Finanzmarktstabilitätsgesetz (FinStaG)

The Financial Market Stability Act was passed alongside the Interbank Market Support Act as part of the Austrian Financial Market Stability Package. 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 (BMF 2008).

FinStaG authorized the federal minister of finance to use the six specific measures described in Figure 1.

According to the Austrian Federal Ministry of Finance, the assumption of liability and the provision of capital through participation capital or shareholder contributions were the options most frequently used by the government to recapitalize institutions under FinStaG (BMF 2015b).

The Ministry of Finance also pointed out that by assuming liability, the government “allowed the distressed institutions to reduce their risk provisioning, thereby freeing capital” (BMF 2015b). Guarantees under FinStaG were also used during the nationalization of some banks during the crisis (BMF 2017).

FinStaG allowed the federal minister of finance to “secure the macroeconomic balance and protect the Austrian national economy” through recapitalization measures in order to “remedy a considerable economic disruption in Austria” (IBSG and FinStaG 2008). FinStaG provided the basic legal framework for the recapitalization scheme.

On October 31, 2008, a little less than a week after FinStaG 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 recapitalization scheme under FinStaG (as well as the guarantees through IBSG) constituted State Aid under Article 87(1) of the EC Treaty, it was permitted under Article 87(3)(b) of the Treaty (GTA 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” (EC 1957). 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 (EC 2008b).

FinStaG stipulated that the federal minister of finance, with the federal chancellor, “shall have the authority to enact an ordinance determining the details of the conditions and obligations imposed for measures taken pursuant to this Federal Act” (IBSG and FinStaG 2008). In line with this, the federal minister of finance released an ordinance that stipulated the detailed provisions governing the scheme authorized by FinStaG (Kalss 2010, 539).

In accordance with FinStaG, the Austrian government established a new separate company, FIMBAG, as a subsidiary of the ÖIAG, the Austrian investment and privatization agency owned by the state. FIMBAG was authorized to carry out measures under FinStaG and was required to monitor compliance with the master agreements (BMF 2015a).

The relationship between the Austrian government and FIMBAG was contractualized by an Assumption Agreement. Under the agreement, FIMBAG agreed to monitor compliance, as mentioned above, and fulfill certain reporting requirements to the federal government (Kalss 2010, 539).

FinStaG, unlike IBSG, did not specify an end date for the recapitalization scheme. However, when the EC issued its State Aid decision, it approved new measures under the scheme only until June 30, 2009 (Kalss 2010, 538). Austria applied for and received four extensions of this deadline, until June 30, 2011 (GTA 2008). After June 30, 2011, any new support measure adopted for an individual institution under FinStaG would have to be separately examined and approved by the EC (BMF 2015b).

Under FinStaG, the federal government could not use more than €15 billion for recapitalization measures. This budget could be augmented if there were funds left over from the €75 billion that was allocated for IBSG (IBSG and FinStaG 2008). This cap was later increased multiple times; in 2016, a €1.5 billion increase brought the legal limit to €23.5 billion (BMF 2017).

FinStaG stipulated that the government could recapitalize credit institutions operating in Austria as defined by the Banking Act, which included branches of foreign banks, and domestic insurance companies as defined by the Insurance Supervision Act (IBSG and FinStaG 2008).

Participation capital, which was introduced in Austria 30 years before the crisis, was used to provide equity to credit institutions and insurance companies. In the context of the financial crisis, participation capital was seen as “a surrogate for the equity which was destroyed by the financial crisis and cannot be recovered through a relevant issuance of share capital,” (Kalss 2010, 541). Participation capital did not grant the Republic of Austria any position or membership rights under stock corporation law, giving the government no direct influence over the beneficiary institution. According to Kalss (2010, 540), the preference for participation capital stemmed from the banks’ influence on the writing of FinStaG and their input during individual negotiations for institutional recapitalization.

In determining the terms and conditions for participation capital, the beneficiary institution had to be judged either sound or distressed. This judgment was made in line with the EC’s Recapitalisation Communication and depended upon a variety of factors, including the volume of recapitalization, equity base, and risk profile of the institution (Kalss 2010, 544). Sound banks were charged an interest rate in line with market conditions but not less than 9.3% annually. For distressed institutions, the minimum interest rate was 10% (Petrovic and Tutsch 2009).

If a sound bank was able to raise 30% of the capital privately, the minimum interest rate would no longer apply. Of this 30%, a maximum of one third could be raised from existing shareholders (Kalss 2010, 544).

Though FinStaG provided the legal framework for recapitalization, once it was deemed necessary to use measures for a specific institution, the Austrian government and the relevant institution signed a master agreement dictating specific terms and conditions (Kalss 2010, 539). FinStaG gave the minister of finance the power to set conditions for the use of recapitalization measures. These conditions could regulate the orientation of the institution’s business policies (for example, providing loans to small and medium-sized enterprises), payment of executives and employees, the use of the funds, and distribution of dividends, and more (IBSG and FinStaG 2008). Guidelines for these master agreements were established by the minister of finance’s ordinance (see “Key Design Decision No. 3”), but these guidelines were flexible enough to be tailored to each recapitalization intervention (Kalss 2010, 538–39).

According to FinStaG, the government was required to privatize any shares or interests in a credit institution or insurance company it acquired once the economic disruption triggering the recapitalization measures had been remedied. The law also stated that in privatizing shares or partnership interests, “the situation on the capital market shall be taken into account” (IBSG and FinStaG 2008).