IFLRinternational financial law review

BANK CAPITAL REPORT 2015: AUSTRIA

1. Bank supervision

The Austrian Financial Market Authority (FMA) and the Austrian NationalBank (OeNB) are responsible for supervising credit institutions. As of No-vember 4 2014, the European Central Bank (ECB) assumed direct super-vision over major Austrian credit institutions in line with the SingleSupervisory Mechanism (SSM). The banks classified as non-significant aresupervised by the national authorities under the supervision of the ECB.

However, the cooperation of the Austrian authorities with the ECB andthe SSM’s joint supervisory teams has yet to evolve.

2. Bank recovery/bail-in

The Bank Recovery and Resolution Directive (BRRD) has been imple-mented in Austria through the Austrian Banking Recovering and ResolutionAct (BaSAG), which entered into force on January 1 2015. The resolutionprocess of Heta (formerly Hypo Alpe Adria) is the first to take place in Aus-tria under this regime.

BaSAG has also implemented the BRRD bail-in tools in section 85 sub-section BaSAG. Before the BRRD implementation, Austrian law did notprovide for a unilateral bail-in tool.

Under this regime, the FMA formed a new authority – the National Res-olution Authority (NRA) – within the FMA for banking resolution. TheEuropean resolution authority, the SRB, will subsequently take on largeparts of the FMA’s responsibility as from 2016 at the latest.

As of January 1 2016, it is expected that credit institutions will need tomeet minimum requirements for own funds and eligible liabilities (MREL)to ensure the feasibility of a bail-in.

3.Buffers

Capital conservation buffer follows the CRD IV framework (see section23 in connection with section 103q point 11 Austrian Banking Act –BWG).

Phase-in begins: January 1 2016 – 0.625%January 1 2017 – 1.25%January 1 2018 – 1.875%January 1 2019 – 2.5%

Countercyclical buffers follow the CRD IV framework (see section 23ain connection with 103q point 11 BWG).

Phase-in begins:January 1 2016 – 0.625%January 1 2017 – 1.25%January 1 2018 – 1.875%January 1 2019 – 2.5% (although the FMA can set a higher amount ifrequired).

The FMA will publish the countercyclical buffer rate used to calculatethe institution-specific buffer on a quarterly basis on its website.

Domestic Sifi bufferIn Austria, domestic Sifis are referred to as systemically important institu-tions (SIIs). These may be required to hold an individual SII buffer of upto 2% as of January 1 2016 (see section 23c paragraph 5 BWG).The bufferis subject to a joint review by the FMA and the OeNB on at least an annualbasis (as set out in article 131 paragraph 6 lit b CRD IV).

Global Sifi bufferGlobal Sifis are referred to as global systemically important institutions (G-SII) in Austria. The G-SII buffer will be phased-in from January 1 2016and will be set between 1% and 3.5% on an individual basis (see section23b BWG and article 131 paragraph 9 CRD IV).

In 2016, G-SIIs only need to fulfil 25% of their individual G-SII bufferrequirement. The percentage increases to 50% in 2017, 75% in 2018 and100% from 2019 (see section 103q point 12 BWG).

Systemic risk buffer The systemic risk buffer of at least 1% is already applicable. It is not capped,although the EC and other EU authorities need to be involved in the deci-sion-making process if the FMA intends to raise the buffer above 3%.

4. Call options

Austria has not issued any rules with regard to regulatory or tax calls in ad-dition to the CRR.

5. Coupon payment

Beyond the CRR and leaving aside resolution measures, the BWG empow-ers the FMA to limit an Austrian institution’s discretion to pay coupons/div-idends on own funds instruments. The FMA may exercise this power if ithas doubts as to the institution’s ability to permanently comply with certainregulatory requirements, in particular with liquidity and capital require-ments. This might, for instance, be the case if a large decrease of the ownfunds ratio occurs, even though the institution might still comply with com-bined buffer requirements.

If the FMA exercises these powers, discretionary payments and distribu-tions may be limited to the institution’s annual net income. Austrian lawdoes not provide for clear guidance on how the maximum distributableamount (MDA) is calculated in this context.

6. Credit default swap contracts

Austria has not issued any rules with regards to the use of credit defaultswaps or other tools to mitigate credit risk in addition to the CRR.

7. Disclosure

CRR disclosure rules apply, including obligations to disclose informationin relation to compliance with countercyclical capital buffer requirements.The FMA will disclose G-SII buffers and information on systemic riskbuffers, if imposed on an institution.

Institutions are obliged to publish their CET1 ratios, both on a solo andgroup basis (see section 65 BWG and section 64 paragraph 1 point 16BWG).

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Austria

Tibor Fabian and Maurizia Anderle-Hauke, Binder Grösswang

www.bindergroesswang.at

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8. Leverage ratio

There are no plans to implement leverage provisions on top of the require-ments under the CRR.

The issuance of additional tier 1 capital (AT1) has an impact on the lever-age ratio, even though in general only marginally, as AT1 counts towardsthe ratio’s nominator and denominator, unless other equity positions are re-placed.

