25th meeting of the Financial Market Stability Board
In its 25th meeting on September 15, 2020, the Financial Market Stability Board (FMSB) again discussed the effects of COVID-19 countermeasures on financial stability in Austria. Based on its regular analysis of alternative investment funds (AIFs), the FMSB did not identify any significant systemic risks for the Austrian financial system from AIFs’ leverage financing. In conclusion, the FMSB recommended leaving the countercyclical capital buffer (CCyB) rate unchanged at 0% of risk-weighted assets.
Stability of the Austrian banking system in the face of the COVID-19 pandemic
The FMSB is closely monitoring the effects of the Austrian government’s special COVID-19 measures. Despite the ongoing pandemic, the FMSB assesses the Austrian banking market as stable. With EUR 19 billion in macroprudential capital buffers that can be used to absorb risk in a crisis, Austrian banks are well prepared for possible shocks and will be able to continue to provide the real economy with credit at competitive terms in an international comparison. While it is hard to gauge overall macroeconomic effects at the moment, the FMSB estimates that the likelihood of cliff effects in fall, in terms of high and sudden strain on the banking sector, is small. Thanks to central bank operations, banks can currently make use of relatively favorable conditions for issuing debt and equity instruments to increase their risk-bearing capacity. To ensure that they are ready for the challenges that will occur when extraordinary monetary and fiscal policy measures are phased out, the FMSB additionally recommends that banks build up their loan loss provisions in a timely manner if a deterioration in credit quality threatens, and that banks keep their balance sheets transparent for investors and the public. Stepped-up monitoring of significant developments affecting Austrian banks has also proven valuable during the COVID-19 pandemic, as it provides supervisory institutions with the factual basis to swiftly react to adverse developments at the systemic level.
Profit distributions should be limited in the interest of strengthening resilience
Among other things, banks crucially need a solid capital base to ensure their resilience. At its 24th meeting, the FMSB issued a related recommendation on capital buffers to the FMA, which was also published online (FMSG/3/2020). Moreover, the FMSB agrees with the recommendations voiced by the European Systemic Risk Board (ESRB), the European Central Bank (ECB)1 the European Insurance and Occupational Pensions Authority (EIOPA) and the Austrian Financial Market Authority (FMA), reiterating that banks and insurance companies should refrain from dividend payments, buybacks and bonus payments to top management at least until January 1, 2021, to strengthen the financial sector’s capacity to absorb increased risk costs in the wake of the COVID-19 pandemic.
Analysis of AIFs
The FMSB has completed its annual analysis of alternative investment funds (AIFs). The analysis did not indicate that AIFs’ leverage financing poses any significant systemic risks for the financial system or significant risks of disruptions in individual or several market segments or for long-term economic growth.
FMSB recommendation on applying the CCyB
Growth of loans to Austrian borrowers is still not excessive. This is why the FMSB recommends that the FMA continue to apply the CCyB at its current level of 0% of risk-weighted assets from January 1, 2021 (FMSG/4/2020).
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.
1As on July 28, 2020.