Since the outbreak of the global financial crisis, a number of regulations have been issued to cope with the too-big-to-fail problem and its devastating effects on financial markets, government budgets and the broader economy in general. The aim of these regulations is to contain the risks stemming from large institutions which potentially jeopardize not only these institutions’ own existence but other institutions and segments of the economy as well. In particular, new legislation in macroprudential supervision and resolution that refers to systemically relevant institutions addresses the too-big-to-fail problem. Still, in practice, it is difficult for supervisory authorities to answer the question which institution may really compromise financial stability. The identification of systemically relevant banks is particularly important for banking systems (like the Austrian) with large numbers of banks, where even medium-sized banks might put stress on the entire financial system. Bringing together macroprudential regulations as well as recovery and resolution planning, this methodological paper aims to contribute to the literature and supervisory practice on the identification of systemically relevant banks. We develop a consistent and comprehensive framework that consists of more than 30 quantitative indicators reflecting four key stability criteria: financial market conditions, economic importance, direct contagion and indirect contagion. A particular challenge in this context is the setting of explicit thresholds for each of these indicators. To resolve this issue, we design a methodological approach to calibrating thresholds for different types of indicators: stress indicators, risk exposure indicators, system share indicators and network indicators. We identify thresholds based on quarterly panel data (from 1999 to 2016) for the Austrian banking sector. One basic assumption of our calibration is the idea of substitutability: If market activities of a failing bank can be absorbed promptly by other market participants, financial stability will not be at risk. As the substitution of bank activities also depends on the current phase of the economic cycle, we account for bust phases by developing stress scenarios.

Current account deficits are not destabilizing per se and cross-border capital flows can contribute to the economic convergence of the euro area and private risk-sharing if monitored more adequately than provided for by the current macroeconomic governance framework of the European Union. Macroprudential policy could fill this gap. This would allow countries with lower capital stocks to continue importing capital and to strengthen private risk-sharing in the euro area, while avoiding negative side effects, such as excessive credit growth and the risk of a balance of payment crisis. We make a case for broadening the EU’s macroeconomic imbalances procedure (MIP) to include the assessment of the macroprudential stance, particularly with respect to the possible negative side effects of capital inflows. Our argument is inspired by the effective application of macroprudential policy in Austria in the post-World War II era, when Austria featured a structural balance of payment deficit and liberalized both its capital account and its banking sector without a balance of payment crisis.

This study provides a conceptual and monitoring framework for systemic liquidity, as well as a legal assessment of the possible use of macroprudential liquidity tools in the European Union. It complements previous work on liquidity and focuses on the development of liquidity risk at the system-wide level. A dashboard with a total of 20 indicators is developed for the financial system, including banks and non-banks, to assess the build-up of systemic liquidity risk over time. In addition to examining liquidity risks, this study sheds light on the legal basis for additional macroprudential liquidity tools under existing regulation (Article 458 of the Capital Requirements Regulation (CRR), Articles 105 and 103 of the Capital Requirements Directive (CRD IV) and national law), which is a key condition for the implementation of macroprudential liquidity tools.

The need for and implementation of macroprudential supervision was a key lesson from the global financial crisis of 2008. However, historical protocols, legislation, policy agreements as well as the literature bear witness of a longer history of macroprudential policy in Austria: it predates the crisis by about 60 years during which it gradually evolved. We argue that careful analysis of this history provides interesting insights for current policymakers. We identify the following key lessons from analyzing the changing legal nature, motivation and effectiveness of macroprudential policy in Austria: first, macroprudential policy requires a sound legal basis; second, measures have to be quite intrusive to effectively curtail the build-up of systemic risk. Less intrusive measures become effective above all by increasing the shock-absorbing capacity of the financial system, once systemic risks materialize.

The need for and implementation of macroprudential supervision was a key lesson from the global financial crisis of 2008. However, historical protocols, legislation, policy agreements as well as the literature bear witness of a longer history of macroprudential policy in Austria: it predates the crisis by about 60 years during which it gradually evolved. We argue that careful analysis of this history provides interesting insights for current policymakers. We identify the following key lessons from analyzing the changing legal nature, motivation and effectiveness of macroprudential policy in Austria: first, macroprudential policy requires a sound legal basis; second, measures have to be quite intrusive to effectively curtail the build-up of systemic risk. Less intrusive measures become effective above all by increasing the shock-absorbing capacity of the financial system, once systemic risks materialize.

