financial intermediaries in austria - startseite08765ef6-5b9f-42ca-9ddb-8eed7ddc5be2… · net fee...

BanksBusiness Activity and ProfitabilityTotal Assets of Austrian Banks Remain onthe RiseThe unconsolidated total assets8 ofAustrian banks rose by 7.0% year onyear, peaking at EUR 640.9 billionin August 2004, which confirmedthe upward trend observed sincemid-2003. Both growth in the totalassets of the ten largest banks (exclud-ing special purpose banks) and themedian came to approximately 6%in August 2004, thus ranking slightlybelow the growth rate for the entireAustrian banking sector.

Foreign assets and liabilities con-tributed to this growth trend again;the former increased by 12.0% andthe latter by 9.4% year on year, eachrising to approximately EUR 197 bil-lion.9 With assets growing by 8.9% toEUR 119.8 billion and liabilities by10.8% to EUR 123.8 billion, domes-tic interbank business also had animportant share in the growth of totalbanking assets. This mirrors the inter-national trend toward more interbankbusiness.

In August 2004 loans to domesticnonbanks posted a year-on-yearincrease of 3.2% and reached EUR244 billion; in August 2003 thegrowth rate had amounted to 1.1%.This trend, which can also beobserved on an international level,reflects improving economic condi-tions. On the liabilities side, domesticnonbank deposits grew by 4.5% yearon year to EUR 204 billion, this

growth rate being slightly higher thanin the previous year (4.3%).

In recent years, the Europeantrend of reducing banking offices(head as well as branch offices) hasalso been observed in Austria. Be-tween year-end 1997 and September2004, the number of banking officesin Austria dropped from 5,686 to5,252 (—7.6%). This means thatcurrently one banking office servesaround 1,500 inhabitants, a ratiowhich is still relatively high by Euro-pean comparison. In the period fromDecember 1997 to September 2004,the number of head offices decreasedfrom 995 to 891 (—10.5%) and thatof branch offices (excluding post offi-ces) from 4,691 to 4,361 (—7.0%).In particular reductions in the jointstock bank, savings bank and Raif-feisen sectors were responsible forthis decline.

Nominal Volume of Derivatives Declinesafter a Peak in August 2003Following its high in August 2003,the nominal value of special off-bal-ance sheet financial operations10 drop-ped from EUR 2,652 billion toEUR 1,825.9 billion in August 2004(—31.2%) and was thus only 2.8 timesas high as the total assets of allAustrian banks (in August 2003 ithad been 4.4 times as high). In August2004, interest rate contracts de-creased by 31.9% year on year toEUR 1,575.4 billion, and foreignexchange derivatives shrank by29.4% to EUR 232.5 billion. The fact

8 Unless specified otherwise, the figures in the text are given on an unconsolidated basis.9 On the assets side, the higher share of external business can be related to Austrian banks� increasing activities

in Eastern Europe, while on the liabilities side, it can be attributed to refinancing transactions for foreigncurrency loans.

10 Pursuant to ⁄ 22, Annex 2, Austrian Banking Act, these include: interest rate contracts, contracts concerningforeign exchange rates and gold, contracts concerning equities and other securities related contracts, preciousmetal contracts not including contracts concerning gold, commodities contracts not including contractsconcerning precious metals, other forward transactions, futures, options purchased and similar transactions.

24 Financial Stability Report 8�

Financial Intermediaries in Austria

that the volume of derivatives tradinghad strongly expanded up until August2003 and then started to declineowing to changes to the positionscan be traced back to the activitiesof a single Austrian major bank. Ifone disregards this particular bank�svolume, Austrian banks� derivativesbusiness can be said to have ex-perienced continuous year-on-yeargrowth since 1999.

The Triennial Central Bank Surveyof Foreign Exchange and DerivativesMarket Activity in April 200411

organized by the Bank for Inter-national Settlements (BIS) revealedthat both of these business areas, forquite a while, have been stronglyexpanding in Austria and worldwide.The average daily turnover in over-the-counter (OTC) derivatives inAustria grew from USD 4.9 billionto USD 14.8 billion between April2001 and April 2004. The share ofAustrian banks in the global OTCderivatives market thus amounted toapproximately 1% in 2004 (2001:0.7%). The average daily turnoveron the Austrian foreign exchange mar-ket has also risen, expanding fromUSD 8 billion in April 2001 toUSD 13.3 billion in April 2004. Thiscorresponds to an increase of Austria�sglobal market share from 0.5% in2001 to 0.6% in 2004. All in all,Austria�s foreign exchange and OTCderivatives business experiencedabove-average growth levels by inter-national comparison between April2001 and April 2004. Nevertheless,

its role in worldwide foreign exchangeand derivatives markets remainsminor.

Austrian Banks� Profit Growth AcceleratesSimilarly to most international bank-ing markets, Austrian banks� profitscontinued to grow at an acceleratingpace in the first half of 2004.12 Theoperating profits of banks in Austriaincreased by 10.3% year on year inthe first half of 2004, as income grewfaster than costs. Operating incomerose by 3.6%, operating expenses byjust 0.5%.

Although the interest margin fellfrom 1.29% to 1.23% between thefirst half of 2003 and the first half of2004, net interest income rose by0.9%, a development which can beattributed to the fact that loans tononbanks increased more stronglythan customer deposits. The slight risein net interest income could, however,not make up for the decline experi-enced since end-2002. While in somecountries the strong growth of mort-gage loans, favored by booming realestate prices, has more than compen-sated for falling interest margins,13

this has not been the case in Austria.This, however, also means that theAustrian banking sector is less vulner-able to real estate price shocks,14

which could negatively affect theabove-mentioned banking marketsthrough an increase in required riskprovisions and deteriorating interestincome.

11 In 2004 this survey involved 1,208 banks in 52 participating countries. The OeNB selected 13 Austrianbanks which account for 98% of the entire derivatives trading volume in Austria for this year�s survey. Itincluded an analysis of the turnover (nominal value of all new business transactions concluded over a specifiedperiod) in foreign exchange markets and over-the-counter (OTC) derivatives for April 2004. Exchange-tradedderivatives were not taken into account.

12 Cf. e.g. IMF Global Financial Stability Report, September 2004, pp. 69—71.13 Cf. BIS 74th Annual Report, pp. 129—131.14 Cf. IMF World Economic Outlook, Chapter II, September 2004.

Financial Stability Report 8 25�


Net fee income, the most impor-tant source of revenue next to netinterest income, grew by 7.6% inthe second half of 2004. In particularsecurities transactions, the mostsignificant area of fee-based income,experienced a strong surge. Sinceend-2003 the increased demand inthe securities market has thus alsohad an impact on banks� profits. Fee-based income from payment systemsand lending has also been on the rise.

