Tibor Fabian March 7 2003 Overview (March 2003) Binder Grösswang Rechtsanwälte GmbH | Banking & Financial Services - Austria Tibor Fabian Banking & Financial Services Market Structure and Trends Regulatory BodiesThe Banking ActFinancial Institutions Establishing Operations Online Financial ServicesBuying Financial InstitutionsCompetition RegulationsSupervisionDisclosure RequirementsInsolvencyCapital RequirementsConfidentialityOutlookMarket Structure and Trends The Austrian banking sector is characterized by division: a few major banks dominate key accounts, capital markets and international business, while the remaining small and medium-sized institutions divide the rest of the market among themselves. The major banks are mainly concentrated in Vienna. Austrian banks have established one of the densest branch networks in Europe. In recent years the industry's level of concentration has been illustrated not only through the reduction of branches, but also through developments within banking institutions themselves. This is one of the consequences of the international trend for concentration into ever-larger units and the privatization process that began in the early 1990s. No separation exists between investment and commercial banks. When banks divest themselves of their investment banking activities they do so in completely supervised units. Usually, Austrian banks hold comprehensive licences covering all forms of investment and banking business (including the acceptance of deposits). 'Banking business' is deemed to include: accepting deposits; carrying out payment transactions; credit business; custody business; foreign exchange and foreign currency business; trading in financial instruments; issuing securities; investment fund business; factoring business; and other activities listed exhaustively in the Banking Act.Organization The fact that the banking industry is established in sectors can be explained in terms of historical development. The sector to which an individual bank belongs is determined by its legal form and membership of a particular trade organization within its respective organization of the Chamber of Commerce. The various trade organizations are: stock corporation banks; savings banks; agricultural credit cooperatives; trade credit cooperative banks; and mortgage banks.The corresponding building societies for each sector also belong to these trade organizations. The initial separation of the business activities of banks has been progressively bridged by legislation, opening practically the entire sphere of banking business to all banks. Currently, the licence issued by the Financial Markets Authority is the decisive factor in terms of the activities that a banking institution may undertake.Foreign banks Generally, foreign banks in Austria concentrate upon a few specialized areas of operation. These areas include capital markets activities, key account business and asset management. Usually, they do not cover consumer lending, which requires a relatively large number of branches. While these foreign banks were (at least legally) organized as independent subsidiaries of Austrian banks before Austria's accession to the European Union, they became national branches of their foreign parent companies upon the introduction of the freedom of establishment bestowed by various EU directives. In addition to further corporate integration in their non-Austrian banking groups, these institutions are no longer subject to Austrian banking supervision but rather to that of their EU home state.EU law has influenced the Austrian banking sector. Over 150 foreign banks have registered to establish branches and provide banking services in Austria. This fact alone is indicative of Austria's significance as a financial platform for international business. Austria is also seen as a springboard for business in Eastern European markets, thus representing an ideal location for banks that are active internationally. Regulatory Bodies Financial Markets AuthorityOn April 1 2002 the new Austrian Financial Markets Authority took effect and assumed its powers and responsibilities under the Financial Markets Supervision Act. The act changed the structure of domestic banking supervision, transferring the duties of the Ministry of Finance and the Austrian National Bank to the Financial Markets Authority. Supervisory activities and resources were transferred from the ministry with regard to banking, insurance and investment funds, and from the Austrian Securities Authority with regard to securities. The Financial Markets Authority also performs a variety of other tasks, including supervision of insurance, investment funds and securities.Although the Financial Markets Authority was established as the single statutory supervisory body, the National Bank has far-reaching operational involvement in the supervision of the banking system, pursuant to the Austrian Banking Act. Recent amendments to the Banking Act introduced stricter prerequisites for obtaining a banking licence and qualifying as a bank auditor.The powers of the Financial Markets Authority under the act include:granting concessions to provide banking services;approving mergers and acquisitions in the banking sector;supervising ownership control;supervising standards determined by law (eg, concerning equity capital ratios or large exposures);imposing penalties in the event of non-compliance with such standards;taking steps to prevent potential insolvencies; andcooperating internationally with other supervisory authorities.The Financial Markets Authority is also authorized to:inspect a bank's records; obtain audit reports and information from the bank's auditor; initiate special audits; and appoint special representatives to supervise compliance with banking regulations. In order to protect bank creditors the authority may issue orders against credit institutions (eg, aimed at prohibiting the withdrawal or distribution of capital or profits). It may appoint government commissioners and grant them comprehensive powers, remove a bank's management and even prohibit a