16th meeting of the Financial Market Stability BoardJuly 4, 2018
In its 16th meeting on July 4, 2018, the Financial Market Stability Board (FMSB) adopted three recommendations to the Austrian Financial Market Authority (FMA) concerning the macroprudential capital buffers. Looking back, the FMSB concluded that macroprudential supervision has contributed substantially to reducing systemic risks in the past few years. Standard & Poor’s (S&P’s) rating upgrade for the Austrian banking system in May of this year attests to this favorable development. The Austrian banks and, by extension the Austrian economy, consequently benefit from lower risk premiums. S&P considers the Austrian banking system to be one of the most stable banking systems worldwide. Moreover, the FMSB re-addressed sustainable lending standards in real estate funding.
FMSB wraps up its evaluation of the systemic risk buffer
In its 16th meeting, the FMSB completed the evaluation (started in 2017) of its 2015 recommendation on the systemic risk buffer. Systemic risks decreased as Austrian banks both improved their capitalization and downsized their foreign business (without scaling back lending to the real sector in Austria), which reduced the overall size of the banking sector in relation to Austrian GDP. Nevertheless, the structural systemic risk in the Austrian banking sector continues to be elevated. As before, risks for the banking system emanate in particular from the substantial exposures to emerging markets in Europe, weak structural profitability, contagion effects and banks’ specific ownership structures. These risk factors corroborate the need for a systemic risk buffer. For details and bank-specific information, see the recommendation FMSG/2/2018.
FMSB recommends extending the list of (other) systemically important banks
Having reevaluated the systemic importance of individual banks, the FMSB concluded that the list of (other) systemically important institutions (O-SIIs) should be extended. It therefore recommends to apply the O-SII buffer to seven – instead of today’s six – banks. In addition, the FMSB concluded that banks may also be systemically relevant at the unconsolidated level. For details and bank-specific information, see the recommendation FMSG/3/2018.
FMSB recommends keeping the countercyclical capital buffer (CCyB) rate at 0%
As lending to domestic borrowers does not indicate excessive credit growth, the FMSB confirmed its recommendation to the FMA to leave the rate for the countercyclical capital buffer for risk-weighted assets at 0% from October 1, 2018 (FMSG/4/2018).
FMSB re-addresses the sustainability of real estate lending
The FMSB first raised the issue of how important sustainable lending standards in real estate lending are for preventing the buildup of systemic risks in the real estate sector in the press release following its ninth meeting, in September 2016. International experiences show that the bursting of credit-financed real estate price bubbles may generate high economic costs.
Unlike many other countries, Austria has been spared from the emergence, and subsequent bursting, of a debt-financed housing bubble over the past decades. With interest rates remaining persistently low and real estate prices expected by borrowers to rise further, one cannot rule out structural change which might go hand in hand with an easing of credit standards.
The FMSB will continue to monitor the development together with the FMA and the Oesterreichische Nationalbank (OeNB), and address this issue as a priority in its next meeting. Should it identify a buildup of systemic risks from real estate lending, the FMSB will recommend to the FMA measures in line with Article 22b Austrian Banking Act, which took effect on July 1, 2018.
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.