Austria and Germany: Hypo Alpe Adria Capital Injection, 2008

December 2008: Capital Injections

To raise HAA’s Tier 1 ratio, the bank’s supervisory board unanimously approved a capital increase on November 12, 2008 (HAA 2008a; Hansen 2008). The supervisory board proposed this measure at the next general meeting, on December 5, 2008 (HAA 2008a; HAA 2008b). The shareholders agreed on a capital increase but disputed who would pay for it (HAA 2008b; Reuters 2008a). Ultimately, BayernLB agreed to inject EUR 699.9 million. Of the minority shareholders, the HAA employee foundation agreed to inject EUR 0.1 million. Grawe-Gruppe and Carinthia did not contribute to the recapitalization (HAA 2009a; Reuters 2008a). The FMA later said that this recapitalization allowed HAA to meet the minimum capital ratio, which HAA reported as 8.3% in its annual report for 2008 (see Figure 2) (FMA 2016; HAA 2009a). Thus, Austrian authorities did not classify HAA as “distressed” in December 2008 (FMA 2016). However, authorities did classify HAA as systemically relevant in order to meet legal requirements under the Financial Stability Law (EC 2012, 4; FMA 2016).

Austrian authorities agreed to inject another EUR 900 million through FIMBAG to raise the capital ratio (EC 2008a; FIMBAG 2015; HAA 2009a).

Broad-Based Support

The Financial Stability Act had three components: (a) authorization for bank recapitalization, (b) bank funding guarantees and the establishment of a clearing bank with a federal guarantee, and (c) an unlimited deposit insurance scheme (see Key Design Decision No. 3, Legal Authority). The Federal Ministry of Finance (Bundesministerium für Finanzen, or BMF) could guarantee bonds issued by banks, bank liabilities, and bank losses with the establishment of a clearing bank, Oesterreichische Clearingbank AG (OeCAG) (EC 2008a, 3–4; IMF 2009). Natural persons enjoyed an unlimited deposit guarantee until December 31, 2009.^FBefore the GFC, Austria had a compulsory deposit insurance scheme organized by subsector with five separate schemes administered by respective trade associations. Contributions were ex post, since member banks contributed only when a guarantee event occurred. Member banks made contributions proportional to their respective percentage of covered deposits in each sector, subject to a ceiling depending on the risk-weighted assets of the contributing bank. Other sectors contributed if a payout exceeded the ceiling of a given sector. If this was not sufficient, the affected sector could issue bonds to raise external funds (IMF 2008). Afterward, the cap for deposit insurance was limited to EUR 100,000. The government pledged EUR 10 billion to back the guarantee (IMF 2009; IMF 2014).

HAA Support Measures

To increase liquidity reserves on July 14, 2009, HAA launched a bond with a total value of EUR 1.35 billion, guaranteed per the debt issuance program under the Financial Stability Law (EC 2009; Euroweek 2009; HAA 2010b). The bond had a coupon of 3.13% per annum, a spread of 60 basis points (bps) over mid-swaps, and a maturity date of July 24, 2013 (Euroweek 2009; HAA 2009b; WSJ 2009). The lead managers were BayernLB and BNP Paribas SA in addition to Citigroup and UniCredit SpA (Euroweek 2009; WSJ 2009). According to HAA, the bond was “oversubscribed several times within a very short time of its issue” (HAA 2009b).

With the nationalization of HAA in December 2009, as additional support to boost HAA’s Tier 1 ratio, Austrian authorities also granted a temporary asset guarantee up to EUR 100 million per the Financial Stability Law (EC 2009; EC 2011, 1–3). Austrian authorities extended this guarantee on June 25, 2010 (EC 2010b, 1–2; EC 2011, 2). Following additional write-downs, Austrian authorities in December 2010 announced an asset guarantee of EUR 200 million until June 30, 2013 (EC 2011, 2; EC 2012, 3). In December 2012, Austrian authorities announced a state guarantee on Tier 2 instruments up to EUR 1 billion with a 10–year maturity (EC 2012, 3; EC 2013). The EC said that remuneration for this subordinated debt would amount to 7.7% (EC 2012, 3).