Income from securities and par-ticipating interests which are notincluded in the trading portfolio roseby 22%. In particular Austrian banks�income from foreign securities andparticipating interest soared, havingincreased by EUR 114 million or81.8% since the first half of 2003.

Following a pronounced upturn in2003, net trading income has nowdropped by 19.3%. Owing to a stockmarket boom and valuation gains inbond markets caused by interest ratecuts, the first half of 2003 saw excep-tionally high profit growth. With a

share of 4% in total operating income,the significance of financial operationscarried out on banks� own accountsremains small for Austrian banks. Thisalso means that profit opportunitiesduring upswings as well as risk expo-sure in times of adverse market move-ments are clearly limited.

An analysis of consolidated dataconfirms the positive development ofAustrian banks� profits. Consolidatedinterest income — including incomefrom securities and participatinginterests — increased by more than8% year on year. At 17%, the growthof consolidated fee income also clearlyaccelerated. Despite a decrease intrading income, which was due tothe very high level of trading incomein the previous year, consolidated op-erating income rose by more than 9%.

Having declined in the previousquarters, costs increased only moder-ately. Staff costs grew by 0.6% yearon year, while administrativeexpenses have remained more or lessconstant, their growth being negli-

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gible (0.2%). The headcount15 of theentire Austrian banking sector wascut by 1.5% between June 2003 andJune 2004 (see chart 4), and wagesand salaries were only slightly in-creased (+0.9%).

On a consolidated basis, expensesgrew slightly year on year, which canbe explained by the fact that Austrianbanking groups have been expandinginto CEE countries. Staff costs,administrative expenses and deprecia-tion of fixed assets experienced

increases of between 5% and 7%. Inrelation to Austrian banks� total assets,however, these expenses decreased incomparison with the previous period.

While net credit risk provisionsslightly expanded by 1.4%, loss provi-sions for securities were released.Through a one-off effect which mate-rialized for some banks in the secondquarter of 2004, the latter risk provi-sioning category showed an extremelypositive development in comparisonwith the previous year (see chart 5).

Thanks to the favorable incomeand cost developments in the first halfof 2004 and the above-mentioned spe-cial effects, which also had a beneficialimpact, Austrian banks expect profitsin the amount of EUR 2.8 billion forthe entire year 2004, which wouldcorrespond to a year-on-year increaseof more than one-third. On a consoli-dated basis, profits in the first half of2004 have even risen by a little more

than half in comparison with resultsof the first half of 2003.

Despite these favorable develop-ments, the profitability of Austrianbanks remains humble by interna-tional standards owing to the fiercecompetition among Austrian banks,which results in low interest margins,and because of expenditures, whichare relatively high by internationalcomparison, in particular staff costs

15 ��Headcount�� refers to actual staff capacities, which means that part-time employees are only includedproportionally to their working time.

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and expenses caused by the densenetwork of banking offices. As far asthe provision of banking services forAustrian businesses and households isconcerned, this situation can beassessed positively. It is, however, nec-essary to continue raising profitabilityin order to strengthen Austria�sposition as a business location, toenable Austrian banks to react moreflexibly to structural and cyclicalchanges, and to finance furtherexpansion into CEE countries.

Credit RiskBank Lending StabilizesWhile loan growth was very subduedin 2003 owing to lackluster economicconditions, it turned positive in early

2004. In the past months, however,this upward trend has been subsidinga bit. Viewed over a longer periodof time, i.e. the past three years, loangrowth has remained below the aver-age levels of the years 1999 and2000 (see chart 6), when the loangrowth rate sometimes exceeded8%. While the annual loan growthrate of all Austrian banks still cameto 4.1% in mid-2004, it dropped to3.2% in August 2004. The loangrowth levels of the ten largestAustrian banks (in terms of totalassets) were similar to the entirebanking sector, peaking at 3.6% inJune 2004 and then declining to2.1% in August 2004.

A breakdown by banking sectorsshows that lending by building andloan associations has remained weak.At —0.9%, however, the decrease inlending was much less pronouncedin August 2004 than it had been atthe beginning of the year (—3.3%).Lending in the other banking sectors

was within the normal range in thefirst half of 2004.

An analysis of loan growth by eco-nomic sector reveals that especiallycorporate lending picked up in thefirst half of 2004 following reluctantdevelopment in 2003. In May 2004the annual growth of loans to non-

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financial corporations was 2.4% (seechart 7), while at the end of 2003loan growth had still been negative(—0.2%). Compared with the volumeof new loans in other economicsectors, corporate borrowing stillrecorded the lowest growth rate,

however. With a 6.4% growth ratein May 2004, household demand16

for loans strongly increased in com-parison with 2003, which reflectsthat consumer demand has somewhatrecovered.

With an annual growth rate of 5%in May 2004, loans to general govern-ment also experienced a marked year-on-year rise as the public sector reliedmore strongly on financing throughbank loans. Loans to nonbank financialintermediaries grew by 2.5% in May2004 year on year.

Credit Quality Remains StableFor most Austrian banks, credit riskpresents the most critical source ofrisk. The current credit risk exposureis assessed on the basis of the externalauditor�s annual prudential report for2003 and intrayear analyses ofspecific loan loss provisions. Data re-

corded in the Major Loans Registerare also used for this purpose, ascredit quality assessment shouldparticularly take into account large-volume loans.

Data from the external auditor�sannual prudential report for 2003,which have been available since mid-2004, provide the framework for theassessment of credit quality and theassociated credit risk of Austrianbanks. The report distinguishes be-tween nonaccrual and nonearningclaims, nonperforming claims andirrecoverable claims on nonbanks.17

According to the report�s results,Austrian banks� credit quality in

16 Growth in household borrowing can to a large part be attributed to foreign currency loans. For data-relatedreasons, repayment vehicles and accordingly �hypothetical� installments could not be taken into account for thecalculation of the loan volume.

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17 Nonaccrual and nonearning claims are claims on nonbanks that are not expected to make payments in the nearfuture. Nonperforming claims are claims that are expected to default, and irrecoverable claims are claims whichhave already defaulted at the time of data compilation.



2003 was satisfactory on the whole;there were no developments thatwould have given cause for concern.

The average irrecoverable claimsof Austria�s ten largest banks (in termsof total assets), however, have beenincreasing in recent years. While theshare of irrecoverable claims in totalclaims stood constantly at about0.4% from 1997 to 2001, this per-centage hovered around 0.6% in thepast two years. This is an indicatorof a minor deterioration of majorbanks� credit quality, as the share ofnonaccrual and nonearning claims alsogrew slightly over the same period oftime, rising from 0.64% in 2002 to0.74% in 2003 (see table 7).

