Klaus Liebscher: Overview of financial services in Austria
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, at the Global Financial
Services Industry 2005 Summit, Vienna, 17 June 2005.
* * *
Ladies and gentlemen,
It is with great pleasure that I accepted the invitation to participate in the Global Financial Services
Industry 2005 Summit here in Vienna, and I would like to extend to all of you a warm welcome on
behalf of the Oesterreichische Nationalbank (OeNB). In the next twenty minutes I will address some
issues regarding the development of the financial services industry in Austria.
First, I would like to highlight the changes in the Austrian economy and financial sector that have
taken place since Austria joined the European Union (EU) ten years ago.
Second, I am going to outline how these developments and adaptations have made Austria's financial
sector highly competitive, sound and stable.
Third, I will focus on the recent performance of the Austrian financial sector and on the major
challenges it will face in the near future.
1. Changes in the Austrian economy and financial sector since EU accession
Austria celebrates a number of important anniversaries this year. We commemorate not only the end
of World War II 60 years ago and the signing of the Austrian State Treaty 50 years ago, but also
Austria's accession to the European Union ten years ago. EU accession was an important milestone
promoting the positive development of the Austrian economy and had - among other things - beneficial
effects on economic growth, price stability, the labor market and the country's attractiveness to foreign
investors. These effects - paired with the high adaptability and innovative character of the industrial
and especially also the financial sector - strengthened Austria's competitiveness in the international
arena.
Let me give you a few figures that attest to the favorable economic development in Austria following its
accession to the EU:
•
Goods exports increased considerably from 25% of GDP in 1995 to 38% in 2004.
•
The trade deficit had been widening until 1995, but this trend clearly reversed following
EU accession.
•
The volume of foreign direct investment from the EU-15 in Austria almost quadrupled from
10 billion euro to 38 billion euro over the last ten years, while the volume of Austrian
investments within the EU-15 went up nearly five times from 4 billion euro to 19 billion euro.
Austria's accession to the EU had a considerable impact on the financial services industry and the
capital market. In this respect, the EU's common market served as an important catalyst for the
increased refocusing and consolidation efforts the Austrian banking sector made in order to become
more competitive. Specifically, consolidation efforts resulted in a decline in the total number of
Austrian credit institutions from 1,053 at end-1994 to 882 at end-2004 while total assets on an
unconsolidated basis increased from 369 billion euro to 653 billion euro over the same period. The
unconsolidated return on assets (ROA) improved from 0.33% at end-1995 to 0.46% at end-2004.
The number of credit institutions went down most significantly in particular in the decentralized sectors
of the Austrian banking industry (that is savings banks, Raiffeisen and Volksbank credit cooperatives)
and to a lesser extent also in the other banking sectors (that is joint stock banks, state mortgage
banks, building and loan associations, and special purpose banks). Examples of the consolidation
dynamics at the level of large banking groups were the acquisition of the largest Austrian bank - Bank
Austria Creditanstalt - by the German HypoVereinsbank as well as the acquisition of P.S.K., the
Austrian Postal Savings Bank, by BAWAG, both in 2000. Austria nevertheless retains a high banking
and branch office density, with the number of inhabitants per banking office (head offices and
branches) amounting to 1,537 in 2003. This compares to 2,113 inhabitants per banking office in
Germany and 2,043 in Switzerland. This means there is still room for further consolidation in the
Austrian banking sector.
Another significant development in the last decade was the formation of clusters of smaller banks
within a sector that became increasingly tied to central institutions (e.g. Erste Bank, RZB) through
cross-guarantee schemes. This development produced a few relatively large banking groups.
To put that into perspective, in a worldwide ranking of banking groups1, BA-CA occupied rank 99 in
2003, while Erste Bank occupied rank 106 and RZB rank 189. The banks at the head of the sector
pyramid provide centralized services and achieve economies of scale in areas such as payment and
settlement, liquidity management and funding. Furthermore, the traditional multisector structure of the
Austrian banking sector - derived from historical differences in lines of business and ownership - has
changed significantly in recent years, and the vast majority of banks now effectively operate as
universal banks.
