Trends and Developments in EU Banking Regulation: An Austrian Perspective

Introduction

The banking regulatory landscape in the European Union (EU) is complex, with the aim of establishing a very secure, harmonised market, fostering financial stability. Austrian banking and financial services laws largely align with the standards set by the European legislator. Some of the most interesting recent developments include the evaluation of the widely discussed Credit Institutions Real Estate Financing Measures Regulation (KIM-Regulation), the upcoming implementation of the sixth Capital Requirements Directive 2024/1619 (CRD VI) and, on the national level, the adoption of accompanying measures for current EU acts and the implementation of Directive (EU) 2023/2225 on credit agreements for consumers.

Commercial real estate risk buffer

In late 2024, due to the considerable risks of commercial real estate lending for the banking sector, the Financial Market Stability Board (FMSB) recommended introducing a sectoral systemic risk buffer of 1% for commercial real estate loans, to be applied at both the consolidated and unconsolidated levels for all banks. This buffer will also cover commercial residential construction but will exempt non-profit housing. The risk-weighted exposure amounts of these loans will serve as the basis for calculating the buffer.

This stands in contrast to the expiration of the KIM Regulation at the end of June 2025. This regulation, effective since August 2022, limits the systemic risks associated with leveraged financing of residential properties. The regulation applies to newly agreed private residential property financing. It sets a maximum loan-to-value ratio of 90%, a debt-service-to-income ratio of 40%, and a maximum loan term of 35 years, with exception quotas of 20%, 10% and 5%, respectively. 

The banking division is critical of the sectoral systemic risk buffer, as it has a pro-cyclical effect and forces banks to tie up more equity for existing exposures, thereby restricting lending. In addition, risks from commercial real estate are already addressed through Pillar 2 capital surcharges. With the introduction of Basel IV under the revised EU Capital Requirements Regulation (CRR III), capital requirements for commercial and residential real estate will increase significantly from 1 January 2025, further intensifying these constraints.

This sectoral systemic risk buffer requires banks to allocate additional equity for existing exposures, thus limiting their lending capacity. While the commercial real estate buffer is intended to address systemic risks, financing for non-profit housing has been excluded from the measure, as analyses by the Austrian National Bank (OeNB) confirm that these loans do not pose systemic threats. The FSMB plans to reassess the necessity of further buffer increases in Q3 2025, once initial reporting data under CRR III becomes available.

In parallel, the FMSB recommended maintaining a counter-cyclical capital buffer (AKZP) of 0% of risk-weighted assets, reflecting subdued credit growth and systemic risk conditions. In Q2 2024, Austria's nominal GDP growth was 1.9% year-on-year, while real GDP contracted by -1.9%. The credit-to-GDP gap indicator remained at -15 percentage points, far below the critical threshold of 2 percentage points, justifying the continued AZKP rate of 0%.

Despite the low credit-to-GDP gap, the FMSB flagged risks linked to the credit cycle. Risk weights for corporate loans, which include a high proportion of commercial real estate loans, remained at historically low levels. Moreover, insolvency rates have risen above pre-pandemic levels, negatively affecting credit quality, while corporate debt levels are near historic highs.

To improve cyclical risk assessment, Austria will implement a new methodology for identifying cyclical risks in 2025. This approach will integrate data from banking, household, corporate, macroeconomic, financial market and credit-to-GDP gap indicators, based on current research and literature. Such proactive measures aim to strengthen forward-looking risk provisions and maintain a capital base comparable to European peers, countering the potential materialisation of cyclical risks.

CRD VI effect on cross-border banking and third-country branch regulation in Austria

CRD VI will significantly impact the way third-country firms provide core banking services into the EU and how third-country branches (TCBs) will be supervised. CRD VI is expected to be implemented into Austrian law by Q4 2025. Although there are some transitional provisions, third-country firms would be wise to start planning now. The EU’s regulatory landscape has seen significant changes aimed at reducing risks associated with cross-border banking activities and addressing potential issues in shadow banking. Key regulatory initiatives, like CRD VI, demonstrate the EU’s commitment to a more cohesive supervisory framework.

Overview of CRD VI implementation and third-country requirements

Under CRD VI, member states will be encouraged to impose stricter requirements on non-EU institutions establishing a physical presence within the EU through branches. Austria’s financial regulatory authority, the FMA, has interpreted these provisions to require TCBs to maintain minimum capital requirements and adhere to specific operational standards.