After HAA’s nationalization, the former shareholders maintained existing liquidity lines to the bank (BayernLB 2010; EC 2009). To this end, existing funding from BayernLB to HAA remained until 2015, which Austria guaranteed per its negotiation with the former parent (see Figure 4) (see Key Design Decision No. 7, Treatment of Creditors and Equity Holders) (EC 2013; General Court of the EU 2016). As understood in December 2009, BayernLB had the right to withdraw this liquidity line to HAA if Austria split HAA or sold a majority stake. Grawe-Gruppe provided EUR 100 million in liquidity by December 31, 2009, with a maturity of four years. Half of Grawe-Gruppe’s liquidity support was collateralized by Austrian covered bank bonds, and the other half was covered by “high-value collateral” from HAA (EC 2009). Carinthia maintained a liquidity line with HAA of more than EUR 200 million (EC 2009).

Austrian Legal Authority

The existing Austrian Banking Act (Bankwesengesetz, or BWG) outlined solvency requirements and conditions for repaying Tier 2 capital (HAA 2009b; Parliament of Austria 2007, art. 23[7]). The BWG—and the Insurance Supervision Act (Versicherungsaufsichtsgesetz, or VAG)—provided the authority for participation capital (see Key Design Decision No. 8, Capital Characteristics) (Kalss 2010; Parliament of Austria 2007, art. 23[4]; Parliament of Austria 2008a, art. 73).

On October 26, 2008, the Austrian Parliament passed the Law on the Stability of the Financial Markets and on Strengthening the Interbank Market for Credit Institutions and Insurance Companies in Austria (the Financial Stability Law). The Financial Stability Law contained two major components: the Interbank Market Reinforcement Act (Interbankmarktstärkungsgesetz, IBSG) and the Financial Market Stability Act (FinStaG)^FFor a case study dedicated to FinStaG itself, see Simon 2021. (EC 2008a, 1–3; Parliament of Austria 2008b).

IBSG focused on strengthening the interbank market by providing EUR 75 billion in liquidity support and establishing the “Clearing Bank for Interbank Operations,” or OeCAG (see Key Design Decision No. 2, Part of a Package) (EC 2008a, 1–3; IMF 2014). To support only solvent companies, and Austrian authorities required banks to have a Tier 1 ratio of at least 7% to receive liquidity support under IBSG (EC 2008a, 2).

FinStaG allowed the recapitalization of individual credit institutions and insurance companies through a newly created entity called the Financial Market Holding Company (FIMBAG) (EC 2008a, 5; FIMBAG n.d.; Parliament of Austria 2008b, art. 2[1-2], 3[9]). Initially, FinStaG authorized up to EUR 15 billion in recapitalizations, but authorities could use leftover funds from the EUR 75 billion authorized by IBSG (Parliament of Austria 2008b, art. 2[2]; Simon 2018). FinStaG authorized the following instruments: capital injections, share acquisition, acquisition of ownership, loans, assumption of liabilities for debts, and assumption of liabilities for assets (EC 2008a, 5; Parliament of Austria 2008b, sec. 2).

FinStaG also allowed the nationalization of a credit institution only if that institution was unable to fulfill its obligations to creditors and other support measures were insufficient or unusable. In this sense, nationalization was to be viewed as a last resort (EC 2008a, 8; Parliament of Austria 2008b, art. 2[2]). The minister of finance and the federal chancellor could decide to take over a credit institution if it was “necessary for the prevention of serious damage to the national economy” (Parliament of Austria 2008b, art. 2[2]).

EC Decision-Making

Article 88 of the European Commission Treaty (EC Treaty) obligates member states to obtain EC approval of State Aid affecting the common market (EC 2002).

In early December 2008, the EC found that Austria’s new Financial Stability Law was compatible with the common market; the EC did not object (see Figure 3). Austria pledged certain institution-related ceilings to the EC regarding the amount of aid given to a particular institution (EC 2008a, 8–9). Shortly thereafter, the EC authorized the December 2008 capital injections—containing State Aid from Germany and Austria—into HAA (EC 2009). Germany committed to providing a restructuring plan to the EC within six months that accounted for the whole BayernLB group (EC 2008b, 7). Austrian authorities amended the Financial Stability Law nine times since its adoption in October 2008 (BMF n.d.).