The refocusing of efforts aimed at raising financial sector competitiveness in the run-up to Austria's
EU accession resulted, among other things, in the expansion of some large Austrian banks (RZB,
BA-CA, Erste Bank) into Central and Eastern Europe (CEE), a region sharing historical ties with
Austria. At the beginning of the transition period in CEE, the financial sectors of these economies
showed inefficiencies, instabilities and a low degree of financial intermediation. For this reason,
Austrian banks' strategic move into this region not only benefited the respective banks, but also
helped stabilize the financial sectors in these economies and improved the penetration of banking
services.
The successful cross-border diversification strategy of several Austrian banks has contributed
substantially to their positive profit development, since margins in CEE are still relatively high. Austrian
banks today account for a market share of approximately 20% in CEE (except Russia), and Erste
Bank, BA-CA and RZB are among the major players in this region. In our neighboring countries
Austrian credit institutions reach market shares ranging from 32% in the Czech Republic to 44% in
Slovakia in 2004. 42% of net profits of Austria's five largest banks stem from operations in Central and
Eastern European countries. Not least owing to the accession of many CEE countries to the EU in
May 2004 and the subsequent boost in economic growth as well as the harmonization of the legal
framework, this positive impact on profitability is expected to continue, although probably on a less
pronounced basis as margins adapt to EU level and therefore are expected to decline. The positive
experience from operations in CEE are now being transferred to upcoming markets, especially in the
Southeastern European countries, with Austrian banks increasingly taking the lead in this region as
well.
As I have shown by taking the Austrian banking sector as an example, European integration has been
a success story. In this respect, Economic and Monetary Union (EMU) - and especially the adoption of
a common currency for 12 EU Member States - certainly marked a historic and successful milestone
of the integration process.
EMU is based on the efficient interplay of three main factors embodied in the stability architecture:
first, a monetary policy with the primary goal of maintaining price stability in the medium term; second,
sustainable public finances; and third, structural policies that support growth and global
competitiveness. Price stability is of high importance for safeguarding consumers' purchasing power
and promoting secure and stable planning conditions for enterprises. Price stability, however, can only
be maintained if a solid financial policy is pursued. Moreover, structural reforms are necessary to
overcome frictions in the labor and product markets as well as in the service sector; they are also
important when it comes to improving the resilience of economies against shocks by making them
more flexible. These three mutually supportive factors are responsible for the success of EMU and are
prerequisite for economic stability, sustainable growth and employment. Therefore, some of the recent
public discussions about a dissolution of EMU are totally absurd.
Regarding price stability, moderate wage increases in Austria in the last ten years and low inflation,
which remained below 2% annually after 1999, have contributed to the positive development of the
economy and supported Austria's competitiveness in the euro area as well as internationally.
However, since the beginning of 2005 inflation in Austria has been higher than 2%, which is mainly
attributable to growing pressures from energy prices, the services sector and increasing rents.
2. Stability and soundness of the Austrian financial sector
The fact that Austria's financial institutions proved to be highly adaptable to the changing
macroeconomic environment has strengthened the stability and soundness of the Austrian financial
sector. This was confirmed by the International Monetary Fund during its Financial Sector Assessment
Program (FSAP)2 in 2004 and reconfirmed during its yearly consultation finalized in May 2005.
The key conclusions of the IMF assessment are as follows:
•
Austria's financial sector is generally stable and resilient to external shocks.
•
The stability of the banking sector was confirmed by detailed stress tests conducted by the
IMF in cooperation with the Oesterreichische Nationalbank.
•
The Austrian insurance sector has performed relatively well compared with that of many
other European countries.
• Austria enjoys a high standard of prudential supervision based on strong institutions and a
comprehensive legal framework. Financial supervision was integrated in the Financial
Market Authority (FMA) in 2002, and the cooperation between the FMA and the
Oesterreichische Nationalbank, which continues to be strongly involved in banking
supervision, works smoothly.
• This framework results in a high level of compliance with internationally accepted standards
in the areas of banking, insurance, securities and the prevention of money laundering.
