Overview (November 2001)

Market 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 medium and small-sized institutions divide the rest of the market among themselves. The major banks are concentrated mainly 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 shown 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;

• saving 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 Ministry of Finance 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 market 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 better 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 member 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

Minister of finance
The most important banking regulatory authority is the minister of finance who issues licences for, and supervises the operation of, the banking business. His responsibilities include the supervision of compliance with regulations that apply to non-Austrian banks conducting banking business in Austria. Although these non-Austrian institutions are subject to the regulatory laws of their EU home country, the minister imposes sanctions for any violation of banking laws in cooperation with the relevant home country's authorities.

In cooperation with the Austrian National Bank the minister may:

• 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 minister may issue orders against credit institutions, aimed at prohibiting, for example, the withdrawal or distribution of capital or profits. He may appoint government commissioners and grant them comprehensive powers, remove a bank's management and even prohibit a credit institution from conducting further business.

Credit institutions whose balance sheet total exceeds €375 million are supervised by a state commissioner who is appointed by the minister of finance. The Ministry of Finance 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.

Austrian national bank
The Austrian National Bank acts as a regulatory body and maintains money-market responsibilities as part of the European system of central banks and within the European Central Bank. It is organized as a stock corporation - one half of its capital is owned by the Republic of Austria and the other by various Austrian credit institutions and public institutions. It conducts sovereign tasks (eg, supervising the Foreign Exchange Act and granting foreign exchange trade licences), and collects, compiles and processes the statistical reports of credit institutions for the banking supervision authority.

Federal Securities Surveillance Authority
The Federal Securities Surveillance Authority supervises the securities sector. It grants licences under the Securities Supervision Act (which introduced the Investment Services Directive into Austrian law) to securities firms that wish to provide securities services. These are mainly services covered by the Investment Services Directive concerning the brokering of business opportunities for the purchase and sale of financial instruments, and asset management and consulting. The issuing business is a form of banking business in Austria and therefore requires a banking licence. A licence obtained under the Securities Surveillance Act would not be a sufficient underwriting qualification. According to the Securities Surveillance Act securities service providers must never become their clients' debtors; accordingly, these companies are never eligible for firm subscriptions (underwriting).

The activities of the authority include:

• granting licences;

• supervising financial service providers' compliance with fair trade practices;

• investigating cases of suspected insider trading; and

• supervising compliance with the publicity regulations applicable to listed corporations.

All securities firms and banks must provide the authority with certain information about securities transactions both on and off the stock exchange.

The Banking Act

The Banking Act of 1993 is one of the main codes governing the finance sector. It:

• exhaustively defines the banking businesses that require a banking licence;

• implements the rules of the second EU Banking Directive for the Operations 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 install 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 provisions of 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, a specialized institution (FGG) is responsible for the assumption of liabilities, the provision of venture capital and the realization of project business in the former eastern European countries.

Establishing an Operation

A banking licence can be obtained on application from the Ministry of Finance. The 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. They are required to 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 Ministry of Finance 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 non-Austrians, the Ministry of Finance 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 financing 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 Ministry of Finance (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 Services

An 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 Parliament and Council 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 duties of care with which a bank must comply when offering online banking, and liability issues in connection with the issue of electronic transfer orders by third parties with false identities.

Buying Financial Institutions

An 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 Ministry of Finance 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 (in)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 Regulations

A 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 (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.

Supervision

Statistic 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 the Ministry of Finance's 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 minister of finance 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 Requirements

A change in the bank's management does not require the Ministry of Finance's prior consent. Nevertheless, it is customary for the 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 minister of finance 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 fall short 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.

Insolvency

Special 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 minister of finance 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 minister of justice in agreement with the minister of finance 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 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 is 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) are monitored during its lifetime. Large exposures may not exceed eight times the credit institution's eligible own funds.

Confidentiality

Pursuant 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).

Outlook

Recently, further developments have occurred in the organization of the supervision of financial markets in Austria.

For example, the Austrian Constitutional Court has ruled that the agency's independent status is unconstitutional but that it should continue to exist as a government agency. The ruling was restricted to the annulment of the provisions that granted the agency its independent status. This decision also affects the All-Finances Supervisory Agency, which is due to become operational on April 1 2002. It will replace the Federal Securities Surveillance Authority and will supervise the banking, insurance, pension savings and investment services sectors. The same misgivings that the court had about the agency apply to the new All-Finances Supervisory Agency, which is similarly conceived as an independent institution that is not answerable to the minister of finance. Thus, the relevant provisions of the Law on Financial Markets must be amended so that the new All-Finances Supervisory Agency can start work in its permissible form. Otherwise, there is a risk that its status will be opposed as unconstitutional on the same basis as the Federal Securities Supervisory Agency. A change to the Law on Financial Markets requires a constitutional amendment which, in turn, requires the support of a two-thirds majority vote in Parliament. Since the present coalition government does not command such a majority, support from the opposition is necessary. The opposition has indicated that such support might be given, subject to certain conditions concerning the incorporation of the Central Bank into the All-Finances Supervisory Agency. It remains to be seen whether a solution will be found in time.

Another 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.