Banking crises such as the latest financial crisis of 2008–09 have a major impact on the real economy, reveal fragilities in financial markets and shed light on (often severe) gaps in banking regulation and supervision. Obviously, during the current crisis, banks had inadequate capital and liquidity buffers to absorb shocks. At the moment, a reform of microprudential regulation is well under way within the framework first established more than 25 years ago by the Basel Capital Accord. However, recent literature on the economics of banking regulation highlights that a more innovative approach is required to deal with the three main crisis catalysts as revealed by the current financial crisis: • The financial system has become substantially more interconnected and complex over the last twenty years. In addition, more complex contagion channels have emerged (e.g. derivative exposures), and shocks can now spread throughout the global financial system almost immediately. • The adverse impact of the financial system’s inherent cyclicality on financial stability was severely underestimated. • Many banks today are too big to fail. They cannot exit the market without causing substantial negative externalities for other financial institutions and the real economy. As a consequence, they are bailed out by the public sector if necessary. This implicit government guarantee leads to severe incentive problems, which in turn result in an inefficient allocation of capital and risk within the economy. At the European level, these issues are addressed i.a. by the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism (SRM), the Macroprudential supervision: A Key lesson from the Financial crisis

This study gives an overview of the insurance market in Central, Eastern and Southeastern Europe (CESEE) in general and of the Austrian insurance groups’ activities in the region in particular. Moreover, it deals with risk management issues and the challenges arising from the new EU regulatory framework, Solvency II. We identify the main risks and opportunites for insurance groups in this respect: While potential market growth rates and still higher margins represent the main opportunities, there is also evidence of some reputational as well as financial risks. Further, cross-border business activities also pose some challenges for the risk management of internationally active insurance groups. From a macroprudential perspective, the Austrian insurance groups’ exposure to CESEE augments the exposure of Austria financial institutions to this region.

This paper looks at the role Austrian investment companies and the mutual funds managed by them play in the context of financial stability. At the end of the third quarter 2009, the 30 Austrian investment companies (of which 5 manage real estate funds) had invested around EUR 114 billion in the market. Given the repercussions arising from interlocks between invest- ment companies and other financial intermediaries (such as credit institutions, insurance com- panies, pension funds and severance funds) in the event of a financial crisis, this study ex- plores the underlying risks and makes an attempt at quantifying the mutual dependencies, focusing above all on market and reputational risks. Areas that are relevant for financial stability include the contribution of investment com- panies to the profitability of banks and the potential risks related to the role of custodian banks. Furthermore, the distribution and administration of mutual funds issued by investment companies affiliated with banks is a source of commission income for the banking sector. Finally, the use of mutual funds (in unit-linked life insurance plans) as repayment vehicles for foreign-currency bullet loans may cause funding gaps in the event of poor fund performance, which could increase the credit risk exposure of the banks involved. 2

This paper looks at the role Austrian investment companies and the mutual funds managed by them play in the context of financial stability. At the end of the third quarter 2009, the 30 Austrian investment companies (of which 5 manage real estate funds) had invested around EUR 114 billion in the market. Given the repercussions arising from interlocks between investment companies and other financial intermediaries (such as credit institutions, insurance companies, pension funds and severance funds) in the event of a financial crisis, this study explores the underlying risks and makes an attempt at quantifying the mutual dependencies, focusing above all on market and reputational risks. Areas that are relevant for financial stability include the contribution of investment companies to the profitability of banks and the potential risks related to the role of custodian banks. Furthermore, the distribution and administration of mutual funds issued by investment companies affiliated with banks is a source of commission income for the banking sector. Finally, the use of mutual funds (in unit-linked life insurance plans) as repayment vehicles for foreign-currency bullet loans may cause funding gaps in the event of poor fund performance, which could increase the credit risk exposure of the banks involved.