This highly favorable IMF assessment reflects, among other things, the strategic foresight of Austrian
banks with respect to the opportunities in Central and Eastern Europe and the innovative potential and
adaptability of Austria's financial intermediaries. The strong competitiveness of the financial sector is
furthermore supported by high business and regulatory standards as well as effective and stringent
banking secrecy rules.
However, the IMF critically mentioned the low domestic profitability and efficiency of Austrian banks.
For one thing, these factors are traceable to strong competitive pressures given the high banking and
branch office density. For another, banks still retain a rather unfavorable cost-income ratio, with some
banks still absorbing the costs of recent domestic consolidation, of expansion into Central and Eastern
Europe as well as of major investments into upgrading information technology platforms and risk
management systems.
Furthermore, the IMF expressed concerns regarding the high level of foreign currency loans taken out
especially for house mortgages. The Oesterreichische Nationalbank had already raised the same
concerns earlier on. In the first quarter of 2005, foreign currency loans accounted for 19.3% of all
loans issued to domestic nonbanks and for about 30% of all loans to households. From the European
perspective, loans granted by Austrian banks accounted for approximately 3% of all euro area loans
to nonbanks while foreign currency loans accounted for 18%
of all euro area foreign currency loans
granted to nonbanks at end-20043. Nearly 90% of all foreign currency loans issued to nonbanks in
Austria are denominated in Swiss francs while the importance of the Japanese yen currently stagnates
at a low level, equaling the volume of loans denominated in U.S. dollars.
This high amount of foreign currency loans is tightly monitored by the Austrian authorities and has
already entailed a number of supervisory actions, including the introduction of a set of
recommendations called "Minimum Standards of Granting and Managing Foreign Currency Loans."
3. Economic and financial sector performance in 2004 and in the first months of 2005
Turning to my third issue, I would now like to give you a brief glance on the development of the
Austrian economy and financial sector in 2004 and the first months of 2005.
Austria encounters the current challenges and reform requirements with a forward-looking economic
policy. The pension reform contributes to a sustainable retirement system that is financially secure in
the long term. The corporate and income tax reform add to making Austria an attractive business
location and supports the real income of households. Austria's current account surplus amounted to
0.3% of GDP in 2004 and is expected to improve further in the course of this year.
Mainly on the back of strong exports, Austria's GDP grew by 2% in 2004, thus being clearly higher
than in the two previous years but in line with the euro area average. The OeNB recently forecast real
GDP to grow by 2.0% in 2005 and 2.2% in the next two years. Supported mainly by exports, the
second stage of the tax reform also constitutes an important impetus for domestic demand. Austria's
economy, however, cannot fully withstand the current economic slowdown in the euro area.
Austria's deficit according to Maastricht amounted to 1.2% of GDP in 2004, which is considerably less
than the euro area average. The 2005 tax reform is expected to raise the deficit to 1.8% in 2005.
However, Austria's most recent Stability Program sets the target of reaching a balanced budget as
well as a debt ratio of below 60% of GDP by 2008.
The stability of the banking sector strengthened further in 2004 and the first quarter of 2005. In March
2005, total assets of the banking sector amounted to 678 billion euro on an unconsolidated basis
(+3.9% qoq).
In other words, total banking sector assets grew by 3.9% compared to the fourth quarter of 2004,
which is among other things attributable to a rise in international business. The cost-income ratio
improved to 64% on an unconsolidated basis owing to reduced costs and higher income. The
unconsolidated operating profit increased in the first quarter of 2005 by 13% year-on-year to
1.34 billion euro. The capital ratio, which relates banks' capital to their risk-weighted assets, remained
well above the minimum requirement and stood at 14.6% on an unconsolidated basis, giving Austrian
banks ample capital buffers in case of stress scenarios. (Year-end 2004 data: consolidated ROA
0.6%, consolidated capital ratio 12.2%).
The insurance industry experienced a positive development in 2004 as well. A total of 52 insurance
undertakings (except small mutual associations) were operating in Austriain 2004. Their total assets
came to 68 billion euro in 2004, which constitutes an increase of 7% year on year. Their total premium
volume rose by 7% to around 14 billion euro in 2004, which was mainly attributable to a further
increase in the demand for retirement-related products. Insurance penetration expressed as a ratio of
total insurance premiums to GDP stood at 7.2% in Austria in 20044.
