Austria
30 August 2011
Though securities lending activity has stalled in Austria, as has the country’s economic recovery, the market appears due for a boost.
Image: Shutterstock
The Austrian economy’s recovery has started to sputter. As a whole, GDP is expected to rise 3.1 per cent this year. However, this is a reflection of a strong first half followed by a slump, according to Bank Austria’s latest business indicator report, which notes that dampened consumer and industrial sentiment persist, and that foreign trade, which had fuelled the upturn to this point, has lost momentum.
“Economic sentiment has worsened across the board during the summer...both consumers and industry alike are taking a less optimistic view of the coming months,” wrote Walter Pudschedl, economist at Bank Austria.
And the outlook for 2012 shows an expectation of GDP growth under two per cent on the back of volatile international conditions that will “burden Austria’s economy”.
In other words, after pre-crisis levels were reached in many areas, it is becoming clearer that there is not enough momentum for a lasting upswing as the eurozone debt crisis, the US fiscal outlook and bearish market sentiment take hold. In addition, consumer sentiment turned downwards in Germany, Austria’s largest trading partner.
One of the bright spots in the economic outlook was an optimistic labour market – Austria, with a population of about 8.5 million, added 30,000 people to the working ranks during the first half of the year - but the trend has been reversing since April, writes Bank Austria.
Moreover, a one per cent hike in inflation is hampering any recovery and it is expected to stay over three per cent in the coming months, adds Bank Austria.
Though this evidence points to faltering business confidence, at the same time, investment growth is expected to continue throughout this year at a “more or less stable rate of a little below one per cent quarter-on-quarter, wrote Pudschedl. For 2011 as a whole, Bank Austria forecasts more than seven per cent growth year-on-year in terms of gross fixed capital formation.
“The mood in the industry...is still good, a further expansion is planned and necessary as during the 2008/2009 crisis investments were postponed and the revival started late and slow,” he wrote, adding that the pace of investment recovery is not anticipated to be very fast.
Despite the gloomy mood, certainly not unique to this European country, Austria gets top scores for global competitiveness. The World Economic Forum ranks it 18th of 139 economies overall and sixth for business sophistication in its Global Competitiveness Index (GCI) 2010/11.
However, in terms of financing through local equity markets, Austria’s ranking drops to 58th in the GCI.
Part of the reason for this might be because some aspects of securities financing, such as securities lending, though regulated and practised, is not offered by the Central Depository and there is no lending pool in the market. If needed, an investor has to agree with his custodian bank if such services can be offered, according to a UniCredit country profile.
The Austrian financial regulator, the Financial Markets Authority (FMA) explains that, with regards to securities lending within UCITS funds, especially within ETFs, three supra-national bodies – the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the Financial Stability Board (FSB) – have indicated serous concerns. Particularly in the context of “counterparty risk and abuse as a cheap refinancing tool for illiquid assets”.
The FMA indicates that it shares these concerns and will closely work with the European Securities and Markets Authority (Esma) to find appropriate measures to avoid and mitigate systemic risks in that particular area.
With regards to the Vienna Stock Exchange, which enforced a general ban on short selling transactions for trades executed on the exchange, the regulator presumes that “securities lending is performed to avoid the prohibited uncovered short sales”, and though the FMA states that it has not verified the information, market participants indicate there is no liquid lending pool in Austria.
In the domestic market, Austrian equities currently have 173 million shares out on loan worth $2.5 billion and inventory stands at 453 million shares worth $8.7 billion, according to Data Explorers, while market utilisation stands at 15.7 per cent, reflecting that Austria is the most heavily borrowed European equity market though this is probably due to lack of supply. The most borrowed stocks, according to its data, are Immofinanz, Intercell, Conwert Immobilien Invest and Wienerberger with with between five and nine per cent of shares on loan respectively.
One of the reasons that the Austrian domestic market is so small, is that consolidation has led banks to move their securities lending desks to other regions, for example Bank Austria moved its desk to Munich after becoming part of the UniCredit Group, according to a local trader. Meanwhile, funds are looking outside Austria for trading, he adds.
