Ninth meeting of the Financial Market Stability Board

In its ninth meeting on September 23, 2016, the Financial Market Stability Board (FMSB) discussed, in particular, possible criteria for sustainable residential real estate lending and the related framework of recommendations issued by the European Systemic Risk Board (ESRB) as well as systemic risks associated with alternative investment funds. Furthermore, the FMSB confirmed its recommendation to keep the countercyclical capital buffer at 0%.

Sustainable lending standards in real estate lending crucial for maintaining stability and growth

Real estate lending, and especially residential real estate lending, is of crucial macroeconomic importance. With a view to safeguarding stable long-term conditions both for borrowers and lenders, the FMSB considers that sustainable lending standards in real estate lending must be consistently complied with to prevent the build-up of systemic risks and speculation in residential real estate lending. Long-term stability in residential real estate lending is an essential precondition for the provision of sufficient and affordable housing and investment activity in the sector. Also, it is of key importance to the economy as a whole, even more so in the current economic situation. When assessing the sustainability of mortgage lending from the perspectives of banks and consumers, the FMSB, independent of interest rate and real estate cycles, takes into account the following criteria: First, it is essential that the valuation of real estate be based on conservative loan-to-value (LTV) ratios. This means that even if real estate prices were to decline, loans would not become undercollateralized, nor would there be a need to provide additional collateral. In addition, a sufficient buffer should be available for facilitating the realization of real estate collateral, if necessary. Second, households’ debt-to-income (DTI) and debt service-to-income (DSTI) ratios must be taken into account in lending and risk management decisions. In other words, banks must ensure that households are also able to pay back their loans under stress, which may be triggered, e.g., by a decline in household income or unexpected payment obligations. Moreover, a household’s ability to pay back their debt must be strong enough to withstand a plausible interest rate shock that would imply a sudden increase in credit costs. Third, loan pricing must adequately reflect risk, meaning that borrower risk as well as liquidity and capital costs under different scenarios must be covered.

The FMSB will continue to closely monitor the sustainability of lending standards in real estate lending. On the basis of improved reporting, it may specify in more detail the criteria outlined above and issue recommendations if the need arises.

No changes to the countercyclical capital buffer

The FMSB recommends that the Financial Market Authority (FMA) also maintain the countercyclical capital buffer rate of 0% of risk-weighted assets from January 1, 2017, onward. Current quantitative and qualitative analyses do not point to excessive credit growth in Austria. Furthermore, total outstanding loans relative to GDP continue to considerably lag behind their long-term trend.

No systemic risks from leverage finance by alternative investment funds (AIFs)

The FMSB – with reference to end-2015 data – has not identified any systemic risks to the Austrian financial system emanating from the use of leverage finance¹ by AIFs. In fact, there are only very few AIFs in Austria that employ substantial leverage. AIFs include, in particular, hedge funds, private equity funds, real estate funds, institutional funds and fund-of-funds. At the end of 2015, the net assets of AIFs domiciled in Austria amounted to slightly less than EUR 90 billion.

Information on the FMSB

The FMSB, which became operational in 2014, works toward strengthening financial stability. Its members are representatives of the Austrian 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 Leverage means any method by which the manager of an AIF increases the exposure of an AIF it manages whether through borrowing of cash or securities, or embedded in derivative positions or by any other means.