credit institution from conducting further business.Ministry of FinanceThe Ministry of Finance assists and monitors the financial community in Austria in cooperation with the Financial Markets Authority and the OeNB.The ministry also acts as a regulatory authority for the distribution of investment fund certificates. Applications for the listing of Austrian and non-Austrian funds are filed with the ministry, which is responsible for the continuous supervision of information and reporting duties. Credit institutions with a balance-sheet total of more than €375 million are supervised by a state commissioner who is appointed by the minister of finance. Austrian National BankBy law, the Austrian National Bank must be entrusted with responsibility for on-site inspections and the examination of credit and market risk of banks. The Banking Act anticipates the extension of auditory responsibilities to other financial institutions. A formal consultation process assures strong institutional cooperation between the Financial Markets Authority and the Austrian National Bank, and the latter's position in international supervisory cooperation is enhanced. The bank has a right to be consulted on important matters (eg, the granting of a licence or issuance of an ordinance), and it continues to collect and process money and banking statistics (eg, monthly returns, quarterly reports and the major loans register) on behalf of the Financial Markets Authority.The Banking ActThe Banking Act 1993 is one of the main codes governing the finance sector. It: exhaustively defines the banking activities that require a banking licence; implements the rules of the second EU Banking Directive for the Operation of Credit and Financial Institutions of Member States; lays down the conditions for Austrian operations of foreign banks from other non-EU countries; governs capital adequacy, liquidity, large-scale investments, shareholdings and bank groups, as well as savings deposits and consumer transactions; and provides for banking confidentiality. Banks are required to establish internal control mechanisms, and their financial statements must follow detailed accounting and reporting regulations. Structural provisions are intended to facilitate the restructuring of banks into modern legal entities and organizations. The act also contains provisions covering deposit guarantee schemes, as well as investor compensation. Financial Institutions Savings banks Savings banks are governed by the Savings Bank Act, which focuses on the liability of the authority that guarantees the savings banks' obligations, the internal constitution of savings banks (which are usually ownerless) and their reorganization. Mortgage banks Mortgage banks are subject to the Mortgage Bank Act, along with related provisions on the issuance of mortgage-backed debt obligations. Only mortgage banks have the right to issue bonds for loans that are secured by liens registered in the Land Register for the benefit of the mortgage bank. Claims against certain political subdivisions may operate as further securities for the benefit of these bonds. Specialized institutions The Oesterreichische Kontrollbank is a specialized banking institution for the export industry, and is subject to special laws governing the granting of export guarantees and the refinancing of export-guaranteed claims. Similarly, another specialized institution (FGG) is responsible for the assumption of liabilities, the provision of venture capital and the realization of project business in Eastern European countries. Establishing Operations A banking licence can be obtained on application from the Financial Markets Authority (Section 4f of the Banking Act). Fulfilment of the licence requirements laid down in the Banking Act entitles the applicant to a licence, leaving the minister of finance no discretion to refuse its issuance. There is no limit as to how many banking licences may be issued. Licence requirements A bank must have a minimum capital of €5 million. The licence application must be accompanied by a detailed business plan for the following three years, among other documents. The bank must have two managing directors, one of whom must reside in Austria and have a good command of the German language. Both must have appropriate experience in the area in which the bank intends to operate and no criminal records. The ownership structure must be disclosed to the Financial Markets Authority, and all persons who have (or could have) a substantial amount of influence in the bank must be trustworthy. If the bank's shareholders are not Austrian, the Financial Markets Authority will contact the authorities of the shareholders' home country in order to confirm that the establishment of the bank in Austria is not objectionable from that country's viewpoint. These provisions do not apply to credit and financial institutions from EU member states intending to conduct banking business in Austria. Such institutions are subject only to the supervision of their home country and must notify their home country's authorities of their intended business activity in Austria; in turn, the authorities will notify the Financial Markets Authority (the so-called 'single passport' principle).An applicant may dispute the refusal of a licence application before a public law court. However, this rarely happens since the requirements for obtaining a licence are usually discussed directly with the Ministry of Finance so that potential difficulties can be eliminated. Withdrawal A banking licence may be withdrawn if the bank does not commence business within 12 months of its issue, or if the bank does not operate for more than six months. Further grounds for withdrawal include: the discovery of false statements or deceit in obtaining the licence; a bank's inability to fulfil its obligations towards creditors; subsequent inability to fulfil the licence requirements; or violations of the bank supervisory laws or regulations when the normal functioning of the bank cannot be ensured by other measures. A bank that chooses to conduct business involving