That means equity financing is dominated by a few players, such as Raiffeisen Bank International (RBI), one of the Austrian banks selected for the most recent European bank stress tests. RBI remained well above the five per cent threshold for its tier one capital ratio in the adverse scenario, at 7.8 per cent, ranking it among the top half of all 90 participating banks across Europe.
Though the domestic market is undeniably small, Austrian banks are well-integrated internationally, says Eugen Puseizer, head of rates at RBI, emphasising that cross-border trade is the prevailing means of business, amounting to between €1 and €2 billion average outstanding volumes at the bank depending on the season.
As opposed to more insulated countries like Israel, the Austrian market is without barriers and not as such a domestic business, except when borrowing securities, he explains, adding that major players in this respect are the larger asset managers such as Raiffeisen Capital Management (RCM), which, along with a number of other asset managers, are the main providers of stock to Austrian banks.
In terms of the wider Western European securities lending market, Puseizer notes that rules are well harmonised and the country follows international legal frameworks such as the Overseas Securities Lending Agreement (OSLA) and Global Master Securities Lending Agreement (GMSLA).
However, a boon to participation, he says would come from better integration of the Central Eastern European (CEE) securities lending market, where RBI has been traditionally involved.
“We face a lot of homework to be done in those countries, like Romania or Russia, where legal issues are not fully sorted out yet, there is still a netting issue and harmonisation in this region would definitely result in more participants in the market, as well as a much better supply of stock,” Puseizer says.
In the same vein, a central depository would increase market participation, but the question is, he says, how and to what extent. Puseizer argues that an international central depository accepted by national banks in Europe would simplify settlement procedure significantly and, though Clearstream or Euroclear operate as central custodians, there is no infrastructure in place which works in all European countries.
At the same time, on the bond financing side, he is optimistic about an “encouraging” project being conducted by European central banks which will allow ECB eligible bond tenders irrespective of where they are held. “If this becomes effective, it will be helpful because it would no longer be a requirement to place ECB eligible bonds with the local central bank...this will be an effective instrument for the securities lending industry when conducting tender activities,” he says.
Though there are no particular restrictions in Austria placing barriers on securities lending, there are some prohibited shorts with regards to banks, as there are in most countries in Europe, as regulators place bans on the practice in a bid to maintain asset prices in the financial services sector.
If there is a restrictive law unique to Austria, he notes, it is associated with mutual funds, which prohibits those mutual funds that are public funds to lend more than 30 per cent of their total assets. Compare this to Germany, where the limitation is that no more than 10 per cent can be borrowed by any one single counterparty, though the entire portfolio can be loaned.
“[The German mutual fund rules ] allow [fund managers] to utilise the total assets...and the risk is spread...this provides additional liquidity and an additional source of income for the fund and I don’t believe it is much riskier,” Puseizer says.
From RBI’s vantage point, the securities lending market at the moment is showing less activity, surprising considering the bearish mood. There is even flattened demand with respect to government bonds, though in general ECB eligible securities are increasingly being used for financing needs.
“It is worth mentioning that we have been facing quite a rise over the last few months in activity in government bonds, which is understandable under the current circumstances,” Puseizer says. “Asset managers have been approached to a much higher extent by borrowers requesting government securities.”
He notes that aside from the current crisis, this increase is the result of Basel III regulations, which will require banks to have a greater portion of holdings in the safest assets, among them ECB eligible government bonds.
“People on [trading desks] are not particularly well informed about the impact on their business [of Basel III]...maybe the controlling units know exactly what is going to happen, but talking trader-to-trader, I have been quite surprised that there is not much interest or knowledge about the details of Basel III...particularly in terms of liquidity,” he says. “Definitely the business models of securities lending will have to be adopted if not significantly changed.”
Puseizer reckons that cash collateral will become more expensive and thus, less frequently used, while the size of up and down grade trades will be done on a much larger scale compared to the levels today as such trades are balance sheet neutral.
This too is in light of the fact that Austria has introduced a bank tax which poses a “significant competitive disadvantage” for the country’s banks, as the tax is related to the size of the balance sheet, also true for countries like Hungary and Switzerland.
