17th meeting of the Financial Market Stability BoardSeptember 21, 2018
In its 17th meeting on September 21, 2018, the Financial Market Stability Board (FMSB) clarified what it means by sustainable lending. Moreover, the FMSB decided to keep its recommendation on the countercyclical capital buffer unchanged.
FMSB clarifies its understanding of sustainable lending
Systemic risks resulting from residential real estate loans are limited at present, which is above all due to lenders’ high risk-bearing capacity and households’ relatively low debt. To keep such risks at bay also in the future, sustainable lending standards remain key. A few banks have, however, been leaning toward easing their lending standards in the recent past.
For this reason – and also to follow up on the announcement it had made in the press release on its 9th meeting –, the FMSB decided to clarify what it means by sustainable lending in real estate financing. Sustainability in lending can best be achieved, according to the FMSB, by requiring borrowers to provide an adequate down payment when taking out a loan. A down payment lower than a benchmark of 20% of total financing needs is considered to be a cause for concern. Loan terms should not be excessively long and should take into account the income situation over the course of the borrower’s life. Loans with maturities of more than 35 years should be granted only in exceptional cases. Lenders should be conservative in calculating borrowers’ household income and expenditure when making lending decisions to ensure that debt servicing remains within reasonable limits (benchmark of no more than 30% to 40% of household net income). Only verified, regular and sustainable income should be included in this calculation.
Individual indicators alone do not completely reflect credit risk in a real estate loan; therefore, it is crucial that the assessment of the indicators listed above are part of a comprehensive assessment that also comprises other available information.
Together with the Financial Market Authority (FMA) and the Oesterreichische Nationalbank (OeNB), the FMSB will continue to monitor developments in the housing market. Should the FMSB identify a buildup of systemic risks from real estate lending, it may recommend to the FMA measures in line with Article 22b Austrian Banking Act.
FMSB keeps its recommendation on the countercyclical buffer unchanged
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 January 1, 2019 (see recommendation FMSG/5/2018).
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. In particular, the FMSB may issue recommendations to the Financial Market Authority and provide risk warnings.