The EC passed a resolution on May 12, 2009, to investigate the December 2008 capital injections into HAA. HAA said it expected this process to be completed in the second half of 2009 (HAA 2009b).

The EC provisionally approved HAA’s nationalization and recapitalization in December 2009. The EC noted that previous support to HAA proved to be inadequate and that Austria paid HAA’s former shareholders a price—EUR 1 each—that was “not higher than the value without State intervention” (EC 2009, 5, 7). Austrian authorities had to submit a restructuring plan for HAA within six months of the EC decision (EC 2009). The State Aid investigation opened by the EC in May 2009 was updated and extended to consider these new measures, including recapitalization and new guarantees (EC 2010a; HAA 2010b). In March 2010, the EC expressed doubt that these measures were sufficient to restore HAA’s viability. The EC also questioned whether burden-sharing with HAA’s previous owners was appropriate. On BayernLB, the EC questioned whether the former shareholder could have contributed more to the rescue. The EC also noted that BayernLB would not be remunerated for its capital injection but Carinthia and Grawe-Gruppe would be, which merited further investigation of minority shareholders’ burden-sharing. Finally, the EC remarked that Grawe-Gruppe’s liquidity support to HAA would be highly collateralized, while this was not the case for the liquidity lines from the other former shareholders (EC 2010a).

Hypo Alpe Adria

HAA’s management board was responsible for risk management, including counterparty default risks, restructuring risks, market risks, liquidity risks, and operational risks. The management board was also responsible for monitoring HAA’s compliance with regulatory capital adequacy requirements. HAA’s supervisory board decided credit policy in terms of HAA’s lending business and risk management procedures (HAA 2010a).

Bank Regulation, Supervision, and Enforcement

The Financial Sector Committee coordinated bank regulation and supervision among the following agencies: the FMA, OeNB, and Federal Finance Ministry. Since its creation in 2002, the FMA was the integrated regulator and supervisor for the financial system. To this end, it had licensing and enforcement powers; the FMA was also responsible for nonbank financial institutions (NBFIs). In a complementary fashion, the OeNB undertook all on-site and most off-site bank supervision. Together, the FMA and OeNB determined the schedule of regular inspections: annual inspections for major banks and inspections every two years for medium-sized banks. The OeNB was solely responsible for off–site analysis, and it shared data with the FMA. The BMF was responsible for certain legislative matters (IMF 2008).

OeNB conducted two macroprudential stress tests in 2009, each one assuming a baseline scenario on the one hand and a stress scenario on the other hand (deep recession). The results indicated that the Austrian banking system could withstand another economic slump, but at the individual bank level, the results indicated that HAA would need additional loan loss provisions (OeNB 2010).

In the fourth quarter of 2009, the FMA issued an ultimatum to HAA’s shareholders: Recapitalize the bank by December 11, 2009, or face supervisory action. BayernLB decided to exit HAA, which led to HAA’s nationalization by the Republic of Austria (BayernLB 2010; EC 2009).

Capital Injections

FinStaG established FIMBAG as a subsidiary of Austria’s sovereign wealth fund, Austria Holding PLC (Österreichische Industrieholding AG, or ÖIAG) (BMF 2015; Parliament of Austria 2000; 2008b, art. 3[9]). FIMBAG commenced its operations on November 14, 2008 (Kalss 2010). FIMBAG administered capital injections on behalf of the Republic of Austria and provided regular reports to the BMF^FThe BMF said that FIMBAG had largely fulfilled its duties and dissolved FIMBAG as of June 30, 2016 (FIMBAG 2016). on banks’ compliance with the terms and conditions of State Aid (BMF 2015; FIMBAG 2015; FIMBAG 2016; OeNB 2010). The federal finance minister and OeNB each nominated one of the two members that comprised FIMBAG’s management board for a term of five years with the possibility of reappointment (FMA 2010; Kalss 2010).

