Austria Central Bank Says Independence Damaged in FMA Revamp

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

The independence of Austria’s central bank and the banking watchdog are damaged by the government’s plans to revamp the oversight for lenders, Oesterreichische Nationalbank said in comments on a draft law.

The new law would force the central bank to pay out 95% of its profit to the government in the future, further limiting its ability to set aside funds for emergencies, according to the statement, signed by Governor Ewald Nowotny. Changes to the board of financial watchdog FMA, which will take over banking supervision from the central bank, may make it beholden to political interference, said the report, was posted on the Austrian parliament’s website.

The draft law, presented in April, will end the dual structure of Austrian banking supervision, which was split between the Financial Market Authority and the central bank for almost two decades. Finance Minister Hartwig Loeger has said the new setup will “make the entire system more efficient and remove unnecessary duplication,” “accelerate and simplify decision-making” and “strengthen service-orientation.”

Central banks around the world, whose independence was seen as sacrosanct during the financial crisis, are increasingly becoming the whipping boys of elected officials, dragging them though the mud or nibbling away at their powers.

Italy’s populist government has criticized the Bank of Italy’s banking supervision, Bank of England Governor Mark Carney has been accused of bias in the Brexit debate, while U.S. President Donald Trump frequently called on Jerome Powell to cut interest rates.

In Austria, the terms of the entire central bank leadership expire over the course of 2019, and Chancellor Sebastian Kurz has seized the opportunity and installed new officials. Carving out banking supervision will move around 180 staff and key powers to the FMA. The current set-up was defined in 2007 after watchdogs prone to political influence failed to prevent bank scandals at Bawag PSK Bank AG and Hypo Alpe-Adria-Bank International AG.

The draft law ousts one of the two FMA heads, Helmut Ettl -- who had been named by the central bank -- before his term expires in 2022 to leave Klaus Kumpfmueller as sole head. The “four eyes” system will be maintained at the FMA, with one of three executive directors providing the second pair of eyes. That arrangement weakens the FMA’s governance, according to the central bank. Ettl’s removal via a law could also undermine the independence of the remaining head, it said.

Austria’s finance ministry said in a statement that the requirement to pay out 95% of the profit didn’t impact the central bank’s ability to set aside reserves and that governance at the FMA will be improved in the new setup with executive directors.

©2019 Bloomberg L.P.