifications to the regulator, not on disclosure. However, disclosure of compliance with pillar 2 requirements is mandatory under the CRR when it comes, for example, to variable remuneration.

12. Qualifying capital


Instruments recognised as CET1 in Austria are defined by article 50 CRR, and include common shares, retained profits and other equity instruments.

Capital instruments issued by Austrian savings banks and cooperative societies may also qualify as CET1 if they comply with the conditions set out in the CRR.

CRR requirements apply to AT1 securities, including minimum 5.125% (article 54 CRR) trigger, loss absorbing, perpetual with no incentive to redeem, subordinated, distributions fully flexible and paid out of distributable items.

Standard CRR requirements apply to tier 2.

Deferred tax assets

Deferred tax assets that rely on future profitability and existed before January 1 2014 need to be deducted in full from CET1 from January 1 2024 (article 478 (2) CRR).

A phase-out begins on January 1 2015, after which 10% of those deferred tax assets that rely on future profitability need to be deducted. This increases by 10% annually and reaches 90% in 2023 (see article 478 para 2 CRR and section 3 subsq CRR-BV).With regard to deferred tax assets created in 2014 or later, 20% needs to be deducted in 2014, 40% from January 1 2015, 60% in 2016, 80% in 2017, and 100% from January 1 2018.

Available-for-sale securities

The FMA has not allowed institutions in their elements of own funds to disregard unrealised gains and losses relating to exposures to central governments of countries belonging to the EU, recognised within the AFS portfolio.

This treatment may change once the European Commission adopts a regulation endorsing the International Financial Reporting Standard (IFRS) which replaces IAS 39. This was due in 2015 but the International Accounting Standards Board voted in February 2014 to postpone its compulsory adoption of IFRS 9 to 2017.

Grandfathering

Instruments that no longer qualify as own funds will in general be de-recognised over an eight-year period, starting in 2014. As of January 1 2015, 70% will remain recognised. This decreases to 60% in 2016, and so on. As of 2022 (see article 486 point 5 CRR) instruments that no longer qualify as own funds will be fully de-recognised.

13. Regulatory intervention


Regulatory intervention powers under the Austrian law will be tested by the Heta case – as of today, no precedents exist.

The impaired assets, rights, and liabilities of Hypo Alpe Adria were transferred to Abwicklungsbank HETA (a kind of 'bad bank') under mechanisms that were available under corporate law at that time. The same happened with Kommunalkredit and the split into KA Finanz as a 'bad bank'.

As a result of the 2014 stress test, all Austrian banks have met the required 8% of CET1 after the asset quality review. Under the adverse scenario, only five banks reached the required CET1 ratio of 5.5%.

The Austrian Federal Banking Act does not use the term 'stress test' in connection with the FMA's supervisory duties. However, article 69 subsq BWG entitles the FMA together with the OeNB to carry out on-site inspections and to obtain specific information to determine systemic risks. The FMA and the OeNB must jointly define an inspection plan for each upcoming calendar year. The aim of this plan is to inspect the top eight Austrian banks at least once a year. The remaining regional banks are inspected every three years.

Article 70 BWG empowers the FMA to take temporary measures to ensure the financial market's stability. These measures include but are not limited to the specification of additional own funds requirements to cover extended liquidity risks. All measures have to be issued by administrative rulings (Bescheid).

Further to the above, article 44 BaSAG empowers the FMA to carry out early intervention measures (Frühinterventionsmaßnahmen) if an institution were to fail in the future (eg, due to a negative development in the liquidity situation) to comply with the standards set by the CRR, the CRD IV, the MiFID II and the MiFIR. By enacting these early intervention measures, the FMA may oblige the management of an institution to take actions defined in the recovery plan. The articles of both the BWG and the BaSAG are based on the supervisory review and evaluation process as described in the CRD IV.