Also the 95% quantile�s share ofirrecoverable claims in the overallcredit portfolio has increased, ex-panding from 3.8% in 2002 to 3.9%in 2003. The values for the mediandid not change significantly in com-parison to the previous year.

Although irrecoverable claimshave increased in the two above-men-tioned categories, the overall develop-

ment of credit quality in 2003 gives nocause for concern.

Lower Level of Loan Loss Provisioningin the First Half of 2004Since the external auditor�s prudentialreport only contains annual data, in-trayear assessments of Austrian banks�credit quality must be based on theloan loss provisions as stated in banks�monthly reports to the OeNB. Theratio of specific loan loss provisions18

to claims on nonbanks is usuallyhigher at the beginning of the yearthan toward the end owing to seasonalfactors and is thus considered on ayear-on-year basis. The majority ofloan loss provisions result from claimson nonbanks. Loss provisions for loansto banks are usually low and are thusnot taken into account in the follow-ing analysis.

In the first eight months of 2004the ratio of specific loan loss provi-sions to claims on nonbanks improvedslightly year on year. In August 2004 itwas 3.3% as compared to 3.4% inAugust 2003. In particular the savings

Table 7

Credit Quality According to the External Auditor�s Annual

Prudential Report

1997 1998 1999 2000 2001 2002 2003

As a percentage of total lending

Nonaccrual and nonearningclaims on nonbanks50% quantile (median) 0.11 0.19 0.16 0.12 0.10 0.11 0.13Mean of ten largest banks 1.11 1.13 1.02 0.90 0.73 0.64 0.7495% quantile 3.89 3.82 3.93 3.37 3.54 3.08 2.86

Nonperforming claims50% quantile (median) 2.28 2.43 2.30 2.44 2.34 2.30 2.23Mean of ten largest banks 2.84 2.12 2.00 1.73 1.77 1.59 1.4795% quantile 8.67 8.64 8.87 9.07 9.25 8.22 8.05

Irrecoverable claims50% quantile (median) 0.53 0.55 0.57 0.55 0.49 0.57 0.57Mean of ten largest banks 0.40 0.43 0.46 0.44 0.42 0.60 0.6395% quantile 4.17 4.15 4.11 4.01 4.04 3.83 3.91

Source: OeNB.

18 Specific loan loss provisions for claims on nonbanks are included in banks� monthly reports; they show whichrisk provisions are in place for cases in which a borrower�s solvency is doubtful.



bank, state mortgage bank and specialpurpose bank sectors reported lowerratios. In these sectors, the ratio stoodat 3.7%, 2.0% and 0.7%, respectivelyin August 2004. By contrast, the ratioof specific loan loss provisions toclaims on nonbanks in the Raiffeisensector rose in 2004, reaching 4.3%in August 2004. In the joint stockbank sector, the picture was mixed.While at the beginning of 2004 theratio of loan loss provisions to claimson nonbanks improved year on year,it deteriorated slightly in August2004 and reached 2.8%.

For the purposes of the MajorLoans Register of the Oesterreichi-sche Nationalbank, banks have toreport loans which exceed EUR350,000, including their respectivecredit lines and the actual use thereofbroken down by month and loan type.Moreover, banks have to indicate thevalue and total amount of collateral,the ratio of specific loan loss provi-sions to major loans as well as theinternal credit ratings of the individualborrowers.

The risk and credit quality ofmajor loans can be assessed throughan analysis of collateral and specificloan loss provisions. The share of un-collateralized loans in total outstand-ing major loans was particularly highin the state mortgage bank sector. At80.1%, it clearly exceeded that ofother sectors, where the correspond-ing percentage ranged from 60% to70% in June 2004. Measured against

uncollateralized loan volume, specificloan loss provisions, which arerecorded in the Major Loans Regis-ter19, were highest in the Volksbankensector (4.7%). In June 2004, thisratio, which is an indicator of thecredit quality of uncollateralized loanvolumes, was 2.5% for all Austrianbanks, which meant a slight improve-ment in comparison with the previousyear (2.6%).

Foreign Currency Loans Remain Popularwith HouseholdsIn June 2004, the total amount offoreign currency loans to domesticnonbanks peaked at EUR 47.6 billion.Their share in all loans granted toAustrian nonbanks was 19.3%, anunprecedented percentage thoughonly slightly above the monthly aver-age of 18.5% recorded between June2000 and June 2004.20

This development can once morebe mainly attributed to householdborrowing. After a period of stagna-tion in the first half of 2003, foreigncurrency loans for households experi-enced continuous growth again. InMay 2004,21 28.2% or EUR 19.5 bil-lion of loans to domestic householdswere foreign currency-denominated.This marked increase led to a newpeak in the period under review. Aparticularly high exposure to foreigncurrency loans was recorded amongprofessionals and self-employed per-sons, where the share of foreign cur-rency loans has been hovering around

19 The Major Loans Register records specific loan loss provisions for both claims on banks and nonbanks.20 As there is no information on repayment vehicles accumulated for paying these loans back, these figures

represent an upper limit. What has to be considered, however, is that, although repayment vehicles in partreduce the credit risk of foreign currency loans, foreign exchange risk and the associated indirect credit riskis only reduced if the currency of the chosen repayment vehicle matches the currency in which the loan wasissued.

21 As the supervisory reporting system for loans to nonfinancial corporations and households was changed in June2004, the comparability of data relating to developments past June 2004 is limited. Therefore currently onlycredit data up to May 2004 can be used for analysis.



30% since mid-2001. At 18.3%, non-financial corporations� exposure toforeign currency loans has remainedstable (see chart 8).

Nowadays the majority of foreigncurrency loans is denominated inSwiss francs. In August 2004 this wastrue for 87.2% of all foreign currencyloans issued to nonbanks. As a conse-quence, the share of loans denomi-nated in Japanese yen dropped to6.7% in August 2004, close to theU.S. dollar�s level (5%). This trendaway from the Japanese yen and to-ward the Swiss franc is a welcome de-velopment with respect to financialstability, as the exchange rate of theeuro against the Swiss franc is less vol-atile than that against the Japaneseyen. Nevertheless, the absolute and

relative level of foreign currencyborrowing should be monitoredclosely in the interest of financialstability.

Market RiskInterest Rate Risk Exposure RemainsModerate and Largely Limited to the EuroAreaAustrian banks� interest rate riskexposure resulting from maturitytransformation remains moderate. Inthe aggregate, interest rate sensitiveassets22 more or less equal liabilitieswithin the same maturity bands; inother words, there is no danger ofextraordinarily risky net positionsarising within the individual maturitybands (see chart 9).23

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22 Including non-interest rate sensitive assets whose performance banks assess on the basis of market interest rates.23 This applies to the data of the interest rate risk statistics, which assign the positions in accordance with the

next interest rate fixing to 13 maturity bands. These data do not comprise the trading book positions of banksrunning a so-called �large trading book.�� Derivatives are decomposed in synthetic assets and liabilities.