The liquidity ratio requirements will be introduced on October 1 2015in accordance with the following phasing-in (article 460 CRR together witharticle 38 of the Commission Delegated Regulations with regard to liquiditycoverage requirements):

60% of the liquidity coverage requirements as from October 1 2015,70% as from January 1 2016,80% as from January 1 2017,100% as from January 1 2018.

Credit institutions will calculate the liquidity coverage ratio according tothe following formula (as set out in article 4 of the Commission DelegatedRegulations):

Liquidity buffer/net liquidity outflows over a 30 calendar day stress pe-riod = LCR (%)

The term ’liquidity buffer‘ will have the same meaning as the BCBS’sdefinition of high quality liquid assets (HQLA). A more detailed descriptionis also included in article 7 of the Commission Delegated Regulations.

9. Loss absorption features

Loss absorbency features of AT1 and tier 2 instruments follow the CRR. Tothis end, only AT1 provides for going-concern loss absorption. Both AT1and tier 2 provide for gone-concern loss absorption, as they qualify as sub-ordinated debt.

With the BaSAG, shareholders and holders of other instruments of own-ership, including AT1 and tier 2 instruments, will be the first stakeholdersto contribute to the resolution by means of a mandatory write-down/can-cellation/conversion of their instruments, taking account of the ranking ofthese instruments in insolvency proceedings.

The ‘no creditor worse-off than under normal insolvency proceedings’principle will apply (see section 107 paragraph 2 BaSAG).

10. Minimum capital

Austria follows the CRR requirements, which are (see section 22 BWG andarticle 92 CRR):

Minimum CET1 ratio January 1 2013 – 3.5%January 1 2014 – 4%January 1 2015 – 4.5%

Minimum tier 1 ratio January 1 2013 – 4.5%January 1 2014 – 5.5%January 1 2015 – 6%

Minimum total capital ongoing 8%

11. Pillar 2

Capital The FMA has not issued guidance on additional pillar 2 capital require-ments.

SupervisoryAustrian law provides guidance on pillar 2 requirements. It focuses on thejoint responsibility of the management board, general risk management re-quirements, organisational duties, documentation, resources, and outsourc-ing. The rules are, in some cases, stricter than the CRD IV framework, forinstance the provisions governing variable remuneration.

Local law provisions under pillar 2 focus on notifications to the regulator,not on disclosure. However, disclosure of compliance with pillar 2 require-ments is mandatory under the CRR when it comes, for example, to variableremuneration.

12. Qualifying capital

Instruments recognised as CET1 in Austria are defined by article 50 CRR,and include common shares, retained profits and other equity instruments.

Capital instruments issued by Austrian savings banks and cooperative so-cieties may also qualify as CET1 if they comply with the conditions set outin the CRR.

CRR requirements apply to AT1 securities, including minimum 5.125%(article 54 CRR) trigger, loss absorbing, perpetual with no incentive to re-deem, subordinated, distributions fully flexible and paid out of distributableitems.

Standard CRR requirements apply to tier 2.

Deferred tax assetsDeferred tax assets that rely on future profitability and existed before January1 2014 need to be deducted in full from CET1 from January 1 2024 (article478 (2) CRR).

A phase-out begins on January 1 2015, after which 10% of those deferredtax assets that rely on future profitability need to be deducted. This increasesby 10% annually and reaches 90% in 2023 (see article 478 para 2 CRR andsection 3 subsq CRR-BV).With regard to deferred tax assets created in 2014or later, 20% needs to be deducted in 2014, 40% from January 1 2015,60% in 2016, 80% in 2017, and 100% from January 1 2018.

Available-for-sale securitiesThe FMA has not allowed institutions in their elements of own funds todisregard unrealised gains and losses relating to exposures to central govern-ments of countries belonging to the EU, recognised within the AFS portfo-lio.

This treatment may change once the European Commission adopts aregulation endorsing the International Financial Reporting Standard (IFRS)which replaces IAS 39. This was due in 2015 but the International Account-ing Standards Board voted in February 2014 to postpone its compulsoryadoption of IFRS 9 to 2017.

GrandfatheringInstruments that no longer qualify as own funds will in general be de-recog-nised over an eight-year period, starting in 2014. As of January 1 2015,70% will remain recognised. This decreases to 60% in 2016, and so on. Asof 2022 (see article 486 point 5 CRR) instruments that no longer qualifyas own funds will be fully de-recognised.

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13. Regulatory intervention

Regulatory intervention powers under the Austrian law will be tested by theHeta case – as of today, no precedents exist.

The impaired assets, rights, and liabilities of Hypo Alpe Adria were trans-ferred to Abwicklungsbank HETA (a kind of ‘bad bank’) under mechanismsthat were available under corporate law at that time. The same happenedwith Kommunalkredit and the split into KA Finanz as a ‘bad bank’.

As a result of the 2014 stress test, all Austrian banks have met the required8% of CET1 after the asset quality review. Under the adverse scenario, onlyfive banks reached the required CET1 ratio of 5.5%.

