Austria: IBSG Guarantee Program

The guarantee scheme was authorized by the €75 billion Interbank Market Support Act (IBSG) established the OeCAG, a clearing bank that could issue government guaranteed debt to facilitate interbank lending and authorized the Minister of Finance to provide guarantees for securities issued by eligible institutions. It was passed alongside the €15 billion Financial Market Stability Act (FinStaG) as part of the Austrian Financial Market Stability Package. FinStaG was a set of measures that authorized the Finance Minister to “recapitalize and strengthen the capital base of credit institutions and insurance companies.” This package of measures was introduced in response to the joint call from euro-area countries for national legislation aimed at restoring financial market stability (Federal Ministry of Finance n.d.-a).

The ISBG, which was established to strengthen the interbank market, allowed the Federal Minister of Finance to guarantee securities issued by eligible institutions other than the clearing bank pursuant to Section 66 of the Federal Budget Act (Republic of Austria 2008).

On October 31, 2008, a little less than a week after the IBSG was enacted, Austria notified the European Commission of its passage. In a letter dated December 9, the EC notified the Austrian government that though the guarantee scheme constituted state aid under Article 87(1) of the EC Treaty, it was permitted under Article 87(3)(b) of the Treaty (Global Trade Alert 2008). Article 87(3)(b) permits state aid “to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State” (European Commission n.d.). This decision was consistent with an earlier communication published by the EC, which stated that Article 87(3)(b) could be used as a legal basis for aid measures like general schemes to address the financial crisis (European Commission 2008).

 As discussed in more detail below, the need to structure the guarantee in such a way as to ensure EC approval significantly influenced the design of certain program features.

IBSG stipulated that any measures taken by the Austrian government under IBSG could not exceed €75 billion in outstanding funds (Republic of Austria 2008). Of this amount,
€4 billion was explicitly earmarked for guaranteeing the losses of the clearing bank, OeCAG. The total budget was reduced by €10 billion in 2009 and by a further €15 billion in 2010, making the new limit €50 billion. (Federal Ministry of Finance n.d.-b).

In correspondence with the European Commission, Austrian authorities committed to limiting participation to institutions with a Tier 1 ratio of at least 7%.

According to IBSG, any securities issued pursuant to section 1, paragraph 1, sub-paragraph 10 of the Banking Act (Republic of Austria 2008) were eligible for the guarantee. This sub-paragraph defines the ability of credit institutions to “[issue] fixed-income securities for the purpose of investing the proceeds in other banking transactions (miscellaneous securities underwriting business)” (Austrian Financial Market Authority n.d.). The European Commission’s decision approving the guarantee program clarified that subordinated debt would not be eligible for the guarantee.

Securities were only eligible for government guarantee if they had a maturity of five years or less (Republic of Austria 2008). In correspondence with the European Commission, Austrian authorities clarified that typically the guarantee would only cover debt with maturities up to 3 years, but that in exceptional circumstances debt with a maturity of up to five years would be eligible. The government does not appear to have established minimum maturity requirements for eligible debt.

Guarantees were issued on debt denominated in Swiss francs and Japanese yen, as well.

As evident from the outcome data, caps were established for each participating institution separately (Petrovic and Tutsch 2009). However, it is unclear what criteria were used to determine these caps.

The “Recommendations on Government Guarantees on Bank Debt” set forth on October 20, 2008, by the European Central Bank provided guidance on the fee structures to be imposed by European countries establishing bank debt guarantee programs. Austrian authorities adopted a fee structure consistent with this guidance.   

For short-term debt with maturities of up to 12 months, the fee was equal to 50 basis points on an annual basis.

For medium-term debt with maturities of more than 12 months, the total participation fee equaled 50 basis points plus the lesser of either: (1) the median of the five-year credit default swap (CDS) spread of a participant’s debt instruments from the period of January 1, 2007, to August 31, 2008, or (2) the median of the five-year CDS spread for debt instruments of the participant’s rating category (based on a sample of large Eurosystem banks) over the same date range.

Guidance issued by the European Commission in October 2008 on the creation of credit guarantee programs called for the inclusion in programs of a set of safeguards “to minimize . . . distortions and the potential abuse of the preferential situations of beneficiaries brought about by a State guarantee” and “to avoid moral hazard.” This guidance did not specify exactly what safeguards a program should include but required “an adequate combination” of elements including restrictions on advertising based on the guarantee, balance sheet growth, share buybacks, and executive compensation some of which Austria adopted (European Commission 2008). To receive guarantees, Austrian institutions agreed to a set of behavioral commitments including:

1. Using proceeds for the benefit of the real economy through lending at market conditions, particularly to small and medium-size enterprises and households.
2. Reviewing corporate compensation systems for appropriateness.
3. Taking job-saving measures.
4. Taking steps to avoid distortions of competition (e.g., refraining from advertising based on the guarantee).

Originally, guarantees under IBSG could only be issued until the end of 2009. This issuance window was extended until December 31, 2010 (Federal Ministry of Finance n.d.-b).