“Securities lending is a most important instrument to provide necessary liquidity into securities trading, to fix settlement failures and to generate an additional source of funding,” he says, adding that because of balance sheet neutral transactions, the market is due for a boost in the future.
“Economic sentiment has worsened across the board during the summer...both consumers and industry alike are taking a less optimistic view of the coming months,” wrote Walter Pudschedl, economist at Bank Austria.
And the outlook for 2012 shows an expectation of GDP growth under two per cent on the back of volatile international conditions that will “burden Austria’s economy”.
In other words, after pre-crisis levels were reached in many areas, it is becoming clearer that there is not enough momentum for a lasting upswing as the eurozone debt crisis, the US fiscal outlook and bearish market sentiment take hold. In addition, consumer sentiment turned downwards in Germany, Austria’s largest trading partner.
One of the bright spots in the economic outlook was an optimistic labour market – Austria, with a population of about 8.5 million, added 30,000 people to the working ranks during the first half of the year - but the trend has been reversing since April, writes Bank Austria.
Moreover, a one per cent hike in inflation is hampering any recovery and it is expected to stay over three per cent in the coming months, adds Bank Austria.
Though this evidence points to faltering business confidence, at the same time, investment growth is expected to continue throughout this year at a “more or less stable rate of a little below one per cent quarter-on-quarter, wrote Pudschedl. For 2011 as a whole, Bank Austria forecasts more than seven per cent growth year-on-year in terms of gross fixed capital formation.
“The mood in the industry...is still good, a further expansion is planned and necessary as during the 2008/2009 crisis investments were postponed and the revival started late and slow,” he wrote, adding that the pace of investment recovery is not anticipated to be very fast.
Despite the gloomy mood, certainly not unique to this European country, Austria gets top scores for global competitiveness. The World Economic Forum ranks it 18th of 139 economies overall and sixth for business sophistication in its Global Competitiveness Index (GCI) 2010/11.
However, in terms of financing through local equity markets, Austria’s ranking drops to 58th in the GCI.
Part of the reason for this might be because some aspects of securities financing, such as securities lending, though regulated and practised, is not offered by the Central Depository and there is no lending pool in the market. If needed, an investor has to agree with his custodian bank if such services can be offered, according to a UniCredit country profile.
The Austrian financial regulator, the Financial Markets Authority (FMA) explains that, with regards to securities lending within UCITS funds, especially within ETFs, three supra-national bodies – the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the Financial Stability Board (FSB) – have indicated serous concerns. Particularly in the context of “counterparty risk and abuse as a cheap refinancing tool for illiquid assets”.
The FMA indicates that it shares these concerns and will closely work with the European Securities and Markets Authority (Esma) to find appropriate measures to avoid and mitigate systemic risks in that particular area.
With regards to the Vienna Stock Exchange, which enforced a general ban on short selling transactions for trades executed on the exchange, the regulator presumes that “securities lending is performed to avoid the prohibited uncovered short sales”, and though the FMA states that it has not verified the information, market participants indicate there is no liquid lending pool in Austria.
In the domestic market, Austrian equities currently have 173 million shares out on loan worth $2.5 billion and inventory stands at 453 million shares worth $8.7 billion, according to Data Explorers, while market utilisation stands at 15.7 per cent, reflecting that Austria is the most heavily borrowed European equity market though this is probably due to lack of supply. The most borrowed stocks, according to its data, are Immofinanz, Intercell, Conwert Immobilien Invest and Wienerberger with with between five and nine per cent of shares on loan respectively.
One of the reasons that the Austrian domestic market is so small, is that consolidation has led banks to move their securities lending desks to other regions, for example Bank Austria moved its desk to Munich after becoming part of the UniCredit Group, according to a local trader. Meanwhile, funds are looking outside Austria for trading, he adds.
That means equity financing is dominated by a few players, such as Raiffeisen Bank International (RBI), one of the Austrian banks selected for the most recent European bank stress tests. RBI remained well above the five per cent threshold for its tier one capital ratio in the adverse scenario, at 7.8 per cent, ranking it among the top half of all 90 participating banks across Europe.