This study, which arose under the OeNB's expanded financial stability mandate, provides the reasoning for an integrated approach to financial stability analysis. It takes stock of the Aus- trian insurance sector and provides an assessment of the sector in respect of financial stability. This study is based on data provided by the Financial Market Authority (FMA) that the OeNB periodically analyzes under its expanded financial stability mandate. In order to moni- tor longer-term developments and trends, the period under review ranges from 2002 to 2008. We find that concentration in the Austrian insurance market and competition have increased and that insurance companies have made efforts in cost and claims management. Compared with the rest of Europe, the Austrian life insurance market still has growth potential. Austrian insurers have diversified their quite considerable debt security portfolios at an increasingly international level. Following the outbreak of the U.S. subprime crisis, profitability fell sharply after having previously grown at a steady rate on the back of a favorable financial market en- vironment, a positive insurance claims trend and Austrian insurance companies' expansion in Central, Eastern and Southeastern Europe. Although the Austrian insurance industry's financial ties with the banking sector deepened on the whole, they remained at a relatively small scale.

This study, which arose under the OeNB’s expanded financial stability mandate, provides the reasoning for an integrated approach to financial stability analysis. It takes stock of the Austrian insurance sector and provides an assessment of the sector in respect of financial stability. This study is based on data provided by the Financial Market Authority (FMA) that the OeNB periodically analyzes under its expanded financial stability mandate. In order to monitor longer-term developments and trends, the period under review ranges from 2002 to 2008. We find that concentration in the Austrian insurance market and competition have increased and that insurance companies have made efforts in cost and claims management. Compared with the rest of Europe, the Austrian life insurance market still has growth potential. Austrian insurers have diversified their quite considerable debt security portfolios at an increasingly international level. Following the outbreak of the U.S. subprime crisis, profitability fell sharply after having previously grown at a steady rate on the back of a favorable financial market environment, a positive insurance claims trend and Austrian insurance companies’ expansion in Central, Eastern and Southeastern Europe. Although the Austrian insurance industry’s financial ties with the banking sector deepened on the whole, they remained at a relatively small scale.

In quantitative financial stability analysis, the link between the macroeconomic environment and credit risk is of particular importance when assessing the risk hidden in loan portfolios. Macroeconomic stress testing, in particular, which aims at measuring the impact of an economic crisis on individual banks or on the entire financial system, depends on means to quantitatively assess this link. Hence, the objective of this paper is to provide a methodological update of the OeNB’s previous credit risk model that improves the capture of the relation between macroeconomic variables and probabilities of default for the main Austrian corporate sectors. In addition to the standard model based on individual macroeconomic variables, the paper explores solutions to two important challenges: first, the challenge related to the exploitation of potential information inherent in a larger macroeconomic data set and second, the problem that accounts for potential nonlinearity in the relation between credit and business cycles. The first issue is addressed via a regression model based on a principal components analysis that takes in a wider range of macroeconomic variables than commonly practiced. The second issue is addressed via a threshold approach. This paper presents the estimation results for the three different models and discusses them on the basis of an illustrative example.

This paper presents the methodology, scenarios and results of the stress tests conducted for the update of Austria's Financial Sector Assessment Program (FSAP) in 2007. The focus of the paper lies in particular on the following two macroeconomic stress scenarios: (a) a regional shock in Central, Eastern and Southeastern Europe hitting Austrian banks through their large exposure in the region, and (b) a global downturn in economic activity causing a deterioration of Austrian banks' domestic loan portfolios, whereby in the second scenario, contagion risk within the Austrian interbank market was also taken into account. Stress test calculations were performed by the OeNB for all Austrian banks (top-down approach) as well as by the six largest Austrian banking groups for their respective exposure (bottom-up approach). The pa- per describes the methodologies for scenario construction and the stress tests themselves and then discusses the scenarios as well as the stress test results in detail, including a comparison of the two approaches. Finally, the paper presents the results of additional sensitivity stress tests for credit risk emanating from foreign currency lending, for the most important catego- ries of market risk and for liquidity risk. Overall, the update of Austria's FSAP 2007 confirmed the results of previous stress testing exercises, in particular for the large Austrian banking groups that show considerable shock resistance mainly as a result of their generally sound capital buffers and high profitability.