14. Stress tests


The following Austrian banks and their subsidiaries participated in the 2014 European Banking Authority (EBA) stress test: Erste Group Bank, Raiffeisen Zentralbank, BAWAG PSK, OeVAG, RLB OOE and RLB NOE-W.

15. Tax treatment


Unlike Germany, in Austria there is no official clarification of the tax treatment of AT1 instruments compliant with the Basel III requirements (CRR, CRD IV). It needs to be assessed according to general principles of tax law, whether the criteria for debt or equity prevail in a qualitative perspective. The fact that the instrument does not provide for a participation in any value increases at redemption or liquidation of the issuer is considered a very negative aspect of an equity instrument for tax purposes, although balance sheet equity will be given in many cases (in case of a full loss participation). According to literature and an informal statement of the Austrian Ministry of Finance, coupon payments for AT1s based on article 51 of Regulation 575/2013 of June 26 2013 should be tax deductible in Austria. However, it is recommended to take advice on a case-by-case basis.

For AT1s regarded as debt instruments for tax purposes, non-Austrian tax resident corporate investors are not subject to withholding tax on interest payments received from an Austrian issuing bank. For Austrian tax resident investors, withholding tax applies. This tax will be deducted by the Austrian custodian or paying agent of the bank where relevant AT1s are deposited in a custody account. In the case of non-Austrian tax resident individuals as investors, ordinary withholding tax (relief according to double taxation conventions available) or EU withholding tax needs to be considered.

In the case of a write-down of AT1s qualifying as debt instruments for tax purposes due to the realisation of a trigger event, the amount by which the repayment capital is reduced should lead to a taxable gain at the level of the issuing bank. Correspondingly, a subsequent increase of the capital to be repaid should lead to tax-effective expenses.

16. Treatment of mutuals and Sifis


Only one Austrian Bank, the Erste Group Bank, has qualified through the EBA as a G-SII. The FMA intends to publish a list of national O-SIIs before the end of 2015.

According to article 131 section 1 2013/36/EU, each member state has to designate a national authority in charge of identifying G-SIIs and O-SIIs. In Austria, according to section 23b (1) BWG, which will come into force on January 1 2016, the FMA is responsible for identifying G-SIIs.

According to section 8 BaSAG, all Sifis are obliged to prepare a recovery plan imposing measures for financial stability.

Rules on the ring-fencing of risks will enter into force in July 2015, subject to transitional rules. Even though these rules do not explicitly require a bank to be systematically important in order to fall within the scope of the ring-fencing regime, factually only systematically important banks are likely to be caught by the provisions.

For mutuals, CRR provisions apply.

About the author
 

Tibor Fabian
Partner, Binder Grösswang

T: +43 (1) 534 80 – 230
F: +43 (1) 534 80 – 8
E: fabian@bindergroesswang.at
W: www.bindergroesswang.at

Tibor Fabian has been a partner at Binder Grösswang since 1996. Before his professional career as a lawyer, he worked as the head of international project finance at Österreichische Länderbank and as an assistant to the chairman of Oesterreichische Kontrollbank. His practice focuses mainly on banking and finance, capital markets, real estate and structured finance. His recent experience includes the representation of an Austrian cooperative banking sector in the setting up of a group pursuant to Art 3 CRD and in the ongoing reorganization of the group. He advises Austrian issuers, particularly banks, on DIP and MTN-Programmes and was involved in the stabilization of the Austrian Pfandbriefbank/Pfandbriefstelle after the HETA-moratorium.


About the author
 

Maurizia Anderle-Hauke
Attorney at law, Binder Grösswang

T: +43 (1) 534 80 – 460
F: +43 (1) 534 80 – 8
E: anderle-hauke@bindergroesswang.at
W: www.bindergroesswang.at

Maurizia Anderle-Hauke joined Binder Grösswang as an attorney at law in 2013. Before that she worked for renowned law firms, including Benn-Ibler and DLA Piper Weiss Tessbach. Her practice focuses mainly on banking and finance, capital markets, regulatory and corporate M&A.


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