the acceptance of bank deposits or the provision of certain securities services is required to join a deposit guarantee scheme in the appropriate sector. Otherwise the licence for accepting bank deposits or providing such services expires automatically. Online Financial ServicesAn increasing number of Austrian banks give their customers the option of handling their banking business online. There is already a proposal in existence for a European directive concerning the distance marketing of consumer financial services, the purpose of which is to lay down a uniform framework for financial services in the internal market. The scope of protection offered to consumers to whom financial services are provided through marketing is due to be adjusted to match that available in the context of the supply of other goods and services. Although not yet adopted, the draft incorporates comprehensive information requirements and allows consumers to rescind a contract. In the meantime, problems that arise in connection with electronic banking must be solved traditionally with the help of Austrian contract law. In particular, current discussion focuses on the bank's duty of care when offering online banking and liability issues in connection with the issue of electronic transfer orders by third parties with false identities. Buying Financial InstitutionsAn alternative to setting up a new bank is the acquisition of an existing bank. Inactive companies with banking licences are often available, particularly from major banks owning such shell companies. However, transactions should be conducted with a degree of caution, as the acquisition of a company includes all of its assets and liabilities. In addition, buying a bank is no quicker than applying for a licence application, since the change of ownership is treated in the same manner and the approval of the Financial Markets Authority is required. Takeover law The acquisition of a new bank must be effected in compliance with merger control regulations and Austrian takeover law if the target is a listed company. Austrian takeover law distinguishes between voluntary public offers, in which a controlling interest is not intended to be acquired, and mandatory public offers, where a controlling interest is at stake. It also provides for an anticipated mandatory takeover offer where the purpose is to obtain control. These cases are principally subject to the same regulations as mandatory offers, although they may be conditional (eg, upon the achievement of a defined interest level).Mandatory public offer The Austrian Takeover Act requires a mandatory public offer to be made to all shareholders upon the direct or indirect acquisition of a controlling stake in a bank that is listed on the stock exchange. A controlling interest exists if a shareholder (or shareholders acting in concert): holds the majority of the voting rights; is entitled to appoint or dismiss the majority of the members of the administrative, management or supervisory body; or is entitled to exercise a controlling influence.Rebuttable presumptions of control exist where a shareholder holds (i) 30% of the voting shares in the target company, or (ii) more than 20%, thereby effectively controlling annual shareholders meetings.Once control in the target bank is acquired, the acquirer must make an offer to all of the other shareholders of the target bank for their shares. The offer must provide for a cash consideration that is payable within 10 working days of the offer becoming binding. Exchange for other securities (eg, shares of the offeror) may be offered only alternatively, and the price of the offer must at least equal the average price quoted for the shares of the target company during the six months preceding the change of control. It cannot be less than 15% below the highest consideration for shares of the target company paid or promised by the offeror (or any party acting in concert) within the preceding 12 months. Considering the legal uncertainties connected to the interpretation of the relatively new Takeover Act, the lack of specific published precedents and the severe consequences of a violation of the act (including suspension of voting and other rights connected to the shareholdings), it may be prudent to obtain a ruling from the Takeover Commission about the act's applicability in relation to a proposed transaction structure. If necessary, the Takeover Commission's non-binding ruling on a hypothetical scenario can be requested anonymously. Generally, rulings can be expected within four weeks.Competition RegulationsA pre-merger notification must be submitted to the Cartel Court provided that certain turnover thresholds are reached or exceeded.Specific turnover calculations apply with regard to banks. In place of turnover, the sum of the following incomes is used for credit institutions and other financial institutions: interest and similar income; income from securities (ie, income from shares and other variable yield securities, participating interests and shares in affiliated undertakings); fees and commissions; and net profit from financial transactions and other operating income.SupervisionStatistic reports Banks are required to comply with specific reporting requirements laid down in the Banking Act. Comprehensive statistic reports must be submitted to the Austrian National Bank in accordance with Financial Markets Authority ordinances. Generally, these are monthly and quarterly reports concerning solvency and liquidity, as well as regulations governing major investments and participations. Furthermore, banks must report major loans to customers or groups of customers to the Austrian National Bank (ie, loans, credit lines or promissory notes exceeding a total of €350,000). Exceptions apply to loans extended to political subdivisions, among others. The Banking Act also provides for the disclosure of information to foreign banking supervisory authorities by the minister of finance. Auditor The financial statements of banks are audited by a bank auditor. If banks are organized as cooperatives, the audit