24th meeting of the Financial Market Stability Board

The 24th meeting of the Financial Market Stability Board (FMSB) on June 15, 2020, focused on the effects of the COVID-19 crisis on financial stability in Austria and an update of the board’s recommendations on the structural macroprudential capital buffers. In addition, the FMSB recommended leaving the countercyclical capital buffer rate unchanged at 0% of risk-weighted assets.

Challenges to financial stability arising from the COVID-19 crisis

At its 24th meeting, the FMSB extensively discussed the financial stability implications of the COVID-19 crisis. The impact the crisis is having on Austrian economic value added, which might decline more strongly in 2020 than during the financial crisis ten years ago, will also affect the Austrian financial system. Yet, the short-term effects will be mitigated significantly by the far-reaching economic policy and supervisory response. Fiscal measures such as direct support to businesses and government guarantees for corporate loans, extended options for short-time working and traditional unemployment insurance will moderate the deterioration of credit quality in banks’ balance sheets. By expanding monetary policy operations, central banks have ensured that banks have access to adequate refinancing. Medium-term challenges are set to arise, however, once these measures will have to be scaled back or discontinued. Moreover, pressure on the banking sector’s operational profitability will increase as the low interest rate environment continues and intensifies and the costs of market-based funding increase as a consequence of the COVID-19 crisis. An essential prerequisite for banks to meet these challenges are sound balance sheets that rely, in particular, on an adequate capital base and sustainable lending. Having already launched relevant initiatives in the past, the FMSB continued in this vein at its 24th meeting by issuing recommendations on applying the capital buffers.

Review of the SyRB and the O-SII buffer

At its 24th meeting, the FMSB completed its review of the systemic risk buffer (SyRB) and the other systemically important institution (O-SII) buffer which it had launched at its 23rd meeting. As a result, it issued a recommendation to the Austrian Financial Market Authority (FMA).

The FMSB found that both buffers have contributed significantly to strengthening the Austrian banking sector’s resilience against crises in general and its capability to cope with the implications of the COVID-19 crisis in particular. Thanks to the buffers, losses induced by the crisis will be easier to absorb, and the refinancing costs for debt capital will be lower. In a crisis situation, creditors tend to distinguish even more clearly between banks whose balance sheets are of good quality and those whose balance sheets are not. In this context, the macroprudential capital buffers played a decisive role in improving Austrian banks’ ratings by investors, rating agencies and international financial institutions. The FMSB points out that during the current crisis, the buffers will be able to work as intended by ensuring that banks dispose of adequate capital. Making use of this capital might partly restrict profit distribution, but will not have any immediate supervisory consequences.

The SyRB addresses the increased vulnerability of the strongly interconnected Austrian banking system to disruptions of the financial system as a whole or of parts thereof. The FMSB found that related risks – in particular risks arising from the sector’s high exposure to emerging economies, low structural profitability and specific ownership structures – have declined, but not disappeared. While, in principle, these risks exist for the entire Austrian banking system, the FMSB has limited its recommendation for applying the SyRB to 11 banks at the consolidated level and 5 banks at the unconsolidated level, taking proportionality criteria into account.

The O-SII buffer addresses risks arising for the financial system and the real economy from the malfunctioning of a systemically important institution. Based on methods developed in recent years, the FSMB recommends, as in the last two years, applying an O-SII buffer to seven banks at both the consolidated and the unconsolidated level.

According to the EU’s revised Capital Requirements Directive (CRD V), the SyRB and the O-SII buffer will be additive as of end-2020, while until then the higher of the two applies. In its recommendation regarding the buffer requirements beyond end-2020, however, the FSMB also took into account the high degree of uncertainty surrounding the further course of the crisis. This means that the overall buffer requirements have been left largely unchanged. Details on the reasoning behind the recommendations, buffer sizes and the list of identified banks can be found in recommendation FMSB/3/2020.

FSMB recommendation on applying the CCyB

In the current macroeconomic environment, there are no signs of cyclical overheating. Moreover, the main indicator guiding decisions on CCyB rates from a technical perspective, i.e. the credit-to-GDP gap, has remained negative also in the fourth quarter of 2019. This is why the FMSB decided to leave unchanged its recommendation to the FMA of applying a CCyB rate of 0% of risk-weighted assets as of October 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.