Advisers

Through summer 2009, Southeastern European economies continued to decline, and the proportion of nonperforming loans on HAA’s balance sheet continued to increase. Thus, BayernLB and HAA commissioned a credit risk report from PwC, delivered on November 13, 2009. PwC conducted a review from August 1–November 6 and delivered a report on November 13, 2009. PwC found problems with HAA’s credit monitoring process and valuation of available collateral. PwC said expected losses would bring HAA’s Tier 1 capital ratio below 4%, which was less than the regulatory minimum of 8% (EC 2009; HAA 2009a). HAA’s executive board used its internal audits and PwC findings to calculate an expected write-down of EUR 1.7 billion for 2009 (BayernLB 2010).

Wolf Theiss, Kosch & Partner and KPMG International Cooperative advised HAA during negotiations between Austria and the shareholders when the bank was nationalized in December 2009. The final purchase agreement was based on a proposal put forth by these advisors (Wolf Theiss 2009).

Oversight of the Measures under the Financial Stability Law

Within one month of each calendar quarter, the finance minister had to submit a report containing all measures authorized by the Financial Stability Law and the financial consequences of the measures taken to the Main Committee in parliament (Parliament of Austria 2008b, art. 1[7]; Parliament of Austria n.d.). The finance minister was responsible for enforcing the Financial Stability Law—except for a company’s exemption from fees and charges according to the Court Fees Act, which was enforced by the justice minister (Parliament of Austria 2008b, art. 1[10]).

Financial Market Authority

The supervisory board monitored the management and business conduct of the FMA, which was the Austrian bank supervisor. Eight members comprised the supervisory board: three voting members appointed by the finance minister, three voting members appointed by OeNB, and two nonvoting members proposed by the Austrian Federal Economic Chamber as representatives of supervised institutions. The supervisory board had to approve the FMA’s financial plans and investments exceeding EUR 75,000 (FMA 2010).

Financial Market Holding Company

Eight members comprised FIMBAG’s supervisory board: three voting members appointed by BMF, three voting members appointed by OeNB, and two nonvoting members appointed by the Austrian Federal Economic Chamber as representatives of the supervised institutions (FMA 2010).

December 2008: Capital Injections

On November 12, 2008, HAA said in a press release that the supervisory board unanimously approved a capital increase that would go for a vote by shareholders at a general meeting on December 2. The statement also indicated that management was considering additional injections of core capital from the Financial Stability Law. The supervisory board’s chairman said: “The capital increase will give us greater options for action and makes [HAA] stronger. This is good news for [HAA] and for our customers” (HAA 2008a).

On December 23, 2008, in a press release announcing Austria’s capital injection of EUR 900 million, the supervisory board’s chairman said: “An increase of the core capital ratio is essential in order to remain internationally competitive. This makes us better capitalised than ever before which is very good news, not only for the bank, but also our employees, and, most of all, our customers” (HAA 2008c). This press release also noted HAA’s commitment to provide EUR 1.8 billion in loans and lease financing over the next three years to small- and medium-sized enterprises (SMEs) (see Key Design Decision No. 13, Other Conditions) (HAA 2008c).

December 2009: Nationalization by the Republic of Austria

Austrian authorities announced the recapitalization and nationalization of HAA on December 18, 2009, four days after the shareholders and Austrian government agreed on a term sheet (EC 2009). In a press release, the FMA noted that shareholders were wiped out and said that HAA’s restructuring was “inevitable”:

With this solution, the owners have been made to face their obligations, while the Austrian government has underlined its support for the country’s financial economy in this difficult situation – it is a clear signal to the customers, creditors and business partners of the bank. ‘This result lays a solid foundation to allow the inevitable restructuring of [HAA] to proceed in an orderly fashion, without danger of damaging the stability of the financial markets in Austria and also in Central, Eastern and South-Eastern Europe,’ concluded the FMA executive directors. (FMA 2009)

June 2010–April 2014 Subsequent Recapitalizations

In November 2013, the Financial Times reported that OeNB denied that it  had conducted a study that concluded HAA would need EUR 17 billion in the worst-case scenario (Shotter 2013).