This means that foreign banks seeking to operate in Austria through branches rather than subsidiaries face stringent regulations intended to align with the EU's prudential standards. The FMA has stipulated that such branches demonstrate effective internal controls, risk management procedures and compliance frameworks comparable to those of Austrian and EU banks. TCBs are also subject to comprehensive disclosure and reporting obligations, to facilitate FMA oversight.

Implications for foreign banks operating in Austria

For third-country banks, these requirements translate into substantial compliance investments. Notably, foreign banks must ensure they are able to meet Austria's expectations on capital adequacy, which includes maintaining capital buffers that may exceed the EU's minimum requirements depending on the branch's risk profile. TCBs should also anticipate close monitoring from the FMA regarding their liquidity and funding structures. Austria’s regulatory emphasis on financial stability necessitates robust liquidity management practices to safeguard against potential market disruptions.

Licensing and reverse solicitation

Austria has historically been cautious about foreign banks conducting cross-border activities within its jurisdiction. The FMA requires all banks engaging in active client solicitation within Austria to obtain the appropriate licences, even if these activities are conducted digitally or through reverse solicitation. Austria’s stance on reverse solicitation – wherein clients initiate contact with foreign banks without any direct marketing or solicitation – has been shaped by recent regulatory clarifications at the EU level, which have aimed to restrict the breadth of activities that may fall under this exemption.

Austrian regulators have adopted a narrow interpretation of reverse solicitation, requiring that any outreach by a bank to Austrian clients is either unsolicited or accompanied by licensing. For instance, if a foreign bank provides marketing material or facilitates the onboarding process for Austrian clients, it may be deemed to have engaged in solicitation, thereby necessitating a licence. This conservative approach reflects Austria’s aim to protect local investors and ensure that foreign financial institutions operate under similar regulatory standards as domestic banks.

Foreign banks must exercise caution when considering reverse solicitation as a means of accessing the Austrian market. The FMA’s strict interpretation implies that even minor interactions could trigger licensing obligations, resulting in administrative penalties if a bank is found to be non-compliant. Consequently, banks interested in serving Austrian clients should assess their activities carefully and consider alternative routes, such as establishing a licensed branch or subsidiary, to avoid potential regulatory complications.

Austria’s capital adequacy standards for banks

Austria’s banking regulations enforce capital adequacy standards in line with CRD VI, with additional requirements for TCBs. These standards are designed to ensure that banks maintain sufficient capital reserves to absorb potential losses and withstand market fluctuations. TCBs in Austria are subject to capital buffer mandates, which may include the counter-cyclical capital buffer and systemic risk buffer, depending on their level of market exposure and the FMA’s assessment of their risk profiles.

Liquidity requirements for third-country branches

In addition to capital adequacy, liquidity requirements are a focal point in Austria’s regulatory framework. TCBs must demonstrate that they can maintain adequate liquidity coverage ratios (LCRs) and net stable funding ratios (NSFRs) to support their operations during stressed market conditions. The FMA mandates that these branches periodically report their liquidity levels and funding structures to ensure alignment with Austria’s financial stability goals. The implementation of these liquidity requirements reinforces Austria’s commitment to reducing systemic risk and safeguarding the local financial market.

For international banks, compliance with these liquidity requirements may necessitate adopting specific funding strategies, such as diversifying funding sources or holding more liquid assets. The cost of meeting these liquidity ratios can be considerable, particularly for banks with significant exposure to Austrian clients or those managing large portfolios of complex financial instruments.

Governance standards for foreign banks in Austria

Austria has implemented corporate governance standards that are applicable to both domestic and foreign banks, with an emphasis on transparency, accountability and risk management. Banks operating in Austria, including TCBs, must establish governance frameworks that promote effective decision-making, risk oversight and ethical business conduct. The FMA requires these banks to appoint local representatives who are responsible for ensuring compliance with Austrian regulations and who can be held accountable for governance failures.

A notable development in Austria’s governance standards is the requirement for foreign banks to integrate environmental, social and governance (ESG) considerations into their risk management processes. This expectation aligns with Austria’s national goals of fostering sustainable finance and supporting the EU’s broader ESG agenda. Banks are encouraged to assess ESG risks within their portfolios and consider these factors when making investment decisions.

Risk management and ESG compliance

Austria’s emphasis on ESG in banking governance has led the FMA to establish specific guidelines for assessing and managing ESG risks. Banks are expected to incorporate ESG factors into their risk assessments, particularly those related to climate change and social impact. For international banks, this may entail adapting existing risk management frameworks to meet Austria’s standards, potentially requiring investment in specialised ESG expertise and technology.

