Tenth meeting of the Financial Market Stability Board

In its tenth meeting, on December 1, 2016, the Financial Market Stability Board (FMSB) undertook its annual review of the achievement of intermediate macroprudential objectives and discussed criteria for sustainable real estate financing, given a warning issued by the European Systemic Risk Board (ESRB). The FMSB confirmed its recommendation to leave the countercyclical capital buffer at 0% of risk-weighted assets in the second quarter of 2017.

Macroprudential action ensures achievement of macroprudential objectives

The FMSB had, in its sixth meeting, defined intermediate objectives for the implementation of its macroprudential policy strategy, which are to be reviewed once a year. Its 2016 annual review of both the intermediate objectives and the effectiveness of measures taken showed that there is no need to adjust the intermediate objectives. The FMSB also concluded that the measures taken so far have contributed to achieving those objectives. Cases in point are the activation of the systemic risk buffer and of the buffer for systemically important institutions, as well as the ongoing work on systemic risks that could arise from real estate financing.

Macroprudential measures are adequate in view of real estate risks in Austria

On November 28, 2016, the ESRB issued a warning on medium-term vulnerabilities in the residential real estate sector for Austria and seven other EU countries.¹ While finding the risk-bearing capacity of the banking sector to be adequate, the ESRB identified a number of vulnerabilities related to the rapid rise in (residential) real estate prices, robust mortgage credit growth as well as the risk of a (further) loosening of lending standards. The Austrian finance ministry published a response to this warning, which had been agreed with the Financial Market Authority and the Oesterreichische Nationalbank.

The FMSB arrived at a more differentiated assessment and considered recent measures taken to be adequate in view of the current house price cycle and the current credit cycle. These measures include the initiative to take preventive legislative action and expand the macroprudential toolbox for real estate lending² as well as the communication on the criteria for sustainable real estate lending.³ Several mitigating factors that play a key role in the Austrian real estate market had not been considered adequately in the ESRB’s analysis: the low share of mortgage lending both as a percentage of GDP and in relation to banks’ capital compared with other euro area countries, the low default and loss ratios as well as the comparatively high significance of social housing and rental housing (above all in Vienna).

FMSB highlights interest rate risks for borrowers

The FMSB finds adjustable rate loans to play a significant role in borrowing, even though the share of adjustable rate borrowing has been declining steadily since mid-2014. It cautions borrowers opting for adjustable rate loans amid the current environment of low interest rates to make sure that they will also be able to service their loans should the interest rate level rise again.

No changes to the countercyclical capital buffer

With regard to the countercyclical capital buffer that is applicable from April 1, 2017, onward, the FMSB confirmed its recommendation to the Financial Market Authority to leave the rate unchanged at 0% of risk-weighted assets.

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 and the Oesterreichische Nationalbank. The FMSB may issue recommendations to the Financial Market Authority and provide risk warnings.
 

¹ http://www.esrb.europa.eu/mppa/warnings/html/index.en.html
² https://www.fmsg.at/en/publications/warnings-and-recommendations/advice-2-2016.html
³ https://www.fmsg.at/en/publications/press-releases/2016/Ninth-meeting.html