Session III: The role of the Austrian Central Bank in the ongoing financial market turmoil

1. Session III: The role of the Austrian Central Bank in the ongoing financial market turmoil Russian Economic and Financial Forum in Austria Vienna, 30 November 2008 Michael Würz Head, Financial Markets Analysis and Surveillance Division Oesterreichische Nationalbank www.oenb.at

2. Financial market tensions emerged from the West • Loss in confidence resulting from US subprime-crisis • Markets for structured products not/only to a limited extent functioning • Significant write-downs by large international banks • Increase in interbank interest rates • Liquidity provision by central banks • High stock price volatility Source: OeNB, Bloomberg.

3. Latest wave hit the Austrian banks too Latest wave First waves First waves

4. Indirect effects of turmoil affect operating profits and risk provisions Growth of Operating Profit Operating Income (unconsolidated): +1.4% and Risk Costs (yoy) in bn EUR 40% 300% 14 -1,2% 1.15 12 1.17 30% 200% -9,1% 3.21 10 20% 3.53 100% 8 +26,8% 10% 2.59 2.05 0% 6 0% +11,4% 4 -100% 5.47 6.09 -10% 2 -200% -20% 0.33 0 -0.33 -198,3% -30% -300% -2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2007Q03 2008Q03 Other operating income Operating profit (cons.) Net fees and commissions income Operating profit (uncons.) Securities and investment earnings Risk costs (uncons.) (right axis) Net interest income Source: OeNB. Trading income

5. Liquidity conditions are challenging and closely monitored • Funding markets dried up in autumn 2008, Austrian banks were also affected • Tight liquidity conditions CHF and USD financing • Non-Euro liquidity situation has improved • General situation remains challenging • OeNB is closely monitoring the situation • Introduction of new weekly liquidity report • The 24 largest banks report in- and outflows plus counterbalancing capacity • Time horizons: up to 1 week, 1 month, 3 months and 6 months • Currencies: CHF, EUR, GBP, JPY, USD and an aggregate of other FX • Additional regular information exchange with banks reporting liquidity mismatches

6. High deposit growth in Austria and Central, Eastern and South-Eastern Europe (CESEE)

7. CESEE exposure of Austrian banks focussed on New Member States (NMS) in the EU • AT banks are …. • … significant players in CESEE • … diversified across the region but • exposure to NMS dominates • Growth is redirected and partly cooling off • CESEE segment is highly profitable • Major banks depend strongly on CESEE Source: BIS, Q2 2008. Source: quarterly consolidated reports.

8. Business model of Austrian banks in CESEE faces short runchallenge • Business model of Austrian banks in CESEE is in principle fit for future • Retail banking based on a strong deposit base will emerge as a winner of the financial turmoil • Cut and run – no option for Austrian banks • Costs would outweigh benefits by far • Turmoil in CESEE represents a short run jeopardy for the long and medium term growth potential • CESEE is an important contributor to EU-15 growth rates

9. Austria‘s comprehensive financial stability package • Strengthening Banks‘ Confidence • Interbank Market Strengthening Act (up to 75 bn EUR): • - Clearing house • - Federal guarantee for securities issued by banks • Strengthening Banks‘ Capitalisation • Financial Market Stability Act (up to 15 bn EUR): • - „Recapitalisation measures“ • Strengthening Depositors‘ Confidence • Deposit insurance • - physical persons: until end-2009 unlimited amount; afterwards up to 100,000 EUR • - legal persons: 90% of up to 20,000 EUR. • Further measures: • - Amendment in the Banking Act: „Capital Add-On“ • - Prohibition of Speculative short selling

10. OeNB‘s role in banking supervision and financial stability • 1. Banking Supervision: • 2 institutions (FMA and OeNB), but 1 process & joint responsibility • OeNB: fact finding, including risk assessment • 2. Financial Stability: • Comprehensive and recently extended mandate, based on the EC-Treaty and the National Bank Act: Monitoring of all circumstances that are of relevance for the safeguarding of financial stability in Austria

11. Thank you for your attention!

12. Austrian Clearingbank/Oesterreichische Clearingbank AG (OeCAG) • Legal basis is a temporary law to stabilise the Austrian interbank market • Austrian government backs a clearing house (OeCAG) to unfreeze interbank lending and debt instrument issuances of financial institutions • Guarantees amount up to 75 bn EUR • Expiration date of law is Dec. 31st, 2009 • Austrian Clearingbank (OeCAG): • Founded on Nov. 14th, 2008 by major banks; Initial own funds: 180 mn EUR • Business activities are conducted by OeKB and guaranteed by the Austrian government • Participants are banks and insurance companies • So far three auctions have taken place • Allocated volume in sum: 804.6 mn EUR; decreasing rates and increasing volume • Intention to raise additional funds through commercial paper auctions

13. OeNB‘s financial stability mandate • Financial stability mandate inherent central banking task • in Austria: comprehensive monitoring responsibility explicitly stipulated by the National Bank Act • combined with the obligation to report observations and findings of fundamental nature or particular importance to the MoF and the FMA • Recent extension of data availability allows for integrated financial stability analyses • Structured processes for core stability issues: • - CESEE Risk Assessment • - Risk Transfer • - Extension of stress testing • - Liquidity Links/feedback-loops to banking supervision and vice versa!

14. Specific focus on CESEE activities in banking supervision and financial stability • Specific CESEE-meetings with the relevant Austrian banks • Further extension of cross-border supervisory cooperation • - Cooperation in the framework of so-called “colleges” • - Joint/simultaneous on-site inspections • - Joint seminars, conferences • - ad-hoc meetings, cooperation in EU fora etc • „CESEE Risk Assessment“ as core issue within the extended stability mandate of the OeNB

15. Cross-border banking supervision in the EU • Consensus: cross-border banking groups require responses in the supervisory process, but: Quo vadis? • OeNB‘s perspective: • - “Lead Supervisor” is no option • decentralized European System of Banking Supervisors might emerge in the long-term (masterplan with milestones and timeline needed) • For the time being: evolutionary development of the model “national supervisory authorities & CEBS” • →Colleges (delegation of tasks ok, but no change in home/host responsibilities) • → via CEBS: European supervisory culture • → ensuring that all banks are subject to the same (high) standards