Despite capitalization issues and conjecture in the financial press, Reuters reported in December 2013 that the HAA chairman said senior creditors would not see a haircut on their HAA bonds guaranteed by the state of Carinthia, as this would have hurt Austria’s reputation as a borrower (Reuters 2013d; Reuters 2013e). However, in subsequent years during HAA’s transformation into Heta for resolution, Austrian authorities did attempt to impose haircuts on senior bondholders, which led to negotiations with HAA’s creditors (see Decker and Shyu [2024]).

In 2008, HAA paid EUR 50 million in dividends to BayernLB and EUR 35.2 million in total to the minority shareholders (HAA 2009a). In 2009, HAA paid no dividends to BayernLB and EUR 17 million in total to the minority shareholders (HAA 2010b).

Majority Shareholder

BayernLB was a German landesbank, owned by the Free State of Bavaria and the Association of Bavarian Savings Banks (EC 2008b, 1; EC 2009). On August 2, 2007, BayernLB proposed its majority purchase (50% plus one share) of HAA to the EC, pursuant to Article 4 of EC Regulation 139/2004 (EC 2007, 1; HAA 2008d). The EC approved this purchase on September 5, 2007 (EC 2007, 2). After the majority purchase and a capital increase of EUR 600 million, BayernLB owned 57.3% of HAA as of December 31, 2007 (HAA 2008d).

German authorities notified the EC of public support measures to BayernLB on December 4, 2008. On December 18, 2008, German authorities obtained EC approval for State Aid to BayernLB: a capital injection of EUR 10 billion and a guarantee up to EUR 4.8 billion on its asset-backed securities (ABS) portfolio. In turn, BayernLB injected EUR 700 million in HAA on December 10. German authorities said the recapitalization of HAA was necessary to clean up HAA’s loan portfolio so that HAA could reach the minimum Tier 1 ratio of 7% to receive Austrian State Aid under the Financial Stability Law (see Key Design Decision No. 3, Legal Authority) (EC 2008a, 2; EC 2008b, 3, 6).

In December 2009, BayernLB’s board of management and board of administration made the decision to dispose of HAA because there was no economic justification to inject more capital, considering PwC’s audit. In its annual report for 2009, BayernLB said that disposal of HAA allowed BayernLB to reduce the group’s overall size and improve risk management standards. Thus, BayernLB agreed to sell its stake in HAA for EUR 1 (see Key Design Decision No. 8, Capital Characteristics) (BayernLB 2010; EC 2009; Wolf Theiss 2009). BayernLB wrote down the full book value of HAA, amounting to EUR 2.3 billion; BayernLB also renounced the right to receivables from HAA amounting to EUR 825 million (BayernLB 2010; EC 2009). In its annual report for 2009, BayernLB said that disposing HAA played a crucial role in stabilizing BayernLB, as it shielded BayernLB from further risk (BayernLB 2010).

On December 13, 2012, HAA announced that it would stop paying back loans it received from BayernLB, because that support should be considered bank capital (AFP 2012; HAA 2013c; Reuters 2012d). In response, BayernLB threatened to call immediately instead of receiving the funds in tranches with maturities at the end of 2013 and 2014 (Reuters 2012d). BayernLB filed a complaint with the Munich District Court to maintain the repayment and interest agreement to which the parties previously agreed (AFP 2012; Coppola 2014; Reuters 2012d). Later in May 2015, the Munich District Court ordered HAA’s successor, Heta Asset Resolution AG, to repay BayernLB EUR 2.4 billion in loans. However, BayernLB did not win the full amount that it sought, because the court said that the debt, amounting to 300 million Swiss francs, did not fall within the court’s jurisdiction (Poltz 2015). BayernLB later filed this case with Austria’s constitutional court in 2014 (see Decker and Shyu [2024]) (Suess 2014).

Minority Shareholders

Only one minority shareholder contributed to the December 2008 recapitalization: The HAA employee foundation injected EUR 0.1 million (HAA 2009a). The minority shareholders Grawe-Gruppe and Carinthia did not contribute (Hansen 2008; Reuters 2008a). Resulting from this recapitalization, BayernLB’s stake increased, Graw-Gruppe’s and Carinthia’s stakes were diluted, and the HAA employee foundation’s stake remained the same (see Figure 4) (HAA 2008b; HAA 2008d).

