On January 1, 1994, the Austrian Banking Act (Bankwesengesetz, BWG) went into effect and replaced the previous banking act (Kreditwesengesetz, KWG 1979) in the version last amended in 1986. The Austrian Banking Act formed the core of the financial market reform laws of 1993, which introduced a far-reaching overhaul of regulations to the Austrian financial market. This act contains the most significant legal provisions for banking in Austria. In drafting the Austrian Banking Act, one of the legislature’s goals was to ensure that Austrian banking legislation complied with EU legislation. The other main objective of the act was to ensure the smooth functioning of credit institutions as well as creditor protection and consumer protection. In particular, the Austrian Banking Act includes a number of provisions intended to guarantee the security of deposits entrusted to Austrian institutions.
Granting of LicensesAs banking business can have considerable effects on the overall economy and protecting bank customers is a high priority, the licensing requirements for banks inAustria are extensive. Each credit institution in Austria is required to employ two full-time managing directors, provide evidence of initial capital amounting to at least EUR 5 million, and be incorporated as a joint stock company, a cooperative, or a savings bank. In addition, the owners of the credit institution have to be identified if their stake exceeds a certain level, and the institution must present a business plan detailing the type of business it plans to transact as well as budget calculations for the first three years.
Freedom of Cross-Border Service Provision and Freedom of Establishment
Credit institutions from EEA (European Economic Area) Member States are permitted to carry out cross-border business (freedom of cross-border service provision) and to establish branches (freedom of establishment) without having to apply for a banking license in Austria.
Regulatory Standards
In order for banks to maintain the smooth operation of their business and to cover potential losses, they have to maintain capital commensurate to the business risk to which they are exposed. The term solvency is often used in connection with capital adequacy. In general, the credit institution should be able to access this capital quickly and with as few restrictions as possible in order to cover any potential risks and losses. The capital held by each credit institution must amount to at least 8% of the institution’s assessment base (essentially: risk-weighted assets and off-balance-sheet transactions) at all times. Each balance sheet item is weighted according to the risk it involves; for example, retail loans are included in the assessment base at a rate of 100% (i.e. in their entirety), while claims against the federal government are considered risk-free and are therefore not included in the assessment base. The risk-weighted approach means that the amount of capital to be maintained is based on the risk level of the credit institution’s business transactions. In the case of transactions carried out in foreign currencies, there is a danger that short-term fluctuations may arise in exchange rates and/or (foreign) interest rates. For this reason, certain standards have been created for the purpose of limiting exchange rate risk. Credit institutions are required to ensure that they can meet their payment obligations at all times. For this purpose, they need to establish the appropriate financial and liquidity planning procedures and to ensure their ability to pay by constantly maintaining sufficient liquid funds (e.g. deposits with short notice periods or maturities). In addition, there are specific regulations for the limitation of large investments. Large investments refer to especially high amounts borrowed from a single credit institution by an individual borrower or a group of borrowers which can be regarded as a single borrower (groups of connected clients). This regulation is meant to shield the credit institution from danger in cases where the borrower or group of borrowers become insolvent. Risk is also minimized by the limitation of equity interests held in non-credit institutions and financial institutions, except insurance companies and companies which perform auxiliary activities for credit institutions. Individual equity interests as well as the overall proportion of such stakes are limited to a certain percentage in relation to equity.
Consumer Protection Provisions
The Austrian Banking Act also contains provisions for the protection of consumer loan agreements. In particular, these provisions include the requirement of agreements in written form, information on a borrower’s overall debt, the publication of prices, youth protection provisions, as well as value dates.
Deposit Insurance
Credit institutions are required to belong to an organization which guarantees the payout of (savings) deposits up to a limit of EUR 20,000 or the equivalent in foreign currency in case the credit institution is unable to meet its payment obligations completely.
Banking Secrecy
Credit institutions are required to maintain the confidentiality of information which becomes known to them exclusively in the course of business transactions with customers. The obligation to maintain banking secrecy can only be overruled in connection with criminal court proceedings and under other special circumstances.
Money Laundering
The Austrian Banking Act also implemented the EU Money Laundering Directive in Austrian law; under this directive, credit and financial institutions are generally required to record the identity of customers in cases such as long-term business relationships or transactions involving amounts in excess of EUR 15,000.
New Regulatory Capital Requirements (Basel II)
The ongoing changes in the banking sector (new products, etc.) require regular adaptation of the general framework, which is why new regulatory capital requirements have been defined on the international level to replace the requirements of Basel I (described above). The development of these new requirements, which have become known under the heading of Basel II (resulting from the name of the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS) in Basel, Switzerland), was mostly completed in 2004, and the relevant regulations should go into effect in the EU in 2007. The new regulations are intended to account for the risk levels of individual banking transactions more effectively and to promote the use of advanced risk management systems in banking.
Other Legislation
The Austrian banking sector is subject to a large number of other banking laws and regulations in addition to the Austrian Banking Act, and Austria’s supervisory authorities are responsible for monitoring adherence to these regulations.
Relevant LawsBanking Act (Bankwesengesetz, BWG)
Savings Banks Act (Sparkassengesetz, SpG)
Act on Building and Loan Associations (Bausparkassengesetz, BSpG)
Mortgage Bank Act (Hypothekenbankgesetz)
Pfandbrief Act (Pfandbriefgesetz)
Act on the Preservation of Pfandbrief Holders’ Rights (Gesetz betreffend die Wahrung der Rechte der Besitzer von Pfandbriefen)
Secured Bank Bond Act (Gesetz betreffend fundierte Bankschuldverschreibungen)
Depository Act (Depotgesetz)
Mutual Fund Act (Investmentfondsgesetz, InvFG)
Participation Fund Act (Beteiligungsfondsgesetz)
E-Money Act (E-Geldgesetz)
Real Estate Investment Fund Act (Immobilien-Investmentfondsgesetz, ImmoInvFG)
Company Pension Fund Act (Betriebliches Mitarbeitervorsorgegesetz, BMVG)
Regulation implementing the Mortgage Bank Act and Pfandbrief Act (EVO zum HypBG und PfandbriefG)
Relevant Regulations
6th Monthly Report Regulation
7th Monthly Report Regulation
2nd Quarterly Report Regulation
Regulation on Prudential Reports
Liquidity Regulation
4th Liquidity Regulation
Regulation on Major Loan Reporting
Regulation on Internal Models for the Limitation of Market Risk
Options Risk Regulation
Regulation on the Protection of Moneys Held in Trust for Wards
Regulation on Reports of Condition and Income for Fully Consolidated Credit Institutions Abroad
Regulation on Reports of Condition and Income for Groups
Regulation Listing Non-Cooperative Countries and Territories
Regulation Implementing the Act on Building and Loan Associations
Regulation Implementing the Participation Fund Act
2nd Regulation Implementing the Pfandbrief Act
2nd Quarterly Report Regulation for Company Pension Funds
Regulation on Risk Disclosure
Regulation on OTC Derivatives Counterparties
Regulation on Reporting of Reserves
Regulation Implementing the Mutual Fund Act of 1993
Regulation on Shares in Pension Investment Funds