Pension funds (Pensionskassen) managed assets to the amount of approximately 10 billion euro in
2004, which means an 11% increase year on year. Pension funds thus further strengthened their
position as important institutional players in Austria's financial sector. The Austrian market for pension
funds is highly concentrated, with the three major players accounting for a market share of
approximately 70%. The performance of pension funds exceeded 7% on average in 2004, thus
continuing the positive trend of the previous year.
The mutual fund sector enjoyed a strong year-on-year growth of 13% in 2004, which can be
attributed to the positive economic environment, the launch of new retirement-related saving products
as well as the good performance of the Vienna stock exchange, Wiener Börse AG. Total assets of the
mutual fund sector amounted to 125 billion euro in 2004. 2,021 funds of domestic mutual fund
management companies and 3,378 funds of foreign mutual fund management companies are licensed
in Austria.
The Vienna stock exchange performed strongly in 2004 and has continued to do so in 2005, with the
ATX outperforming major international indices. Stock market capitalization amounted to 74 billion euro
in April 2005, reaching approximately 30% of GDP. While market capitalization can still be considered
rather low compared with other advanced economies, the ATX showed a strong growth of
approximately 33% year on year at end-April 2005, or of 140% when comparing end-2000 with April
2005.
Having demonstrated the positive performance of the Austrian financial sector as well as its stability
and soundness, I would now like to outline some major challenges that financial institutions face in the
near future.
These challenges result not only from the continuing integration process of the EU financial services
sector, but also from the development of new products and techniques that shape the financial
industry.
Continuing financial integration in the euro area is - from the perspective of a central bank - conducive
to the effective implementation of monetary policy. Moreover, the economies of the euro area should
become more efficient owing to an improved allocation of financial resources and a reduction of
financing costs. However, the impact of financial integration on financial stability is more complex.
Deeper financial integration may increase diversification and reduce certain vulnerabilities, while
possibly raising contagion risk. Close cooperation between supervisors and central banks especially in
the euro area therefore seems warranted.
Faster and more efficient legislative procedures on the European level are important in order to keep
pace with rapid technological changes and financial innovations. In this respect, the so-called
Lamfalussy regime, which was developed in the securities business, was extended to comprise the
entire financial services sector in 2004. The Committee of European Banking Supervisors (CEBS),
which consists of high-level representatives of national supervisory authorities and central banks, has
become the most important advisory body supporting the European Commission in supervisory
matters. The CEBS not only aims to ensure a consistent implementation of EU directives across
member countries, but develops standards and guidelines to harmonize supervisory practices in the
EU.
In order to achieve further financial integration in the EU and a single market in financial services, the
European Commission launched the Financial Services Action Plan (FSAP) in 1999. One of the last
and most prominent open issues on the agenda of the FSAP is the proposal of a new capital
adequacy directive to implement the New Basel Capital Accord (Basel II) in the banking sector.
Basel II is regarded a necessary instrument to meet the fundamental changes in the banking industry,
which includes the emergence of new financial products and advances in risk management practices.
Basel II aims to enhance the stability of the financial system via more risk-sensitive capital
requirements.
Austrian banks are considered to be well informed of, and prepared for, the changes induced by
Basel II. The Oesterreichische Nationalbank is closely involved in the Basel II process and currently
conducts a road show on this topic to improve the level of know-how especially among small and
medium-sized enterprises (SMEs) in Austria.
While completing the EU initiatives especially with a view to the new capital requirements, Solvency II,
and the Legal Framework for Payments, the European Commission has announced that in the
postFSAP era, its activities will rather focus on the effective implementation and enforcement of
regulations issued in recent years. Any new initiatives will be subject to rigorous impact assessments,
and the European Commission will continue its consultation activities with the industry. One of the
priorities in this respect will be the further integration of the retail financial market.
Ladies and gentlemen,
Given the limited time frame I was only able to touch upon some cornerstones of the financial services
industry in Austria. By way of conclusion, however, let me say that I am convinced that, based on its
solid background, the Austrian financial sector is in an excellent position to meet both current and
future challenges.
Thank you very much for your attention.