A breakdown of interest rate riskby currency reveals that the euroaccounts for a large part of the expo-sure, as chart 9 also shows. In thematurity bands of more than sixmonths, the net position comprisingall currencies more or less equals theeuro net position. The overwhelmingamount of euro exposure corrobo-rates the results of the stress testsfor interest rate risk presented in thisreport�s section on banks� risk-bearingcapacity.

The Basel ratio for interest raterisk, which can be extracted fromthe data presented here, indicates thedecline in a bank�s value that wouldfollow from an interest rate changein relation to its eligible regulatorycapital. A parallel yield curve shiftfor the individual currencies by 200basis points causes the average regula-tory capital of Austrian banks todecrease by 10.9% for the first half

of 2004, compared with 10.1% atthe beginning of the year. Since boththis relatively high percentage and itsincrease are attributable to smallerbanks, this development should notbe regarded as a threat to systemicstability. After all, during the sameperiod, the average of the Basel ratiofor interest rate risk weighted by totalassets shrank from 7.8% to 7.5%.Furthermore, the values are put intoperspective when taking into accountthat the original level of the capitalratio was as high as 14.7% in August2004.

Austrian banks� capital require-ments for position risk of interest rateinstruments of the trading book againincreased slightly in the first half of2004. The rise from EUR 470 millionto EUR 515 million indicates anexpansion of interest rate trading butstill remained below historic highs.

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Level of Equity Price Risk and DirectExchange Rate Risk Increases butRemains LowBanks stepped up their equity tradingactivities more strongly than interestrate trading. The capital requirementfor equity position risk in the tradingbook went up from EUR 28 millionto EUR 52 million in the first half of2004. This value, however, is stillbelow the historic high of EUR 110million recorded in mid-1999.Despite stepped-up equity trading,the risk potential in equity tradingcontinues to be small due to Austrianbanks� limited exposure. Stress testscarried out for traded equity positionsat the aggregate industry level supportthis conclusion.

Capital requirements for open for-eign exchange positions indicate thatAustrian banks� exposure to directexchange rate risk increased onlyslightly in the first half of 2004, fromEUR 55 million to EUR 66 million,which is still a little below the averageof the last two years.

Payment SystemsThe smooth functioning of paymentsystems is essential for financial stabil-ity. Hence, the European System ofCentral Banks is entrusted with pay-ment systems oversight. In perform-ing this task, which is set down inlaw at the national level throughArticle 44a Federal Act on the Oester-reichische Nationalbank, on January1, 2004, the OeNB began to compiledata on the type and volume of trans-actions processed through electronicpayment systems as well as disturban-ces in these systems.24

The following systems are subjectto oversight by the OeNB: ARTIS,the payment system operated by theOeNB which links Austria to thepan-European central bank paymentsystem TARGET, Wiener Bo‹rse AG�sand Oesterreichische KontrollbankAG�s securities trading, clearing andsettlement systems as well as 14 pay-ment systems for processing retailpayments. In addition, the OeNB isresponsible for overseeing providersof infrastructure which is relevant tothe smooth functioning of paymentsystems as well as Austrian banks� par-ticipation in international paymentsystems.

In the first half of 2004, a total of183.4 million transactions wereprocessed through Austrian systems(this amount equals around 24% ofbilateral payments, i.e. interbankpayments, in Austria25). 1% oftransactions were processed throughARTIS, 0.3% through securities trad-ing, clearing and settlement systemsand 98.7% through retail paymentsystems. Austrian banks processedaround 3 million transactions throughinternational payment systems.

In terms of value, the transactionsprocessed through payment systemstotaled EUR 4,279.8 billion in theperiod under review (this amount isabout 2.8 times the value of bilateralpayments settled in Austria). ARTISaccounted for 97.5% of transactionsprocessed, securities trading, clearingand settlement systems for 2.1% andretail payment systems for 0.4%.Austrian banks processed transactionsrepresenting a value of EUR 578 bil-lion through international paymentsystems.

24 Defined as any system standstill exceeding 30 minutes during operating hours or any standstill due to systemdisruption during the last 30 minutes preceding settlement cut-off.

25 Comparable data extracted from ECB, Blue Book 2003.



System disturbances observed inthe first half of 2004 were of minorsignificance. All in all, the level of

system availability was very high inthe period under review.

Risks Incurred Through Businessin Central and Eastern EuropeanCountries26

CEECs Continue to Offer Growth Potentialfor Austrian BanksLeading the way in investment inCentral and Eastern Europe, Austrianbanks started to expand into theregion years ago; today, their subsidia-ries hold substantial market shares inthe region. As early as in the mid-1980s, the first Austrian banks ven-tured into the market. In the mean-time, a total of 11 Austrian banksoperate subsidiaries and branches in14 CEECs. Domestic credit institu-tions have come to view the regionas an ��enlarged home market.��The major banks seek to furtherstrengthen their foothold in the CEEmarket — first and foremost by ex-panding their branch networks, butthere are also signs that they may bewilling to make new acquisitions.The CEE markets still hold enormousgrowth potential, which is highlightedby the small share of personal loans

(7% of GDP). By comparison, theratio of personal loans to GDP inthe euro area is as high as 49%. Inany case, business continues to flour-ish thanks to the bright economicenvironment and rising middle classincomes, which in turn boost demandfor banking products (mortgage loans,private pension plans).

Business and Profitability Continueto Increase27

Austrian banks� business activities inthe CEECs continue to expand at astable rate, both in terms of total as-sets and profitability.

The aggregate total assets ofAustrian banks� subsidiaries in thesemarkets came to EUR 89.3 billion atthe end of June 2004, up 25.5% orEUR 18.1 billion against the previousyear. By comparison, the increaserecorded between June 30, 2002,and June 30, 2003, had amounted to13% or EUR 8.1 billion. Since CEEcomprises both new EU MemberStates28 and countries that are due to

Table 8

Payment Systems (Period under Review: January to June 2004)1

Volume(million)

Value(EUR billion)

Systemdisturbances

ARTIS 1.8 4,174.50 4Securities trading systems 0.5 89.8 0Retail payment systems 181.1 15.4 12Participation in international payment systems 3 578 11Interbank payments 763.3 1,511.60 . .

Source: OeNB.1 Number and value of bilateral payments correspond to the average half-year figures of 2003.

26 This section covers developments in the 14 Central and Eastern European countries in which Austrian banksoperated fully consolidated subsidiaries as at June 30, 2004.

27 On the basis of quarterly reports on condition and income, which Austrian banking groups have submittedsince early 2002. These reports comprise selected positions taken from the consolidated annual accounts ofthe parent banks and their fully consolidated subsidiaries abroad.

