THE BANKS EMERGE FROM OBSCURITY
Austria's policymakers are preoccupied with a banking problem of their own making. In 1979 they introduced legislation that allowed the different types of banks to engage in all manner of banking business. All the savings institutions were placed on the same footing and in 1980 fixed-interest rates were removed. The result was a tremendous upsurge in competition in a very short time--too short, as it turned out, for the banks to adjust.
In the six years since 1979, despite the fierce competition, there has been little change in the way the banking pie is cut. The one enduring result has been an erosion of margins to the stage where capital ratios for all Austrian institutions are now down to 2.5% of liabilities.
Klaus Mundl, an executive director at the National Bank, summed up the developments. "What we had was a country with a large number of banks competing in a market that wasn't growing very much, in a situation where credit demand wasn't very strong and where the main demand for credit comes from the public sector. The banks had depressed interest rates on the asset side, competition was squeezing margins on the lending side.'