(Nov. 20, 2008) On October 26, 2008, the Austrian Parliament enacted a support package for the financial sector (Bundesgesetzblatt (BGBl) I No. 136/2008). It consists of two new laws: the Interbank Market Strengthening Act (Interbankmarktstabilisierungsgesetz) and the Financial Market Stabilization Act (Finanzmarktstabilitätsgesetz). In addition, the new enactment amends laws on banking, stock exchanges, and nationalized industries, as well as the Austrian federal budget for 2008. The Act is further implemented by a Regulation that specifies the conditions that may be imposed on financial institutions that accept services offered by the support package (Verordnung, Oct. 30, 2008, BGBl II No. 382/2008).
The new legislation aims to counteract the impact of the ongoing global banking crisis on Austrian banks and insurance companies and to place them on a level playing field with the financial institutions of other developed countries that are being rescued by their governments (Regierungsvorlage, Nationalrat, XXIII. GESETZGEBUNGSPERIODE, 682 der Beilagen). To achieve this goal, the Interbank Market Strengthening Act creates mechanisms to provide liquidity to banks in need, while the Financial Market Stabilization Act allows the government to improve the equity situation of troubled institutions.
Liquidity for Financial Institutions: The Interbank Market Stabilization Act
The Interbank Market Stabilization Act creates a clearing house for interbank lending. The new institution is to be owned collectively by the Austrian banks. The clearing house is to borrow money from banks and insurance companies with excess liquidity and to lend the money to financial institutions that are suffering from liquidity shortages.
The Federal Minister of Finance supports the clearing house by guaranteeing its granted loans against any default that would occur before December 31, 2009. In addition, the Minister may guarantee individual loan contracts if executed before December 31, 2009. These would be guaranteed until the maturity of the loan. Moreover, the Federal Minister may also guarantee bonds already issued by other banks, if the issuing bank observes certain conditions to ensure its prudent banking practices. Governmental coverage for the guarantees is not to exceed €75 billion (about US$93.7 billion), and the granted loans and guarantees must be purchased at market rates.
The clearing house has not yet been set up, possibly because the banks are not happy with the burdens that they will have to shoulder under the new system. It appears that the government will act only as a guarantor of last resort for defaulting loans and that the immediate liability to provide coverage rests on the clearing house that is financed by the banks. The banks initially must provide funding of €180 million (about US$224.9 million) to establish the clearing house. (A. Schnauder, Unklarheiten beim Clearing, Der Standard (Vienna), Nov. 6, 2008, LEXIS/NEXIS, NEWS Library, Zeitng File).
Equity-Strengthening for Financial Institutions: Financial Markets Stabilization Act
The Financial Markets Stabilization Act authorizes the Federal Minister for Finance to increase the equity of banks and insurance companies if this is indicated to protect the Austrian economy. A recapitalization of the Austrian financial institutions may involve guaranteeing pertinent obligations and providing equity capital in any of the forms recognized by the Banking Act (Bankwesengesetz, BGBl I No. 533/1993, §§ 23 & 24). Also permissible is the purchase, by the government, of participations in various forms from equity holders who are to be compensated at a rate that the government deems appropriate. Governmental participations are to be privatized again when market conditions no longer indicate a need for governmental support.
Financial institutions that accept equity-building assistance under the Act must pay fees at market rates for this service. In addition, they must live up to certain conditions to ensure that their conduct will benefit the Austrian economy. The Financial Markets Stability Act enables the Minister of Finance to set tough conditions relating to:
- a prudent business policy that includes the provision of service to small- and medium-sized businesses;
- the compensation of employees, executives, and agents;
- dividend distributions;
- workplace retention measures;
- time limits for achieving the above goals;
- the avoidance of anti-competitive effects;
- standards for reporting to the supervisory authorities; and
- standards for written reports on the observance of these conditions.
The implementing Regulation (Verordnung, BGBl II No. 382/2008) provides somewhat more specific instructions for these conditions, but the language is still very general. For the prudent standards of doing business, reference is made to Annex V of the European Union Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions, which is also a very general statement of sound banking practices (see 2006 OFFICIAL JOURNAL OF THE EUROPEAN UNION (L 177) 1)). The Regulation does not prohibit dividends; it merely limits their distribution to proper market conditions. Likewise, no upper limit is set for the compensation of executives. It appears, however, that the new regulatory instruments could lead to tighter supervision by the authorities, if they were willing to exercise it.
