Austria’s banking supervisors suffered their own crisis of confidence long before the global financial crisis. After two big scandals this decade, the Finanzmarktaufsicht (FMA), the main watchdog, and the National Bank were heavily criticised for carelessness, cronyism, and the futile duplication of effort.
The agencies had failed to catch the balance sheet manipulations at the trade-union bank Bawag that suffered massive losses from speculative dealings early in the decade and also missed the cover-up of currency losses at Hypo Alpe Adria in 2006, a regional bank based in Carinthia.
So, by the time of the Lehman Brothers collapse in September 2008, a new law had just gone into effect that streamlined the watchdog procedures and tightened some regulations for financial institutions.
Supervision remained divided between the FMA and the National Bank, but, in contrast to the earlier infighting, “they are now working closely together”, says Friedrich Jergitsch, a Vienna-based banking expert at the law firm Freshfields Bruckhaus Deringer. Morale at the FMA has improved, as there are now more and better paid staff, he adds.
The central bank was given full charge of day-to-day banking supervision and will conduct future probes. But only the FMA has the right to impose fines.
Wilhelm Rasinger, head of the small shareholder association, thinks the job is unfinished. “The FMA needs more power to conduct raids and secure evidence. The fines are ridiculously low by international standards. And it must have the right to publish its verdicts”, without fearing civil law suits, he says.
The FMA was certainly outgunned when it had to deal with two private banks that used the real estate boom in central and eastern Europe to sell property-based stocks to private retailers. Mr Rasinger says that the supervisors were chasing “heavily armed gangsters with water pistols and bicycles”.
In both cases, the FMA failed to spot or flag doubtful practices within the companies and in stock market transactions.
Meinl Bank and Constantia Privat Bank (CPB) aggressively marketed their investment vehicles, Meinl European Land (MEL) and Immofinanz/Immoeast, as safe, but profitable, alternatives to savings accounts and were even labelled as “gilt-edged” in documents.
In both cases, the managers pocketed huge fees, frequently revalued the book price of their holdings and borrowed heavily to keep the stock prices rising. When secondary offerings became hard to place, they parked them in special vehicles to keep up the façade.
When the property bubble collapsed in 2008, the share prices tumbled, triggering charges of ethical and legal misconduct.
At Meinl, the company started a buy-back to prevent a stock slide without public notification. MEL was registered in Jersey, so did not fall under Austrian securities laws, but the buy-back violated the regulations of the Vienna bourse, where the stocks were traded as certificates.
At Constantia, stocks and loans were passed back and forth between Immofinanz and its spin-off Immoeast.
In both cases, the masterminds of these schemes are now under judicial investigation. Julius Meinl V, the scion of one of Austria’s most prominent corporate dynasties, was arrested and freed on record-breaking bail of €100m.
He says he had nothing to do with the fund’s activities, as it was 100 per cent public. Family-owned Meinl Bank is still operating.
CPB collapsed and was taken over by a large bank syndicate. Its CEO Karl Petrikovits, who also ran Immofinanz and Immoeast, faces charges of breach of trust and fraud.
The FMA has now become “more active and more intrusive than the original law intended”, says Mr Jergitsch.
Unlike some smaller institutions, the country’s largest banks had no big regulatory problems before and during the financial crisis. Nonetheless, they got into trouble abroad, raising the question of whether the watchdogs missed early warnings.
Regulators failed to spot some risk concentration in banks – for instance, overexposure to foreign risk. says Mr Jergitsch.
For years, the rapid expansion of Bank Austria, now owned by Unicredit, Erste Bank and Raiffeisen in the CEE region was applauded as an excellent business strategy. For several years, profits boomed and stock prices climbed.
By 2008, the banks’ exposure in CEE represented 70 per cent of Austrian GDP, the highest share in Europe. When the financial crisis hit, banks faced massive loan losses and a potential wipe-out of their capital.
A bail-out would have overwhelmed Austria’s public finances.
The main weakness in banks’ loan portfolios was the large share of foreign-currency loans denominated in euros or Swiss Francs that were given to commercial and private customers who made their earnings in local currencies. When they lost value, even solvent debtors had difficulties servicing their loans.
Starting last year, the banks sharply restricted foreign-currency loans, but they still had the risk on their books. It was only the stabilisation in foreign-exchange markets since the summer that helped defuse this time-bomb. Another wave of currency turmoil might cause havoc.
Foreign-currency loans are also a widespread practice among Austrian homeowners, who for years took advantage of lower Swis franc and yen rates to reduce their personal interest burdens.
Unlike credit institutions in other European countries, Austrian banks, large and small, encouraged this practice and helped create massive financial risks for households and themselves. Fortunately for them, the Swiss franc did not rise as much against the euro as feared.
The National Bank and theFMA frequently warned of these practices, but did not intervene until June, with new rules restricting the granting of foreign-currency loans to households.
There were €37bn of such loans on banks’ books in the first quarter, mostly in Swiss francs, which constituted 31 per cent of loans to private customers.
While yen loans declined sharply from the middle of the decade,more than 40 per cent of Swiss franc loans in the Eurozone originated from Austrian banks.