Money and Banking

Money and Banking

The Austrian banking system is under the broad direction of the Nationalbank, the Austrian central bank, in coordination with the Austrian government. The bank is centralized, unlike the United States Federal Reserve System. It is the bank of issue and enjoys substantial autonomy, while consulting with the Austrian government.

Austria's currency, the schilling, is strong and stable. There was an attempt to float it in 1973, when various global currencies floated after the collapse of the Bretton Woods system, but in July 1976 the schilling was formally pegged to West Germany's currency, the deutsche mark. This policy was abandoned in December 1977, but the schilling remained stable in relation to the deutsche mark through management of short-term interest rates and through careful efforts to control the Austrian monetary supply. In practice, the policy meant that Austria was an informal member of the European Monetary System (EMS) and its exchange rate mechanism ERM since their establishment in 1979, and the country was expected to join the European Monetary Union (EMU) under whatever arrangement and timing might finally be agreed.

The principal banks are full-service banks, of which there were about fifty-five with approximately 850 branches at the end of 1991. They transact all kinds of business and also channel credit for all purposes. Many of them function only regionally, but the two largest--the Creditanstalt-Bankverein and the Österreichische Landesbank--operate throughout Austria. The state owns majority shares in both those banks. A 1991 merger between the Österreichische Landesbank and the Zentralsparkasse created Austria's largest bank, Bank Austria, and other mergers could follow to make Austrian banking more competitive within the larger European framework.

The banking system consists of a number of other kinds of institutions as well. These include the ten provincial mortgage banks (Hypobanken), with 124 branches in 1989; the savings banks (Sparkassen), of which there were about 126 with 1,278 branches in 1988 that function as regular local banks despite their name; the people's bank (Volksbanken), of which there were 103 with 323 branches in 1989 that serve small business as commercial credit cooperatives; the agricultural credit cooperatives (Raffeisenkassen), of which there were 863 in 1989 with over 1,600 branches; and a small number of private banks and specialized institutions.

The system is locally and regionally based, with savings and credit channeled at the district level; full-service banks serve large companies. The post office system, with over 2,000 branch offices throughout Austria, also plays an important role in household savings. Austria has one of the highest savings rates in the OECD, and most of the funds saved are deposited in the banking system.

Banks play the central role in the Austrian financial system, especially in corporate finance. They carry out not only regular deposit and lending activities but also such other functions as portfolio management and investment advice. Because most savings are deposited in banks, banks are the principal source of funds for business. Austrian banks tend to maintain close relations with industry, especially with the firms to which they have extended credit. Banks are often represented on supervisory boards or, at the very least, play prominent roles in advising firms with respect to business and investment decisions. Austrian financial markets reflect this situation. There is an important bond market, largely for government and bank issues and for utilities, about eight times as large as the equity market. The debt-to-equity ratio for corporate financing is high, more like the German model than the British or United States model. In the early 1990s, the Vienna stock exchange was a very limited market, although it will probably become more important as the privatization of nationalized companies continues. The money market is also dominated by banks.

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