Sustainability of large Austrian banks’ business models

In March 2012, the Oesterreichische Nationalbank (OeNB) and the Austrian Financial Market Authority (FMA) published a supervisory guidance on strengthening the sustainability of the business models of large internationally active Austrian banks with a view to contributing to financial stability both in Austria and in the subsidiaries’ host countries. More specifically, the original set of measures aimed at

  • increasing these banks’ capital base in the medium and long term,
  • ensuring that banks have in place adequate recovery and resolution plans for potential crisis situations and
  • achieving a more balanced refinancing structure of exposed foreign subsidiaries.

The economic, legal and institutional environment has made considerable progress since the publication of the “Sustainability Package”:

  • The capital ratios of the addressed banks have increased substantially and they are now subject to the Supervisory Review and Evaluation Process (SREP) and macroprudential capital buffers that improve the risk bearing capacity of the Austrian banking system.
  • The guidance regarding recovery and resolution planning was also met. With the transposition of the European Bank Recovery and Resolution Directive (BRRD) in the Austrian Federal Act on the Recovery and Resolution of Banks (BaSAG), the establishment of the European Single Resolution Board (SRB) and the FMA as national resolution authority, new foundations were created to foster the resilience and the stability of the financial market.

Therefore, the first two objectives of the „Sustainability Package“ – i.e. a stronger capitalization of the addressed banks and the early drafting of recovery and resolution plans – were accomplished. These two pillars of the original guidance have been replaced by other measures and have consequently been withdrawn by the FMA and OeNB from the “Sustainability Package”.

Analyzing the local stable funding situation of foreign subsidiaries has evolved into a widely-recognized risk monitoring process to avoid excessive loan growth.1 Hence the monitoring of the loan-to-local stable funding ratio (LLSFR) and the pricing of intra-group liquidity transfers, which is meant to act as an early warning tool in boom periods, will continue and, going forward, the “Sustainability Package” will focus on this pillar. In line with historical evidence, the Austrian supervisors place a particular focus on already exposed subsidiaries whose stock-LLSFR exceeds 110%. The results of this monitoring are discussed in the framework of international supervisory cooperation with a view to agreeing whether constraining supervisory measures are necessary.

The guidance currently applies to two Austrian banking groups on the grounds of their size, systemic relevance as well as the complexity of their business models (with numerous subsidiaries): Erste Group Bank and Raiffeisen Bank International.2
 

1 The local stable funding includes deposits from non-banks, supranational funding, capital from third parties and the total outstanding volume of debt securities with original maturities of one year or more issued by the subsidiary to investors outside their consolidated group.

2 Due to the transfer of the CESEE-subsidiaries of UniCredit Bank Austria to the Italian parent bank in 2016, this bank is no longer being addressed by this supervisory guidance.