Assessing the Relevance of Austrian Investment Companies and Mutual Funds for Financial Stability

This paper looks at the role Austrian investment companies and the mutual funds managed by them play in the context of financial stability. At the end of the third quarter 2009, the 30 Austrian investment companies (of which 5 manage real estate funds) had invested around EUR 114 billion in the market. Given the repercussions arising from interlocks between investment companies and other financial intermediaries (such as credit institutions, insurance companies, pension funds and severance funds) in the event of a financial crisis, this study explores the underlying risks and makes an attempt at quantifying the mutual dependencies, focusing above all on market and reputational risks. Areas that are relevant for financial stability include the contribution of investment companies to the profitability of banks and the potential risks related to the role of custodian banks. Furthermore, the distribution and administration of mutual funds issued by investment companies affiliated with banks is a source of commission income for the banking sector. Finally, the use of mutual funds (in unit-linked life insurance plans) as repayment vehicles for foreign-currency bullet loans may cause funding gaps in the event of poor fund performance, which could increase the credit risk exposure of the banks involved.