Sixth meeting of the Financial Market Stability Board

In its sixth meeting on November 26, 2015, the Financial Market Stability Board (FMSB) discussed, and agreed on the key points of, the macroprudential policy strategy for Austria. The FMSB furthermore recommended setting the countercyclical capital buffer (CCB) rate at 0%. Further items on the agenda were the recent developments in the Austrian financial sector, especially against the backdrop of the low interest rate environment, and macroprudential instruments geared toward real estate funding.

The macroprudential policy strategy for Austria

The macroprudential policy strategy lays down the cornerstones for implementing macroprudential supervision in Austria with a view to fostering decision-making processes as well as communication and accountability to the general public. The European Systemic Risk Board (ESRB) had issued a recommendation1 in 2013 to develop such an overall policy strategy by the end of 2015.

In line with this policy strategy, macroprudential supervision in Austria aims at safeguarding the stability of the Austrian financial system as a whole by pursuing and meeting the following intermediate objectives:

Mitigating and preventing excessive credit growth and leverage,
mitigating and preventing excessive maturity mismatches between financial companies’ assets and liabilities as well as liquidity shortages in the markets,
limiting direct and indirect exposure concentrations,
limiting the systemic impact of misaligned incentives, in particular with a view to reducing moral hazard,
strengthening the resilience of financial infrastructures,
minimizing information deficits.

Once adopted, the macroprudential policy strategy will be published on the FMSB’s website both in English and German.

Recommendation for the activation of the countercyclical capital buffer

The FMSB reaffirmed its recommendation to the Austrian Financial Market Authority (FMA) to set the countercyclical capital buffer (CCB) rate at 0% of risk-weighted assets. Total outstanding loans relative to GDP have fallen well below their long-term trend, and Austrian banks continue to have sound balance sheets in terms of their unconsolidated aggregate leverage ratios (tier ¹ capital relative to total assets). Furthermore, the Austrian current account does not point to any major imbalances in terms of economic growth.

Discussion on systemic risks arising from real estate funding

International research shows that real estate price booms, once they have subsided, may result in substantial welfare losses. If such booms go hand in hand with strong credit growth, systemic risks are set to increase. Up to end-2012, property prices rose substantially in Austria as a whole, and, in Vienna, this uptrend continued – at an even faster pace – until early 2014. While mortgage credit growth had remained subdued during the property price boom, it gained momentum in recent quarters, and both the loan-to-value ratio² and the debt-to-income ratio³ have started to deteriorate.

Based on these developments, the FMSB concluded that there was no immediate cause to activate macroprudential instruments regarding real estate funding. Nevertheless, the FMSB considers it necessary to extend the macroprudential toolkit with a view to aligning it with international best practice. To this end, it will start working on a respective recommendation in the first quarter of 2016. Such an extension of the toolkit is to ensure that the authorities will be well equipped to respond to the systemic risks associated with real estate price booms and to rein in an accelerated buildup of systemic risks when properties are increasingly being leveraged during a protracted upswing in the real estate market.

Effects of the low interest environment on Austrian banks

The current environment of low interest rates poses an additional challenge to Austrian banks, which are already under scrutiny on account of their capital ratios and risks arising from foreign currency lending and activities in emerging markets. At bank level, average interest margins have been compressed steadily over the past years, which is to some extent attributable to the declining interest rate level; as a result, banks’ ability to raise capital internally has been limited. Small and medium-sized banks were hit harder by the compression of interest margins, because their business models rely more strongly on funding through customer deposits and a physical branch network. However, the contraction of defaults on loans in Austria and stepped-up investment in higher-yielding asset classes (corporate and household loans versus bank and general government loans) have partly offset the generally decreasing interest rate level of recent quarters. The FMSB furthermore considers additional options for cushioning the impact of the prevailing low interest rates by improving the sector’s operational and structural efficiency. It will continue monitoring the challenges arising from a protracted period of low interest rates in its regular risk discussions and warns against the risks associated with the search for yield. Moreover, the FMSB points out that rising interest rates go hand in hand with risks both for borrowers and banks, in particular given that a large share of Austrian loans are variable rate loans.

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 Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (ESRB/2013/1).

² The outstanding loan relative to the property value.

³ A borrower’s total debt relative to his or her overall income.