The FMA’s oversight extends to verifying that banks adequately address both traditional financial risks and emerging ESG-related risks. This dual focus reflects Austria’s proactive approach to ensuring that its banking sector remains resilient in the face of both market volatility and societal pressures for sustainable finance.

Austria’s role in EU-wide supervisory efforts

Austria collaborates closely with the European Banking Authority (EBA) and other EU regulatory bodies to align its banking regulations with EU standards. The FMA participates in EU-wide stress testing and regulatory benchmarking exercises, which provide insights into the resilience of Austrian banks relative to their European counterparts. These co-ordinated efforts support Austria’s objectives of maintaining a stable and competitive banking environment that can withstand cross-border shocks.

Supervisory approaches to cross-border banking

In practice, Austria’s involvement in the EU’s supervisory architecture means that the FMA adopts a harmonised approach to overseeing cross-border banking activities. The FMA has implemented the EU’s Single Supervisory Mechanism (SSM), which establishes a framework for the consistent supervision of significant banks operating across EU member states. This framework enables Austria to maintain rigorous oversight while fostering greater integration within the EU banking sector.

For foreign banks operating in Austria, the SSM’s implementation facilitates smoother interactions with regulators and reduces potential compliance burdens associated with multi-jurisdictional operations. However, these banks must remain vigilant in complying with both Austrian and EU-level regulations, as failure to do so may attract scrutiny from multiple regulatory authorities.

Practical implications for international financial institutions – compliance strategies

The cumulative impact of Austria’s regulatory framework on foreign banks necessitates a comprehensive compliance strategy. International banks must consider Austria’s unique interpretations of EU regulations, particularly regarding capital, liquidity and governance standards. Compliance costs can be significant, particularly for banks operating through TCBs, which face additional requirements on capital reserves and liquidity management.

One effective compliance strategy for foreign banks is to engage with Austrian regulatory experts who are well-versed in both EU and local regulations. This approach enables banks to navigate the complexities of Austria’s regulatory environment more effectively and reduce the risk of non-compliance.

Practical implications – considerations for market entry and expansion

For banks contemplating entry into the Austrian market, careful consideration of the licensing and operational requirements is essential. Austria’s stringent licensing regime and narrow interpretation of reverse solicitation mean that banks must be prepared to either establish a licensed branch or structure their operations in a manner that does not trigger solicitation rules. Establishing a physical presence, although more costly, may provide greater regulatory certainty and allow for a wider range of client services.

Banks with existing operations in Austria may benefit from reviewing their governance frameworks and ESG risk management practices to ensure compliance with Austria’s evolving standards. As Austria continues to prioritise financial stability and sustainability, banks should anticipate further regulatory developments in these areas.

Conclusion

Austria’s approach to banking regulation reflects its commitment to financial stability and alignment with EU standards. Foreign banks seeking to operate in Austria face a robust regulatory environment that demands adherence to capital, liquidity and ESG standards. By understanding these requirements and adapting their operations accordingly, international banks can position themselves for success within Austria’s competitive banking landscape.

Implementation of the new EU Consumer Credit Directive

The Austrian Ministry of Justice has circulated an initial draft for implementing the EU Consumer Credit Directive (Directive (EU) 2023/2225), which introduced significant changes to harmonise consumer protection across member states in credit transactions. Scheduled for implementation by November 2025, the Directive replaces the 2008 framework. In Austria, its civil law aspects will be incorporated into a new Consumer Credit Act (Verbraucherkreditgesetz – VKrG), while supervisory provisions will be addressed by respective ministries. The Directive’s expanded scope and enhanced requirements reflect a response to modern market practices, including the rise of “buy now, pay later” schemes, necessitating broader inclusion of credit types and stricter consumer protections.

The draft is intended as an initial discussion framework and is being reviewed within a working group at the Ministry of Justice. A particularly contentious point in the draft is the proposal to introduce an interest rate cap to curb excessively high interest rates on consumer credit. However, the draft rejects the proposal to invalidate contracts with excessively high interest rates, referencing the existing Austrian usury law (Section 879 of the Austrian Civil Code, which already prevents grossly disproportionate transactions).

The draft implementing act closely follows the EU Consumer Credit Directive, with some adjustments tailored to the Austrian legal landscape, particularly in areas such as the interest-free loan exemption, the consumer definition and the pre-contractual information obligations. These amendments are designed to enhance consumer protection while maintaining the integrity of Austria’s existing laws on credit and consumer finance. Member state options that would make the rules stricter were generally not adopted.