The recapitalization measures are to be carried out by the Bank Participation Holding Company, a newly constituted subsidiary of the Austrian Industry Holding Corporation (Österreichische Industrieholding AG (ÖIAG), http://www.oeiag.at/asp/home.asp (last visited Nov. 14, 2008)), the Austrian holding company for governmental participations in industry. Until about 1990, Austria had many nationalized industries that have since been privatized to a great extent. (M. Scherb & E. Morawetz, Stahl und Eisen bricht (Wien, 1886); G. Riemer, Die Aufhebung des ÖIAG-Konzerns und die Privatisierung, Österreichische Zeitschrift für Wirtschaftsrecht 104 (1995).) The Austrian Industry Holding Corporation is the legal owner of the remaining governmental participations, and it is also instrumental in carrying out any further privatizations.
For the equity-building activities under the Financial Markets Stabilization Act, the sum of €15 billion (about US$18.7 billion) has been set aside. Austrian banks have shown much interest in obtaining support under the program. Many of them have been strongly engaged in the banking business in Eastern Europe, and the loans extended there have now become a serious risk (B. Groendahl, Eastern Europe Puts Austrian Banks at Risk, The International Herald Tribune, Nov. 5, 2008, at 16, LEXIS/NEXIS, NEWS Library, ZEITNG File). Nevertheless, the success of the Austrian rescue program is by no means assured. It is quite possible that the European Commission of the European Union my find the terms too generous and therefore anti-competitive and insist on tougher standards for the Austrian equity-building assis
tance (R. Lechner, Auf Österreichs Banken kommen harte Bandagen zu, Wirtschaftsblatt [Vienna], Nov. 13, 2008), at 2, LEXIS/NEXIS, NEWS Library, ZEITNG File).
Deposit Guarantees: Amendments to the Banking Act
Amendments to sections 93 and 93 (a) of the Banking Act provide an unlimited guarantee for the bank deposits of individuals until December 31, 2009, and a guarantee of €100,000 (about US $124,960) for any time thereafter. Before the reform, the guarantee per bank account of an individual was limited to €20,000 (about US$25,000). The additional funding for the unlimited guarantee comes in part through government guarantees and in part through an increase in the amount that banks have to contribute when a bank in their sector fails. The banks within a sector would guarantee an individual's deposits only to an amount of €50,000 (about US $62,480) per account, and the funds for this would be raised through increases in the contribution rates of the banks. Before the reform, banks would have had to contribute up to 0.93 percent of the bank's assets (as computed for solvability purposes), whereas now this limit has been raised to 1.5 percent. Additional funds that would be required to pay out to the depositors are to be secured by government guarantees.
For the guaranteeing of accounts of legal entities, the heretofore prevailing limit of €20,000 (about US$25,000) per bank account has generally been left in place. For small and medium businesses, however, the guarantee limit has been raised to €50,000 (about US $62,480). Now, as before the reform, only 90 percent of the deposits of corporate account holders are guaranteed.
Strengthened Banking Supervision in Amendments to Several Acts
In addition to providing support for troubled financial institutions for a limited period, the banking support legislation strengthens the supervision over financial institutions on a continuing basis through amendments to the Banking Act (Bankwesengesetz, BGBl I No. 533/1993), the Stock Exchange Act (Börsengesetz, BGBl I No. 555/1989), and the Financial Markets Supervisory Agency Act (Bilanzmarktaufsichtsbehördegesetz, BGBl I No. 97/2001, as amended). Since 2002, the supervision of all financial institutions, including those that provide investment banking services, has been entrusted to the Financial Markets Authority (FMA website, http://www.fma.gv.at/cms/site/EN/einzel.html?channel=CH0036 (last visited Nov. 14, 2008)). Among the increased powers that have now been given to this agency is the right to order, under certain circumstances, that a financial institution have a better equity-debt ratio than is required by law.
Short Sales: Amendments to the Stock Exchange Act
Through amendments to the Stock Exchange Act, the Financial Market Authority has been empowered to prohibit or restrict short-sale transactions and trading in derivatives. The restrictions on short selling must be enacted by a published regulation. Such a regulation must name the securities for which short sales are to be prohibited or restricted and the time period of the measure, which, as a rule, is not to exceed three months. Notification requirements may be imposed, and short sellers may be required to have purchased a certain percentage of the securities at the time of executing the short sale transaction. Trading in derivatives can be limited in the same manner as short selling.