Though the domestic market is undeniably small, Austrian banks are well-integrated internationally, says Eugen Puseizer, head of rates at RBI, emphasising that cross-border trade is the prevailing means of business, amounting to between €1 and €2 billion average outstanding volumes at the bank depending on the season.
As opposed to more insulated countries like Israel, the Austrian market is without barriers and not as such a domestic business, except when borrowing securities, he explains, adding that major players in this respect are the larger asset managers such as Raiffeisen Capital Management (RCM), which, along with a number of other asset managers, are the main providers of stock to Austrian banks.
In terms of the wider Western European securities lending market, Puseizer notes that rules are well harmonised and the country follows international legal frameworks such as the Overseas Securities Lending Agreement (OSLA) and Global Master Securities Lending Agreement (GMSLA).
However, a boon to participation, he says would come from better integration of the Central Eastern European (CEE) securities lending market, where RBI has been traditionally involved.
“We face a lot of homework to be done in those countries, like Romania or Russia, where legal issues are not fully sorted out yet, there is still a netting issue and harmonisation in this region would definitely result in more participants in the market, as well as a much better supply of stock,” Puseizer says.
In the same vein, a central depository would increase market participation, but the question is, he says, how and to what extent. Puseizer argues that an international central depository accepted by national banks in Europe would simplify settlement procedure significantly and, though Clearstream or Euroclear operate as central custodians, there is no infrastructure in place which works in all European countries.
At the same time, on the bond financing side, he is optimistic about an “encouraging” project being conducted by European central banks which will allow ECB eligible bond tenders irrespective of where they are held. “If this becomes effective, it will be helpful because it would no longer be a requirement to place ECB eligible bonds with the local central bank...this will be an effective instrument for the securities lending industry when conducting tender activities,” he says.
Though there are no particular restrictions in Austria placing barriers on securities lending, there are some prohibited shorts with regards to banks, as there are in most countries in Europe, as regulators place bans on the practice in a bid to maintain asset prices in the financial services sector.
If there is a restrictive law unique to Austria, he notes, it is associated with mutual funds, which prohibits those mutual funds that are public funds to lend more than 30 per cent of their total assets. Compare this to Germany, where the limitation is that no more than 10 per cent can be borrowed by any one single counterparty, though the entire portfolio can be loaned.
“[The German mutual fund rules ] allow [fund managers] to utilise the total assets...and the risk is spread...this provides additional liquidity and an additional source of income for the fund and I don’t believe it is much riskier,” Puseizer says.
From RBI’s vantage point, the securities lending market at the moment is showing less activity, surprising considering the bearish mood. There is even flattened demand with respect to government bonds, though in general ECB eligible securities are increasingly being used for financing needs.
“It is worth mentioning that we have been facing quite a rise over the last few months in activity in government bonds, which is understandable under the current circumstances,” Puseizer says. “Asset managers have been approached to a much higher extent by borrowers requesting government securities.”
He notes that aside from the current crisis, this increase is the result of Basel III regulations, which will require banks to have a greater portion of holdings in the safest assets, among them ECB eligible government bonds.
“People on [trading desks] are not particularly well informed about the impact on their business [of Basel III]...maybe the controlling units know exactly what is going to happen, but talking trader-to-trader, I have been quite surprised that there is not much interest or knowledge about the details of Basel III...particularly in terms of liquidity,” he says. “Definitely the business models of securities lending will have to be adopted if not significantly changed.”
Puseizer reckons that cash collateral will become more expensive and thus, less frequently used, while the size of up and down grade trades will be done on a much larger scale compared to the levels today as such trades are balance sheet neutral.
This too is in light of the fact that Austria has introduced a bank tax which poses a “significant competitive disadvantage” for the country’s banks, as the tax is related to the size of the balance sheet, also true for countries like Hungary and Switzerland.
“Securities lending is a most important instrument to provide necessary liquidity into securities trading, to fix settlement failures and to generate an additional source of funding,” he says, adding that because of balance sheet neutral transactions, the market is due for a boost in the future.
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