In December 2009, the minority shareholders agreed to sell their respective stakes in HAA to the Republic of Austria for EUR 1 each (EC 2009; Wolf Theiss 2009). See Figure 4 for details on the conversions and recapitalization.

Introduced in 1986, participation capital (Partizipationkapital) is an instrument in Austria to increase an institution’s core capital ratio and enhance risk-bearing capacity (EC 2009; Gapp and Marschall 2009; Kalss 2010; Rath 2010). Participation capital’s perpetuality and loss absorbency—on a going concern with share capital—allow it to be recognized in an institution’s core capital ratio (Gapp and Marschall 2009; Kalss 2010; Parliament of Austria 2007, art. 23(4); Parliament of Austria 2008a, art. 73; Rath 2010). Without voting rights, participation capital is senior to equity and subordinate to debt (EC 2009; Gapp and Marschall 2009; Kalss 2010; Rath 2010). Dividends must be profit-related and noncumulative (Gapp and Marschall 2009; Kalss 2010; Parliament of Austria 2007, art. 23[4]; Parliament of Austria 2008a, art. 73; Rath 2010). Susanne Kalss, an Austrian academic, explains why participation capital was an advantageous instrument injected by FIMBAG: Because of this instrument’s capital characteristics, the Republic of Austria would not hold any position under stock corporation law (Kalss 2010; Parliament of Austria 2007, art. 23[4]). Thus, Austria exercised control and influence because it acquired interest governed by the law of obligations, not by virtue of membership. Kalss further asserts that the GFC “helped bring participation capital back into the limelight” (2010, 541).

December 2008: Capital Injections

In December 2008, shareholders recapitalized HAA by EUR 1.6 billion in total (see Figure 5) (EC 2008b, 3; HAA 2009a). Thus, HAA had a Tier 1 capital ratio of 8.3% and total equity ratio of 11.9% as of December 31, 2008 (HAA 2009a).

According to FinStaG, the Republic of Austria required a minimum remuneration for participation shares: 9.3% for Tier 1 capital. If there was significant participation in a capital increase by private shareholders, the minimum was 7% (EC 2008a, 6).

Figure 5: HAA Recapitalization in December 2008

Sources: EC 2013, 5; HAA 2009a; Hansen 2008.

December 2009: Nationalization by the Republic of Austria

In December 2009, Austria nationalized HAA by paying a symbolic price of EUR 1 to each of HAA’s shareholders. See Figure 6 for the terms, which amounted to a total capital injection of EUR 1.1 billion (EC 2009). According to section 23(7) of the BWG, HAA could pay interest on Tier 2 capital only if the bank made a profit; interest could not be paid from reserves (HAA 2010b; Parliament of Austria 2007, art. 23[7]). According to the EC, remuneration for FIMBAG’s capital injection followed the requirements of FinStaG, which suggests that the minimum remuneration for the Republic of Austria’s shares was 7% (EC 2008a, 6; EC 2009).

Figure 6: HAA Nationalization and Recapitalization in December 2009

Note: Dividends were due only if the net income for the year covered changes in reserves and payment of dividends on FIMBAG’s December 2008 capital injection of EUR 900 million. Executive and supervisory boards also had to pass a resolution to this effect.

Sources: BayernLB 2010; EC 2009; HAA 2010b; HAA 2011.

June 2010–April 2014 Capital Injections and Guarantees

On June 28, 2010, FIMBAG injected EUR 450 million with 9,000 participation shares (HAA 2011). In May 2011, HAA converted some participation capital into Tier 1 share capital (HAA 2012).

In December 2012, FIMBAG injected a total of EUR 1.5 billion into HAA: EUR 500 million in ordinary shares and a state guarantee on Tier 2 capital instruments with a nominal value of EUR 1 billion (EC 2013, 2; Reuters 2012b; Reuters 2012c). According to Moody’s Investors Service, this guarantee was unconditional and irrevocable, even if Austrian authorities later decided to apply loss absorption or a resolution regime (Moody’s 2012).