may be carried out by an auditor who is appointed according to cooperative regulations. The bank auditors must notify the Financial Markets Authority and the Austrian National Bank of any circumstance established in connection with the audit which may result in a discontinuation of the banking business or the non-satisfaction of the bank's obligations, along with any violations of relevant regulations.Disclosure RequirementsA change in the bank's management does not require the Financial Markets Authority's prior consent. Nevertheless, it is customary for new managers to introduce themselves to the competent authorities. Notification of changes in ownership The relevant authorities must be informed when the interest thresholds of 20%, 33% or 50% of the voting rights or capital are reached or exceeded. The minister of finance may prohibit the proposed participation within three months if the new owners are, in principle, unreliable or would obstruct supervision. Before he issues such a prohibition, the minister must inform the competent authorities of the EU member state in which the potential acquirer is licensed or controls a credit institution. Permits for changes of ownership Special permits must be obtained from the Financial Markets Authority as follows: for any merger or affiliation of credit institutions; when the thresholds of 10%, 20%, 33% and 50% of the voting rights or capital of a credit institution are reached, exceeded or fallen below and another credit institution directly or indirectly holds, acquires or divests these voting rights or the capital; for any change in a credit institution's legal form; for the establishment of branches in a non-EU country; and for any demerger of credit institutions. InsolvencySpecial receivership A credit institution's assets may not be subject to judicial composition proceedings, although bankruptcy proceedings may be instituted. Credit institutions that are insolvent or in serious debt may file an application with the court for an order for special receivership. This application may also be made by the Financial Markets Authority through the Attorney General's Office. If such order is issued, the credit institution's management will be monitored. An order for special receivership must be publicized. As soon as special receivership is effective, claims against the credit institution are deferred. Special receivership ends one year after such an order is issued, unless an extension is granted by the Financial Markets Authority on application of the court. As long as a bank is under special receivership, a petition for bankruptcy may be filed only by the special receiver. Deposit and investor guarantee scheme Credit institutions that accept deposits which must be secured (or that provide securities services which must be secured) must be members of the deposit guarantee scheme within their respective trade organization. Should any of their members become bankrupt or subject to an order for special receivership, these institutions ensure that deposits of up to €20,000 or its equivalent in foreign currency are paid to each depositor within two months of request. The deposit guarantee scheme is obliged to accept as members all credit institutions holding a licence to accept secured deposits and to provide secured securities services. The scheme is financed by the member institutions of the individual sectors. Private individuals' deposits are insured up to €20,000 for each depositor; deposits made by corporate bodies are insured at 90% (but not exceeding €20,000). In principle, the same applies to securities firms providing certain services to clients (in particular asset management).Capital Requirements Capital requirements in Austria are based on the capital adequacy model currently applicable in Europe (Basel 1), according to which banks must hold 8% own funds depending on the risk category of their assets, which may range from 0% to 100%. Aside from paid-up share capital, own funds include unappropriated reserves, certain hidden reserves and instruments similar to own funds that must have a certain relationship to the share capital.On the basis of the Basel 2 proposal, a new system for the satisfaction of capital adequacy requirements is likely to be introduced in Austria. If the balance-sheet items of a customer or group of affiliated customers (including off-balance sheet financing transactions) exceed 10% of the credit institution's eligible own funds, but at least €500,000, they are referred to as large exposures. Certain items secured by particular securities or covered by liabilities accepted by political subdivisions may be deducted. In no case may large exposures exceed 25% of the credit institution's eligible own funds and they always require the consent of the bank's supervisory board. If an exposure exceeds €750,000 the borrower's credit rating (and that of other relevant parties) is monitored during its lifetime. Large exposures may not exceed eight times the credit institution's eligible own funds. ConfidentialityPursuant to Section 38 of the Banking Act credit institutions (and persons acting for them) may not disclose or act on confidential issues that have become known during the course of business. The Banking Act also governs cases in which confidentiality does not apply (eg, in connection with criminal proceedings, and in cases of express and written consent). OutlookAnother new development is that banks are preparing for the new capital adequacy rules of Basel 2 and some business sectors (in particular small and medium-sized companies and the tourism industry, for which a rating will not easily be available) feel that obtaining credit will be more difficult or expensive. This trend will probably continue and could prompt borrowers to tap the capital markets for their financing needs. For further information on this topic please contact Tibor Fabian at Binder Grösswang Rechtsanwälte by telephone (+43 1534 80) or by fax (+43 1534 808) or by email ([email protected]). The Binder Grösswang Rechtsanwälte website can be accessed at www.bgnet.at.