Fifth meeting of the Financial Market Stability Board

In its fifth meeting of September 7, 2015, the Financial Market Stability Board (FMSB) decided to adjust its recommendations to the Financial Market Authority (FMA) regarding the activation of the systemic risk buffer (SRB) and the buffer for other systemically important institutions (O-SII buffer) in the light of developments at European level. Further items on the FMSB's agenda included keeping the countercyclical capital buffer at 0%, the most recent developments in the Austrian financial sector, as well as the potential application of additional macroprudential instruments to counteract risks associated with real estate financing.

Adjustment of the recommendation issued after the fourth meeting of the Financial Stability Market Board regarding the activation of the systemic risk buffer

In its fourth meeting, on June 1, 2015, the FMSB had decided upon the recommendation to activate macroprudential capital buffers of up to a total of 3% to strengthen the Austrian banking sector. These buffers are to be applied in addition to the applicable supervisory SREP ratio¹.

Since this meeting, the Supervisory Board of the ECB has preliminarily determined the SREP ratios to be applied in 2016². These are markedly higher than the CET1 ratios on which the recommendation had been originally based. This is assumed to mitigate systemic risk as well. In light of this development, the FMSB recommends that the FMA limit the systemic risk buffer to 2% of risk-weighted assets.

Furthermore, to ensure a smooth implementation of the cumulated capital requirements in analogy with the Basel III phasing-in process, the FMSB recommends a longer and more gradual implementation horizon for building up the systemic risk buffer (SRB) and the buffer for other systemically important institutions (O-SII buffer) to banks that are directly supervised by the ECB³. To facilitate operational implementation, systemic risk buffer requirements (and the transitional buffer ratios applied for the purpose of their gradual implementation) shall enter into force at the beginning of a calendar year. To avoid further delays, and since the burden on banks is mitigated through the phasing-in process (target buffer values are to be achieved gradually in progressive steps), the initial application of the systemic risk buffer is to be brought forward to January 1, 2016.

On this basis, the following systemic risk buffers shall apply:

Recommendation for the activation of the countercyclical capital buffer

Based on the currently available data, the FMSB again recommends that the FMA set the countercyclical capital buffer at 0% of risk-weighted assets with effect from January 1, 2016. The countercyclical capital buffer is supposed to shield the banking system from the effects of cyclical systemic risks, which may in particular arise from unsustainable lending on an aggregated level. The growth of outstanding credit volume as compared to GDP growth currently does not indicate the need to recommend such a buffer. Further indicators support this assessment: Austrian banks continue to record sound balance sheets in terms of their unconsolidated aggregated debt ratios (tier 1 capital relative to total assets). Furthermore, the current account does not point to any major macroeconomic imbalances in terms of economic growth.

FMSB discusses possibility of additional instruments

Strongly rising real estate prices accompanied by expanding debt levels may increase borrowers' and lenders' vulnerability to crises. Past experience has shown that overvaluation in the real estate market that is coupled with a strong rise in real estate lending is often a trigger for systemic financial crisis. Different countries have implemented caps on loan-to-value (LTV) ratios, debt-to-income (DTI) ratios and debt service-to-income (DSTI) ratios as instruments to address systemic risks associated with real estate financing.

So far, the price increases on the Austrian housing market have not been accompanied by excessive mortgage lending growth. Over the medium or long term, however, macroprudential risks could arise in the wake of a real estate price boom. As a first precautionary step, the FMSB has started discussing how additional instruments might be applied, should the need arise. At the moment, however, the FMSB sees no need for their application.

Information on the FMSB

The FMSB, which became operational in 2014, works toward strengthening financial stability. The members of the FMSB are representatives of the Federal Ministry of Finance, the Fiscal Advisory Council, the Financial Market Authority (FMA) and the Oesterreichische Nationalbank (OeNB). The FMSB may issue recommendations to the FMA and provide risk warnings.

 

_{¹ SREP: Supervisory Review and Evaluation Process.}

_{² The final decision of the Supervisory Board/Governing Council of the ECB is expected for November 2015.}

_{³ The risk buffers applicable to banks that are not directly supervised by the ECB do not need to be adjusted.}