In 2013, FIMBAG injected EUR 700 million and EUR 250 million in Tier 1 capital in September and November, respectively (Moody’s 2013). In December, FIMBAG injected EUR 800 million in participation capital without voting rights (HAA 2014a; Reuters 2013f). Also, in July 2013, HAA specifically had to inject EUR 150 million into its Italy-based branch^FThe regulatory minimum capital ratio in Italy was 10%. As early as September 2012, Moody’s reported that the FMA and Italy’s regulator had informed HAA of the need for a capital increase in its Italy-based branch (Moody’s 2012). (Reuters 2013b).

On April 11, 2014, FIMBAG injected EUR 750 million in share capital into HAA (HAA 2014a).

Initially, FinStaG authorized up to EUR 15 billion in recapitalizations,^FIn 2016, parliament increased the legal limit to EUR 23.5 billion to fund the purchase of state-guaranteed debt instruments of Heta, HAA’s successor (see Decker and Shyu [2024]) (BMF 2018). but authorities could use leftover funds from the EUR 75 billion authorized by IBSG (Parliament of Austria 2008b, art. 2[2]; Simon 2018).

In practice, OeNB used its reserves to provide the funding for the December 2008 capital injection (OeNB 2009; HAA 2009a). The source of funding is unclear for subsequent recapitalizations and nationalizations.

FIMBAG recapitalized HAA from December 2008 to April 2014 for a total of EUR 5.8 billion (EC 2009; HAA 2009a; HAA 2011; HAA 2014a; Moody’s 2013; Reuters 2012b; Reuters 2012c; Reuters 2013e).

In December 2008, HAA underwent its first round of recapitalization after the bank’s supervisory board unanimously voted for a capital increase in November (HAA 2008a; HAA 2009a). Capital injected by HAA’s majority shareholder, BayernLB, coincided with the support that BayernLB received from Germany (EC 2008b, 3). The HAA employee foundation and Austria also contributed to HAA’s recapitalization at the juncture in December 2008 (HAA 2009a).

Throughout summer 2009, the proportion of nonperforming loans on HAA’s balance sheet continued to increase as Southeastern European economies continued to decline. PwC delivered a credit risk report on November 13, 2009. HAA’s executive board used its internal audit and PwC’s findings to calculate an expected write-down of EUR 1.7 billion for 2009. At this juncture, the FMA issued an ultimatum to HAA’s shareholders: Recapitalize the bank by December 11, 2009, or face supervisory action. BayernLB decided to exit HAA, which led to HAA’s nationalization by the Republic of Austria (BayernLB 2010; EC 2009).

As HAA’s losses continued from 2011 to 2014, FIMBAG continued to inject capital so that HAA could meet the regulatory minimum core capital ratio. HAA’s nonperforming loan ratio reached 27% by the end of 2011, and the EC characterized the underlying collateral as difficult to sell. The FMA decided that HAA had to meet an increased minimum of 12.04% by December 31, 2012 (EC 2012, 2; EC 2013; HAA 2011; HAA 2012; HAA 2014a; Moody’s 2013; Reuters 2012b; Reuters 2012c; Reuters 2013c).

The September 2013 restructuring plan provided for a three-part process: (a) the sale of the Austrian subsidiary, HBA, (b) the sale of HAA’s Southeastern European network (SEE network), and (c) the creation of an asset management vehicle, Heta (EC 2013).

Sale of Austrian Subsidiary

The September 2013 restructuring plan called for the sale of HBA by June 30, 2014. The plan also said that HBA would be transferred to Heta if a sale did not occur by that deadline (EC 2013). In fact, Austrian authorities initiated the sale of HBA to Anadi in May 2013 and closed the transaction on December 19, 2013, for a purchase price of EUR 65.5 million (HAA 2013a; HAA 2013b; HAA 2014a). Anadi paid EUR 40.8 million at the time of sale and agreed to pay EUR 24.7 million to an escrow account as a security to protect against various risks that Anadi had identified (HAA 2014a).

Sale of the Southeastern European Network

The September 2013 restructuring plan called for the sale of the entire SEE network by June 30, 2015 (EC 2013; HAA 2014a). Heta—the asset management vehicle created from HAA—initiated a sale purchase agreement with Advent and the EBRD in December 2014, and the deal closed on July 17, 2015 (Heta 2014; Heta 2016). The buyers agreed to a share purchase price of EUR 200 million, where Advent acquired an 80% stake and the EBRD acquired a 20% stake (Advent 2014; Heta 2016).

