23rd meeting of the Financial Market Stability Board
At its 23rd meeting on March 10, 2020, the Financial Market Stability Board (FMSB) discussed the development of structural systemic risks in the Austrian banking sector and of systemic risks arising from real estate financing, the funding models of deposit guarantee schemes in Austria and the FMSB’s annual report for 2019. The FMSB also affirmed its recommendation to leave the countercyclical capital buffer (CCyB) rate at 0%. Moreover, the FMSB looked into the economic impact of the coronavirus disease (COVID-19) on Austria. In this respect, the macroprudential capital buffers activated in 2016 upon the FMSB’s recommendation have been instrumental in getting banks to strengthen their capital base and in enabling them to maintain a stable supply of credit to the economy also in challenging circumstances.
FMSB launches systemic risk buffer review
As planned, the 23rd meeting marked the kickoff of the FMSB’s review of the systemic risk buffer in 2020. The FMSB noted that the systemic risk buffer has, since its introduction in 2016, successfully addressed structural systemic risks, while continuing to allow for robust growth of lending to businesses and households. The buffer has also considerably improved the way the Austrian banking sector is perceived by investors, rating agencies and international financial institutions. It shores up the banking sector by strengthening risk sharing, and it also supports the supply of credit in the event of crises. As a result, bank rescue packages should be a thing of the past.
FMSB continues to closely monitor systemic risks arising from real estate financing
The data point to a steady increase of systemic risks arising from real estate financing. Growth in lending accelerated noticeably until year-end 2019, as real estate prices continued to go up and interest rates remained low. This drove up the share of real estate finance and mortgage loans in the balance sheets of Austrian banks at a time when they saw their margins dropping on account of tighter competition. In addition, new real estate loans granted in Austria appear to exhibit high debt service-to-income and debt-to-income ratios. In light of this, the FMSB will continue to closely monitor the development in this area in 2020.
FMSB looks into funding models of deposit guarantee schemes in Austria
In its 23rd meeting, the FMSB moreover discussed what implications the funding models of Austrian deposit guarantee schemes might have for systemic risk. To fund payout claims in case of deposit insurance events, deposit guarantee schemes may tap into the deposit guarantee fund and use member institutions’ special contributions as well as credit operations. The FMSB concluded that the funding models have been designed in such a way that they reduce systemic risk, i.e. the risk of contagion for other banks should one institution encounter difficulties. This, in turn, reduces the likelihood that deposit insurance events trigger the need for public bailouts.
FMSB discusses its 2019 annual report
The agenda of the 23rd meeting also included a discussion of the annual report for 2019, when the FMSB celebrated the first five years of its existence. Since convening for the first time in September 2014, the FMSB has successfully contributed to the much improved view that international investors take on the Austrian financial market. As a result, Austria’s financial system and, consequently, companies and households have benefited from low funding costs.
Furthermore, the FMSB assessed its communication on sustainable lending standards in real estate funding, stressing their importance for ensuring financial stability in Austria and holding off intrusive supervisory measures. Moreover, systemic risk monitoring would benefit from the development of a conclusive index for commercial real estate prices.
Lending growth has been brisk, but not excessive, although capital ratios have increased considerably over the past five years. Consequently, the FMSB kept renewing its recommendation throughout 2019 to leave the counter-cyclical capital buffer (CCyB) unchanged at 0% of risk-weighted assets. The annual review of banks identified as other systemically important institutions (O-SIIs) did not result in a change in the number of O-SIIs or in the O-SII buffer rate.
Once the final finance sector data for the year 2019 can be included, the annual report will be submitted to the Finance Committee of parliament and the Federal Minister of Finance, and subsequently published on the FMSB’s website in late April 2020.
FMSB affirms its recommendation on the counter-cyclical capital buffer
Growth of loans to Austrian borrowers continues to be not excessive. Negative for the past ten years, the gap between the credit-to-GDP ratio and its trend declined again in the third quarter of 2019. Therefore, the FMSB decided to recommend that the FMA apply the CCyB at its current level of 0% of risk-weighted assets also from July 1, 2020 (Recommendation FMSG/1/2020).
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.