28 The Czech Republic, Hungary, Poland, Slovenia, Slovakia.



join the EU in a second enlargementround29 as well as other countries30

and because growth dynamics in theregion thus vary, it appears reasonableto differentiate accordingly whendescribing developments in the re-gion: The new EU Member States ac-counted for 55% of total asset growthposted by Austrian subsidiaries in CEEbetween June 30, 2003, and June 30,2004 (compared with 22% one yearearlier). The countries joining theEU in the second round of enlarge-ment, by contrast, contributed almost62% (one year later: 23%) to totalasset growth of EUR 8.1 billionbetween June 2002 and June 2003.Furthermore, total asset growth ofthe subsidiaries in the new MemberStates was 17.6% between June 30,2003, and June 30, 2004, while thecountries of the second round ofenlargement recorded an increase of37.7% and the other markets doubledtheir total asset growth rate (whichhad been very low, however).

At 33% year on year, AustrianCEE subsidiaries� claims on non-banks31 expanded more rapidly thantotal assets (+25%) in the first halfof 2004. In the same period of theprevious year, the growth rates were23% and 13%, respectively.

The operating profits of Austriansubsidiaries in CEE went up 33% toEUR 855 million between June 30,2003, and June 30, 2004. Duringthe same period, the cost/incomeratio improved from 62.6% to

58.9% (in the first half of 2002, ithad been as high as 63.3%). Thispositive trend is essentially attributa-ble to the fact that operating incomeincreased more sharply than operatingexpenses. The subsidiaries accountedfor 20% of their 11 parent banks� totalassets and earned 40% of their operat-ing profits.

Stepped-Up CompetitionMay Diminish MarginsInternational banking activities havefacilitated and fostered the develop-ment of the CEE banking market,thereby enhancing stability in inter-national banking. Furthermore, bycontributing to the stability of bankingsystems, EU enlargement also adds totheir sustainability. While for the timebeing, the operating income earned inthese markets continues to makepositive contributions to Austrianbanks� business results, fiercer com-petition, especially in the new EUMember States, will drive down mar-gins in these markets and local marketconditions will increasingly resemblethose in Austria.

Risk-Bearing CapacityCapital Ratio Remains HighAustrian banks� capital ratios, a keyindicator of banks� risk provisions,continued at a highly satisfactory levelover the past few months. Afterreaching a high of 14.98% towardsthe end of 2003, the unconsolidatedcapital ratio32 of all Austrian banks

29 Bulgaria, Croatia and Romania.30 Albania, Bosnia and Herzegovina, Belarus, Serbia and Montenegro, Russian Federation and Ukraine.31 Loans extended by Austrian subsidiaries operating in CEE (indirect loans).32 The capital ratio discussed in the following refers to the capital eligible as credit risk cover under the Austrian

Banking Act (tier 1 capital plus tier 2 capital minus deductible items) as a percentage of the assessment base(according to Article 22 paragraph 2 Austrian Banking Act). The result of this calculation may differ from thecapital ratios quoted in other OeNB publications, which usually also include tier 3 capital and are thereforeobviously higher. However, as tier 3 capital is subordinated capital that may only be used as capital charge formarket risk, it was not included here for the purpose of assessing capital adequacy primarily in relation tocredit risk.



went down slightly in the first half of2004. At 14.7% in August 2004, itstill stood at a very high level,however, clearly above the requiredminimum capital ratio of 8% (seechart 10).

Especially the ten largest bankshave tended to hold more capital.The mean capital ratio of the ten larg-est banks (in terms of total assets) alsostood at record levels during the pastfew months compared with previousperiods; in August 2004, it came to14.1%. At 12.5% in August 2004,the capital ratio of the median wasbelow that of the major banks.

Little has changed for the 5%quantile, which represent the bankswith comparatively low capital ratios.In August 2004, the capital ratio of the

5% quantile came to 9%, which is inline with the long-term average. Putdifferently, by mid-2004, 95% ofAustrian banks reported unconsoli-dated capital ratios of more than 9%.

Also, there is no evidence thatcapital adequacy levels differed sub-stantially across sectors.

As to the core capital ratio, whichby relating tier 1 capital (core capital)to the assessment base also providesinformation about banks� capital ade-quacy, the industry total of all Aus-trian banks was also comparativelyhigh. Contrary to previous periods,Austrian banks� core capital ratio wascontinuously above the 10% mark inthe first half of 2004.

All in all, Austrian banks have astrong risk-bearing capacity.

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The European Supervisory Framework

Prudential supervision in the EU is currently based on the principle of national responsibility for bankingsupervision, the regulatory harmonization of certain minimum standards (in conjunction with theprinciple of mutual recognition) as well as bilateral and multilateral supervisory cooperation. Thisframework inter alia implies that banking groups which operate internationally are supervised by varioussupervisory institutions (which may pursue different approaches of supervision).

Against this background — in particular in light of the increase in cross-border activities, growingcentralization of certain functions at group level and the upcoming introduction of more complex andmore risk-sensitive capital adequacy requirements (Basel II) — in recent months major banks haverepeatedly called for the establishment of a lead supervisor. The idea of a lead supervisor entrusted withkey supervisory powers and responsibilities is based on the aim to facilitate a kind of one-stop shoppingfor banking groups and to reduce the costs of cross-border activities by applying the same supervisoryrules to the entire group. For many, however, establishing a lead supervisor is only a possible intermediatestep to the ultimate goal of creating a single European (banking) supervisory authority, which could, forexample, be modeled along the lines of the European System of Central Banks.

Viewed from the perspective of regulation and financial stability, these alternative ideas, especiallythe concept of a lead supervisor, give rise to a number of questions as regards, for instance, the precisedelimitation of powers (including liability), accountability, market proximity, the possibility of taking intoaccount local data, ensuring a level playing field for all institutions in the same market, crisis manage-ment (e.g. the use of tax money, deposit insurance), etc. Furthermore, before taking a further steptowards the centralization of prudential supervision it should be considered whether the Single Markethas already been realized to an extent deemed sufficient both in banking and finance and as regards thegeneral (legal) framework.

Supervisors and central banks have therefore suggested that, at least for the medium term, theestablished consolidated supervisor model should be refined: the tasks and responsibilities of the consoli-dated supervisor could be enhanced where necessary and cooperation among supervisors could bestepped up. Furthermore, the newly created Committee of European Banking Supervisors (CEBS), whichperforms the tasks of a so-called �level 3 Lamfalussy committee�� for the banking sector, should play akey role and help ensure increased convergence of supervisory practices.

