The recent spate of bank failures in Austria has caused international bank creditors to grow increasingly concerned about the security of their investments. This essay aims to provide a comprehensive understanding of the Austrian banking law, bank failure definitions, determining factors, and the legal mandate of the Austrian bank supervisor. It also outlines the stages of recovery planning, resolution planning, and succession planning, common reasons for bank failure, supervision and resolution practices, and the protection of account deposits and creditor interests under Austrian law.
Austria’s banking law is governed by the Austrian Banking Act (Bankwesengesetz, BWG) and the Austrian Financial Market Authority Act (Finanzmarktaufsichtsbehördengesetz, FMABG). The European Union’s Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) are also applicable in Austria. These regulations stipulate the process for managing bank failures and protecting the interests of depositors and creditors.
Definition and Determination of Bank Failure in Austria
Bank failure in Austria is defined as a situation where a credit institution is unable to meet its financial obligations or maintain adequate capital and liquidity levels. This may result from insolvency, a significant deterioration in the bank’s financial situation, or a severe violation of regulatory requirements. The determination of bank failure in Austria is made by the Austrian Financial Market Authority (FMA) and the European Central Bank (ECB), based on the bank’s solvency, liquidity position, and compliance with regulatory requirements.
The FMA and the ECB, as the bank supervisors in Austria, have the legal mandate to conclude that a bank has failed or is likely to fail. They base their conclusion on the financial institution’s solvency, liquidity position, and compliance with regulatory requirements. The bank supervisors are also responsible for implementing recovery and resolution measures for failing banks in Austria.
Recovery planning: When a bank is identified as being in financial distress, it is required to submit a recovery plan to the FMA and the ECB. The recovery plan outlines the measures the bank intends to take to restore its financial health and ensure its long-term viability.
Resolution planning: If the recovery plan is deemed insufficient or fails to restore the bank’s financial health, the FMA and the ECB initiate resolution planning. This involves developing a strategy to either reorganize, recapitalize, restructure, or dissolve the failing bank while preserving its critical functions and minimizing the impact on financial stability.
Succession planning: In case a bank’s dissolution is deemed necessary, succession planning ensures an orderly transfer of the bank’s assets and liabilities to a successor institution, minimizing disruptions to the financial system and protecting the interests of depositors and creditors.
Bank supervision and resolution planning in Austria aim to preserve the critical functions of failing banks, ensuring their continuation during financial distress. This is achieved through recovery and resolution planning, regulatory oversight, and adherence to the BRRD and SRMR framework. When a bank fails in Austria, the resolution authority (FMA and ECB) takes the following steps:
- Assessment of the bank’s financial condition and determination of whether the bank has failed or is likely to fail.
- Evaluation of the recovery plan submitted by the bank and implementation of necessary recovery measures.
- If recovery measures prove insufficient or unsuccessful, initiation of resolution planning to reorganize, recapitalize, restructure, or dissolve the failing bank.
- Coordination with other relevant authorities, including the European Banking Authority (EBA) and the Single Resolution Board (SRB), to ensure a harmonized approach to resolution.
- Implementation of the resolution plan, which may involve bail-ins, sale of assets, establishment of a bridge institution, or asset separation.
- Monitoring and overseeing the implementation of the resolution plan, ensuring that the objectives of preserving critical functions and minimizing the impact on financial stability are met.
Protection of Account Deposits and Creditor Interests in Austria
In Austria, account deposits and creditor interests are protected by the Austrian Deposit Guarantee Scheme (Einlagensicherung), which guarantees deposits up to €100,000 per depositor per bank. Additionally, the BRRD and SRMR provide a framework for bailing-in creditors, ensuring that they bear losses in proportion to their exposure to the failing bank.
The local deposit guarantee scheme in Austria is activated when a bank fails and depositors are at risk of losing their deposits. It ensures that depositors receive compensation for their insured deposits up to €100,000, maintaining trust in the banking system and preventing bank runs.
Orderly Exit of Non-Viable Firms in Austria
The orderly exit of non-viable firms in Austria is facilitated through the implementation of recovery and resolution planning, regulatory oversight, and adherence to the BRRD and SRMR framework. This process ensures that non-viable firms exit the market in a manner that minimizes disruptions to the financial system, preserves critical functions, and protects the interests of depositors and creditors.
Austria’s banking law, bank failure definitions, and determining factors provide a comprehensive framework for addressing bank failures and protecting the interests of international bank creditors. The stages of recovery planning, resolution planning, and succession planning, along with the preservation of critical functions and continuation of organizations, ensure that bank failures are managed effectively and with minimal impact on financial stability. The Austrian Deposit Guarantee Scheme and the BRRD and SRMR framework protect account deposits and creditor interests, ensuring that international bank creditors are safeguarded against losses in the event of bank failures in Austria.