The Austrian Federal Banking Act does not use the term ’stress test‘ inconnection with the FMA’s supervisory duties. However, article 69 subsqBWG entitles the FMA together with the OeNB to carry out on-site in-spections and to obtain specific information to determine systemic risks.The FMA and the OeNB must jointly define an inspection plan for eachupcoming calendar year. The aim of this plan is to inspect the top eightAustrian banks at least once a year. The remaining regional banks are in-spected every three years.

Article 70 BWG empowers the FMA to take temporary measures to en-sure the financial market’s stability. These measures include but are not lim-ited to the specification of additional own funds requirements to coverextended liquidity risks. All measures have to be issued by administrativerulings (Bescheid).

Further to the above, article 44 BaSAG empowers the FMA to carry outearly intervention measures (Frühinterventionsmaßnahmen) if an institutionwere to fail in the future (eg, due to a negative development in the liquiditysituation) to comply with the standards set by the CRR, the CRD IV, theMiFID II and the MiFIR. By enacting these early intervention measures,the FMA may oblige the management of an institution to take actions de-fined in the recovery plan. The articles of both the BWG and the BaSAGare based on the supervisory review and evaluation process as described inthe CRD IV.

14. Stress tests

The following Austrian banks and their subsidiaries participated in the 2014European Banking Authority (EBA) stress test: Erste Group Bank, RaiffeisenZentralbank, BAWAG PSK, OeVAG, RLB OOE and RLB NOE-W.

15. Tax treatment

Unlike Germany, in Austria there is no official clarification of the tax treat-

ment of AT1 instruments compliant with the Basel III requirements (CRR,CRD IV). It needs to be assessed according to general principles of tax law,whether the criteria for debt or equity prevail in a qualitative perspective.The fact that the instrument does not provide for a participation in anyvalue increases at redemption or liquidation of the issuer is considered avery negative aspect of an equity instrument for tax purposes, although bal-ance sheet equity will be given in many cases (in case of a full loss partici-pation). According to literature and an informal statement of the AustrianMinistry of Finance, coupon payments for AT1s based on article 51 of Reg-ulation 575/2013 of June 26 2013 should be tax deductible in Austria.However, it is recommended to take advice on a case-by-case basis.

For AT1s regarded as debt instruments for tax purposes, non-Austriantax resident corporate investors are not subject to withholding tax on interestpayments received from an Austrian issuing bank. For Austrian tax residentinvestors, withholding tax applies. This tax will be deducted by the Austriancustodian or paying agent of the bank where relevant AT1s are deposited ina custody account. In the case of non-Austrian tax resident individuals asinvestors, ordinary withholding tax (relief according to double taxation con-ventions available) or EU withholding tax needs to be considered.

In the case of a write-down of AT1s qualifying as debt instruments fortax purposes due to the realisation of a trigger event, the amount by whichthe repayment capital is reduced should lead to a taxable gain at the level ofthe issuing bank. Correspondingly, a subsequent increase of the capital tobe repaid should lead to tax-effective expenses.

16. Treatment of mutuals and Sifis

Only one Austrian Bank, the Erste Group Bank, has qualified through theEBA as a G-SII. The FMA intends to publish a list of national O-SIIs beforethe end of 2015.

According to article 131 section 1 2013/36/EU, each member state hasto designate a national authority in charge of identifying G-SIIs and O-SIIs.In Austria, according to section 23b (1) BWG, which will come into forceon January 1 2016, the FMA is responsible for identifying G-SIIs.

According to section 8 BaSAG, all Sifis are obliged to prepare a recoveryplan imposing measures for financial stability.

Rules on the ring-fencing of risks will enter into force in July 2015, sub-ject to transitional rules. Even though these rules do not explicitly require abank to be systematically important in order to fall within the scope of thering-fencing regime, factually only systematically important banks are likelyto be caught by the provisions.

For mutuals, CRR provisions apply.

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About the authorTibor Fabian has been a partner at Binder Grösswang since 1996.Before his professional career as a lawyer, he worked as the head ofinternational project finance at Österreichische Länderbank and as anassistant to the chairman of Oesterreichische Kontrollbank. His practicefocuses mainly on banking and finance, capital markets, real estate andstructured finance. His recent experience includes the representation ofan Austrian cooperative banking sector in the setting up of a grouppursuant to Art 3 CRD and in the ongoing reorganization of the group.He advises Austrian issuers, particularly banks, on DIP and MTN-Programmes and was involved in the stabilization of the AustrianPfandbriefbank/Pfandbriefstelle after the HETA-moratorium.

Tibor FabianPartner, Binder Grösswang

T: +43 (1) 534 80 – 230F: +43 (1) 534 80 – 8E: fabian@bindergroesswang.at W: www.bindergroesswang.at

About the authorMaurizia Anderle-Hauke joined Binder Grösswang as an attorney at lawin 2013. Before that she worked for renowned law firms, includingBenn-Ibler and DLA Piper Weiss Tessbach. Her practice focuses mainlyon banking and finance, capital markets, regulatory and corporateM&A.

Maurizia Anderle-HaukeAttorney at law, Binder Grösswang

T: +43 (1) 534 80 – 460F: +43 (1) 534 80 – 8E: anderle-hauke@bindergroesswang.at W: www.bindergroesswang.at