Stress Tests Confirm Austrian Banks�Adequate Resilience to ShocksThe OeNB�s Financial Stability Report7 for the first time presented theresults of standardized stress tests forthe quantitative assessment of theaggregate Austrian banking system�srisk-bearing capacity as regards creditand market risk. The OeNB con-ducted these stress tests for the refer-ence date June 30, 2004, applyingthe same methodology and the samestress scenarios as last time.33 Table 9provides a summary of the stress testresults.

Most importantly, the results showthat the negative impact of the shocksapplied on the capital ratio of theentire banking system increased onlyslightly in the stress test for credit riskand remained broadly unchanged inthe stress test for market risk incomparison with early 2004. Thesmall increase in the potential lossdue to credit risk is more than offsetby banks� higher capital ratios, how-ever. In other words, the Austrianbanking system improved its shockresilience in the first half of 2004.

33 For details on the methodology and scenarios applied, see the box �Stress Tests for the Quantitative Assessmentof the Banking System�s Risk-Bearing Capacity�� in Financial Stability Report 7 (pp. 37—38).



Credit risk continues to have thelargest influence on capital ratios. Inthe aggregate scenario, in which allthree credit risk components — i.e.an economic slowdown in Austriaand in the CEECs as well as increasedcredit risk in foreign currency loansdue to an appreciation of the Swissfranc and the Japanese yen — material-ize, the capital ratio drops by 1.61 per-centage points. The impact is thus0.23 percentage point higher than atthe beginning of the year. Since theactual capital ratio rose by 0.40 per-centage point to 14.84% in the firsthalf of 2004, though, the capital ratioin the stress scenario only falls to13.23% (against 13.06% at the be-ginning of the year).

Of the individual credit riskcomponents, a slowdown of the

domestic economy has the largestimpact (—0.96 percentage point),followed by a slowdown in the CEECsand the appreciation of the Swiss franc(around —0.3 percentage point each).The stress tests for foreign currencyloans reflect the ongoing rebalancingof Japanese yen-denominated loansto Swiss franc-denominated loansobserved in the first half of 2004.Accordingly, an appreciation of theyen currently affects the capital ratiomuch less severely than at the be-ginning of the year (reduction in thecapital ratio by 10 basis points against16 basis points in early 2004),whereas the appreciation of the Swissfranc has a somewhat larger effect(with the capital ratio declining by30 basis points against 28 basis pointsat the beginning of the year).

Table 9

Stress Test Results for the Aggregate Austrian Banking System

% Capital ratio

Current capital ratio 14.84

Credit riskDomestic credit exposure

Increase in the ratio of loan loss provisions to loans outstanding by +30 13.88Credit exposure in Central and Eastern Europe

Increase in the ratio of loan loss provisions to loans outstanding by +40 14.55Foreign currency loans

Appreciation of the Swiss franc against the euro by +10 14.54Appreciation of the Japanese yen against the euro by +20 14.75

Accumulated credit riskAggregate analysis of all three credit risk components1 13.23

Market RiskBasis points Capital ratio

Interest rate risk short-term

medium-term

long-term

EUR Upward parallel shift of the yield curve 130 130 130 14.36USD Upward parallel shift of the yield curve 110 110 110 14.78CHF Upward parallel shift of the yield curve 150 150 150 14.83JPY Downward shift of the yield curve2 —20 —40 —130 14.83

% Capital ratio

Equity price riskCrash of the Austrian stock market, ATX falling by —30 14.69International stock market crash, international stock indices falling by —35 14.61

Exchange rate riskWorst case estimation3 appreciation/depreciation of the euro by –10 14.76

Source: Own calculations based on data reported to the OeNB.1 Increase in the ratio of loan loss provisions to loans outstanding by 30% for claims on domestic nonbanks in euro and by 40% for direct and indirect claims

on CEE nonbanks as well as an appreciation of the Swiss franc by 10% and of the Japanese yen by 20%.2 The Japanese yen was assumed not to have undergone a parallel downward shift to avoid a scenario with negative interest rates.3 Decline in absolute values of all banks� open foreign exchange positions in the twelve most important currencies (excluding CEE currencies).



Furthermore, the stress testsrevealed that the interest rate riskwithin the euro area, or, more pre-cisely, an upward shift of the yieldcurve, remained the component ofmarket risk which is likely to causethe largest (if limited) losses. Theimputed parallel shift by 130 basispoints reduces the capital ratio of theaggregate Austrian banking systemby 48 basis points. In an aggregate

scenario of stock market crashes (withinternational stock prices falling by35% and domestic stock prices by30%), the capital ratio drops by38 basis points. The worst case sce-nario for direct exchange rate riskshows that the potential loss resultingfrom open foreign exchange positionsremains limited, with the capital ratiofalling by no more than 8 basispoints.

New Austrian CAMEL Ranking of Banks

This box provides a first overview of the Austrian CAMEL ranking of banks, a key element of bankexamination in Austria.34 Already several years ago, some key elements of the Federal Reserve�s ratingsystem CAMEL, under which examiners assign a rating for each of the five components described belowto derive a composite rating, were implemented in bank examination in Austria; this approach has nowbeen reviewed and revised to allow a quarterly update of rankings. A ratio for each of the five areasoutlined below is calculated for all banks on the basis of the reports provided by the banks; then, thebanks are ranked according to these ratios. In a final step, the ranks of the banks for each component— based on the overall relevance and the distribution of the individual ratios — are weighted and added,which yields an average weighted composite rank. If certain ratios cannot be calculated (for instancebecause a new bank lacks data on the previous year) these ratios will be replaced by the correspondingmedian values of all banks. These more or less �neutral�� values are used to ensure an undistortedassessment of such banks based on the remaining ratios. The table below shows the five components,the corresponding ratios and their weights in the Austrian CAMEL framework.

The capital ratio is based on the data from the monthly report and calculates a type of solvencyratio by taking into account market risk. Asset quality is assessed by multiplying the loans as recordedin the Major Loans Register adjusted for collateral and specific loan loss provisions by the probabilities ofdefault of the respective OeNB ratings and adding these together. The risk exposure thus obtained,which also covers the approximate amount of small loans recorded in the monthly reports, is thenrelated to the total amount of loans. While all other indicators are updated on a quarterly basis, theratio approximating the qualitative criterion of management quality can only be calculated on an annualbasis, since it is defined as the percentage deviation between the projected income from ordinaryactivities according to the third quarterly report of a year and the actual income from ordinary activities.To reflect a bank�s profitability, the annual result before risk provisions as reported quarterly is related tothe core capital, which yields a return on equity ratio. Finally, liquidity is based on the report of residualmaturities and serves as a measure of the transformation of capital lockup periods.