Heta Asset Resolution AG

Heta’s task was to wind down all assets not sold with HBA and the SEE network. As of December 2022, Heta still had EUR 675.3 million in assets (see Decker and Shyu [2024]) (Heta 2023a).

Tilo Berlin was the chairman of HAA’s management board in 2008; he resigned in 2009 before the government nationalized the bank (HAA 2009a; Reuters 2012a). From 2006 to 2007, Berlin invested EUR 250 million into HAA through his investment company, Berlin & Co. Capital (see Key Design Decision No. 7, Treatment of Creditors and Equity Holders). Berlin claimed that former HAA CEO Siegfried Grigg exaggerated the strength of HAA’s balance sheet by failing to disclose share buyback guarantees that the bank had granted. In turn, HAA sued Berlin and others for EUR 50 million in special dividends to which the bank says they were not entitled (Reuters 2012a).

In January 2010 the financial press reported that Austrian authorities would appoint a new board for HAA and reduce the number of members from eight to four (APA 2010).

The chairman, Johannes Ditz, and CEO, Gottwald Kranebitter, resigned from HAA in June 2013 and July 2013, respectively, as it became apparent that HAA would need additional capital injections. Reuters contemporaneously reported that these executives had fallen out of favor with the government when Austrian authorities were preparing a restructuring plan to send to the EC (Reuters 2013a).

On February 27, 2014, three of HAA’s former managers were sentenced to jail for hiding facts about the bank’s capital position: hiding put options on preference shares that HAA sold in 2006 (Reuters 2014a; Reuters 2014b). This ruling was potentially helpful for BayernLB, which said it was misled into buying a majority stake in HAA in 2007 (for more on the legal proceedings from BayernLB against HAA and later Heta, see Decker and Shyu [2024]) (Reuters 2014a). Former executive Tilo Berlin was later sentenced to jail on April 9, 2014, for the same reason (Reuters 2014b).

Pursuant to Austria’s capital injection of EUR 900 million in December 2008, HAA was subject to certain conditions. First, HAA could not award bonuses to managers in 2008. Second, HAA had to offer twice the amount it received from Austria (in other words, EUR 1.8 billion) in loans and lease financing to SMEs (Dow Jones 2008; HAA 2008c).

With the nationalization of HAA in December 2009, Austrian authorities committed to submit a restructuring plan to the EC by March 31, 2010 (EC 2009).

Research did not uncover regulatory relief. In fact, the stated reason for FIMBAG’s capital injections was to help HAA reach the regulatory minimum Tier 1 ratio (EC 2013; Moody’s 2013).

Austrian authorities recovered EUR 265.5 million with the sale of HBA and the SEE network (see Key Design Decision No. 11, Restructuring) (Advent 2014; HAA 2013a; HAA 2013b; HAA 2014a; Heta 2016).

On March 18, 2014, the Austrian government decided to wind down HAA rather than have the bank enter insolvency. The FMA revoked HAA’s banking license on October 30, 2014, marking the transformation into an asset management vehicle, Heta Asset Resolution AG (Heta 2015a).

On May 23, 2014, HAA’s executive board initiated the process to redeem (that is, withdraw) HAA’s 2009 participation capital. On July 7, 2014, the executive board decided to exercise its authority to withdraw the total participation capital of 2009 for a nominal value of EUR 64.4 million for cash consideration of zero. The supervisory board approved this redemption on July 8, 2004. Also, in mid-July 2014, a court-appointed auditor began its audit of HAA’s withdrawal plan. The FMA ultimately approved this redemption of participation capital (HAA 2014b).

Austria had EUR 6.5 billion in losses with regard to the recapitalization of HAA and later resolution of Heta; Carinthia lost EUR 1.2 billion plus operating expenses of the Carinthian Compensation Payment Fund (for details on state losses during Heta’s resolution, see Decker and Shyu [2024]) (KAF 2016; Heta 2019a; Heta 2019b). The FMA transferred the ownership rights of Heta to a joint stock company for liquidation (FMA 2021b; Heta 2023c).