Austrian Major Banks� Ratings Remain StableMoody�s Investors Service assigns notonly conventional ratings for savings,

sight and time deposits and bankdeposit ratings but also Bank FinancialStrength Ratings (BFSR).35 Unlike

34 A detailed publication is scheduled for spring 2005.

C Capital Solvency ratio 0.5A Asset Quality Risk-weighted loans/total loans 2.0M Management Profitability ratio: quarterly report 3 to quarterly report 5 1.0E Earnings Annual result/core capital 2.0L Liquidity Maturity transformation 0.5

35 The ratings range from A to E, and + is used to further refine the rating.



deposit ratings, the BFSR reflectsbanks� individual fundamental finan-cial strength, regardless of whetherthe banks rated are supported by thirdparties (e.g. parent banks, guarantees,etc.). The BFSR for the twelveAustrian banks rated by Moody�s cur-rently ranges between B— and C—.During the past one and a half years,two Austrian banks were upgradedin this category: Erste Bank der oes-terreichischen Sparkassen AG (ErsteBank) in June 2004 and Kommunal-kredit Austria AG in June 2003, bothfrom C+ to B—.36 The upgrading ofErste Bank is attributable mainly tothe ongoing integration and coopera-tion with the savings bank sector,whereas the better rating of Kommu-nalkredit can be traced to its strategicpositioning in the public sector andthe extension of its product range.

Both rating categories — depositrating and BFSR — are supplementedby the additional �outlook�� rating,which can be either ��positive,��stable�� or �negative.�� The outlookrating reflects the medium-term per-spective of deposit and BFS ratings.The BFSR outlook of the Austrianbanks concerned is generally stable,except for the ones assigned to Raiff-eisen Zentralbank O‹ sterreich AG andRaiffeisenlandesbank Obero‹sterreichAG, which are both negative. Thesenegative outlook ratings can be attri-buted to the banks� strategic orien-tation and the risks resulting there-from.

Furthermore, both the depositrating outlook and the long- andshort-term ratings were stable. Thewithdrawal of Bayerische Landesbankfrom Bank fu‹r Arbeit und WirtschaftAG in June 200437 triggered the onlydowngradings in the long-term range,from A1 to A2 and from A2 to A3(subordinate debt).

Austrian Banks� Stock Prices OutperformDow Jones EURO STOXX Banks IndexThe ATX Prime Market, which con-sists of 36 securities, includes threebank stocks (Bank Austria Creditan-stalt AG, Erste Bank and Investkredit)with a joint market capitalization ofEUR 16.9 billion as at September30, 2004. Compared with the previ-ous year, this amount increased byEUR 7 billion or 70%. The aggregatemarket capitalization of the ATXPrime index expanded by EUR 14.6billion or 43.5% to EUR 48.2 billionbetween September 30, 2003, andSeptember 30, 2004. Also, the surgeof the Bank Austria Creditanstalt AGand Erste Bank stocks by 85% and57%, respectively, between Septem-ber 30, 2003, and September 30,2004, was far more impressive thanthe performance of the Dow JonesEURO STOXX Banks38 index, whichrecorded an 18% rise during the sameperiod.

36 B—: Bank Austria Creditanstalt AG, Erste Bank, Raiffeisenlandesbank Obero‹sterreich AG, KommunalkreditAustria AG.C+: Raiffeisen Zentralbank O‹sterreich AG, O‹sterreichische Volksbanken-AG, Bank fu‹r Arbeit und WirtschaftAG, O‹sterreichische Postsparkasse AG, Hypo Alpe-Adria-Bank AG.C: Landes-Hypothekenbank Vorarlberg AG.C—: Investkredit Bank AG.

37 Moody�s changed BAWAG�s rating from Aa3 to A1 as early as at the end of 2003, arguing that the ownershipsituation was uncertain.

38 The Dow Jones EURO STOXX Banks index comprises 48 European banks.



Other FinancialIntermediariesInsurance CompaniesMore Favorable Conditions Foster BusinessActivity and ProfitabilityThe developments in the insuranceindustry observed in 2003 continuedinto 2004. The more favorable condi-tions, both in international financialmarkets and in individual Europeaninsurance markets, had a positiveimpact on the business activities ofinsurance companies. Across Europe,shares issued by insurance companiesdeveloped broadly in line with themarket, with prices moving sideways,following the stronger upward trendthat prevailed during the second halfof 2003. By comparison, insurancecompany shares listed (in the primesegment) on the Vienna stock marketdeveloped positively, reflecting thepositive development of profits onthe one hand, and the momentum ofAustrian shares on the other. Profita-bility benefited mainly from betterfinancial results, the strong perform-ance of Central and Eastern Europeanmarkets and tighter cost management.Austrian insurance companies con-tinue to consider Central and EasternEuropean markets to be growth mar-kets. In the domestic market, lifeinsurance business continued to bethe most important segment in2004, but premium income from theproperty insurance business is ex-pected to have grown faster than theoverall economy again, as in 2003.

Continued Uptrend for Investmentin Foreign Debt InstrumentsIn the first half of 2004, insurancecompanies� assets (excluding reinsur-ance transactions) increased by EUR3.1 billion to EUR 65.9 billion. Asin 2003, this increase is essentiallyattributable to the rise in external

assets, notably investment in foreigndebt instruments. Further reasonsfor the rise in total assets are, albeitto a lesser extent, the increase indomestic equities and other domesticsecurities as well as the increase indebt instruments issued by domesticcredit institutions. In the first half of2004, the foreign debt instrumentholdings expanded by EUR 2.1 billionto EUR 15 billion, surpassing theresults of June 2003 by EUR 3.2 bil-lion. At EUR 16 billion, domesticequity securities and other domesticsecurities, which posted the secondlargest rise on the assets side (EUR819 million), remain the most impor-tant balance sheet items. After acumulative decline by EUR 498 mil-lion in the first two quarters of2004, the loans hit a new record lowin terms of value on the assets sidesince 1996 at EUR 6.7 billion. Thisis mainly traceable to a decline inlending to the public sector by EUR519 million to a new low of EUR5.3 billion. A more favorable invest-ment climate prevailing since the firstquarter of 2003 accounted for the de-cline in deposits of insurers� assetswith Austrian banks; at EUR 1.7 bil-lion they decreased by 51.8% yearon year. Given that investments byinsurance companies correspond tojust 1.4% of the total assets ofAustrian banks and as this share istrending downward, the insuranceindustry continues not to pose anycontagion risk for the domestic bank-ing sector.

With regard to the liabilities sideof the balance sheet, insurance techni-cal reserves accounted for the largestpart of liabilities, widening by EUR3.1 billion (from June 2003) andEUR 2.6 billion (from January 2004)respectively to EUR 58.7 billion asof end June 2004.



Solvency II

During the past few years, large claim payments, weaker capital markets as well as a reduced inflow ofnew capital (life insurance segment) entailed considerable changes in the conditions under which theinsurance industry operates. At the beginning of 2000, the European Commission together with theEU Member States established the Solvency II project, which focuses on reforming the existingsupervisory structure of the insurance industry. By mid-2003, the first project phase was concluded,which had been dedicated to define the framework for a new supervisory structure. The newsupervisory framework is modeled on the rules and regulations adopted for the banking sector(Basel II); i.e. it is based on a three-pillar approach. This approach comprises financial requirements(first pillar), risk management, internal control procedures and supervisory review (second pillar) as wellas regulations on market discipline (third pillar). Solvency II thus basically provides for capitalrequirements with respect to economic capital39 (target capital) and minimum capital (minimum capitalrequirements) and set up solvency control levels at which the supervisory authority can or must inter-vene. As an alternative to the internal models for determining capital requirements, which thesupervision reviewed and consequently approved, a risk-based standardized approach shall apply tosmaller insurance companies. In this second and last phase, the project has gained particularmomentum. The purpose of this stage is to clarify the actual design of the new system and to drafta framework Directive.

The main objectives of Solvency II are to review existing solvency regulations in light of currentdevelopments in the fields of risk management, actuarial theory and financial reporting as well as toestablish a comprehensive, realistic solvency system that can better match the true risks of insurancecompanies. Other goals include the harmonization of supervisory frameworks and the creation of a levelplaying field which does not allow for regulatory arbitrage opportunities between the banking and theinsurance industry. To secure coherence between the financial services industries, the general structureof the new system should be in line, to the extent necessary, with Basel II. The idea is that products whichinvolve comparable risks should be supervised in the same way and be subject to the same capital andsolvency requirements.

The new solvency system will lead to a paradigm shift in the insurance industry; they will not onlyimpose additional requirements, but they are also expected to help achieve the desired objectives and topromote financial stability.

Pension FundsTotal Assets under Management by PensionFunds IncreaseIn the second quarter of 2004, 12single-employer occupational pensionfunds and eight multi-employer occu-pational pension funds were active inAustria. In September 2004, twomulti-employer occupational pensionfunds merged and one single-em-ployer occupational pension fund wasnewly established. Total assets undermanagement by pension funds aug-mented from EUR 8.56 billion inthe second quarter of 2003 to EUR9.56 billion in the second quarter of

2004, which corresponds to anincrease of 11.7%. The pension fundsoutsourced asset management andasset allocation decision-making byinvesting in mutual funds shares(EUR 9 billion or 94.1% of total as-sets). Claims on pension fundsamounted to approximately 3% ofhouseholds� financial assets totalingEUR 311.3 billion.

With a view to securing benefitsaccrued by active and retired benefi-ciaries and to creating incentives forpension funds and their shareholders,a law was passed in 1990 whichrequired pension funds to guarantee

39 Depending on the respective corporate strategy, this may be economic capital, rating capital or solvencycapital.



a minimum yield on pension contri-butions. This framework implied thatpension funds had to top up contri-butions if the minimum yield wasnot reached. However, when an actualneed for supplementary contributionsmaterialized for the first time, therules on the guaranteed minimumyield were amended. The amendmentof the Austrian Pension Fund Actadopted as part of the budget trailerbill in 2003 abolished supplementarycontributions for future pensionersand significantly reduced these contri-butions for current pensioners.40 Thisamendment was made because pen-sion funds had argued that they didnot have sufficient own funds to coverthe risks incurred.41 The 2003 amend-ment of the Austrian Pension FundAct stipulates that only actual payouts(but not the assets themselves) areguaranteed under the guaranteed min-imum yield provision. Furthermore, ifthe investment returns are below theguaranteed minimum yield, the initialaveraging period (60 months) will beextended by successive periods of12 months (Article 2 paragraph 3 ofthe Pension Fund Act), until activebeneficiaries retire or until the invest-ment returns increase to a level abovethe guaranteed minimum yield. Bothactive and retired beneficiaries thusface a potential financial loss, becausecredits initially guaranteed through asupplementary contribution regimewere abolished. In addition, they also

forgo the interest they could haveearned with those supplementary con-tributions. The extent of respectivelosses results from the positive differ-ence between the respective invest-ment return and the guaranteed mini-mum yield.

On the one hand, the 2003amendment contributed to the stabil-ity of financial intermediaries becausethe latter are now transferring a largerdegree of capital market risk to bothactive and retired beneficiaries, whileearning steadily increasing returns,which after all are primarily depend-ant on the contributions and not oncapital market developments. On theother hand, the 2003 amendmentmight have negative implications onfinancial stability, because such ad-hoc legislation creates moral hazardproblems and has adverse implicationsfor the reputation of financial gover-nance.

With respect to the stability offinancial intermediaries, proposalsfor waiving the minimum yield guar-antee42 are generally welcome, as suchguarantees have already proved unreli-able and as associated administrativecosts are eliminated.43 However, uni-lateral adjustments, without the ex-plicit agreement of the affected bene-ficiaries, must be avoided with a viewto maintaining confidence both infinancial intermediaries and the finan-cial system.

40 Federal Law Gazette No. 71/2003.41 See the draft evaluation of the finance ministry on the federal law amending the Pension Fund Act

(GZ. 040010/7-Pr.4/03) of March 28, 2003, Explanatory Notes — General Provisions.42 See the draft evaluation of the finance ministry on the federal law amending the Pension Fund Act and the

Company Pension Act (GZ. 23 3700/28-III/5/04) of June 30, 2004, Article 2 paragraph 1.43 The explanatory notes on the 2004 draft amendment of the Pension Fund Act thus suggest that waiving the

minimum yield guarantee would diminish administrative costs. The only cost savings that will actually bepassed on retrospectively are contributions to the minimum yield reserve, to be built up since 2003, whichbecomes irrelevant when beneficiaries opt out of the minimum yield guarantee (to be made possible by thecurrent draft amendment to the Pension Fund Act).



In September 2004, market trans-parency was significantly increased byjoint initiative of Austria�s pensionfunds and the Oesterreichische Kon-trollbank (OeKB). Henceforth, theOeKB will publish a quarterly reporton average yields and yield volatilitiesof the various investment and risk-sharing groups in which pension fundmembers are grouped. Taking intoaccount the long-term investmenthorizons, these performance indica-tors are calculated over several peri-ods (six months, three, five and sevenyears). The indicators refer to fiveinvestment and risk-sharing groupsreflecting different asset allocation

choices (i.e. the percentage investedin stocks). To enhance long-termfinancial stability, it would be advisa-ble to further increase market trans-parency by publishing the correspond-ing measures for the various multi-employer occupational pension fundsas well. The disclosure of such infor-mation, in addition to administrativecosts and asset management costs,would enable interested parties tomake informed decisions about pri-vate pension provision. This wouldhelp maintain Austria�s economic in-terest in a sound occupational pensionfund system.



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