27th meeting of the Financial Market Stability Board
In its 27th meeting on March 9, 2021, Austria’s Financial Market Stability Board (FMSB) focused once more on the effects of the COVID-19 pandemic on the financial system. Apart from its annual report for 2020, the FMSB also discussed the systemic risks arising from the financing of commercial real estate. In addition, the FMSB recommended leaving the countercyclical capital buffer (CCyB) rate unchanged at 0% of risk-weighted assets.
FMSB keeps an eye on systemic risks from commercial real estate financing
In recent years, Austrian banks’ business models have started to increasingly rely on mortgage lending. For this reason, the FMSB has taken action to reduce systemic risks arising from the financing of residential real estate. An EU-wide comparison shows that mortgage-backed corporate loans likewise account for an above-average share in Austrian banks’ total assets. In addition, some sections of the commercial real estate market, above all those related to retail trade and tourism, have been hit particularly hard by the pandemic. Therefore, the FMSB is monitoring systemic risks arising from the financing of commercial real estate very closely. In particular, the Oesterreichische Nationalbank (OeNB) has stepped up efforts – in cooperation with the banking sector – to improve the collection of data to obtain indices on prices, rents and rental yields of commercial property. The FMSB expects that a greater wealth of data will help make its risk assessments more precise.
FMSB discusses its 2020 annual report
The 27th meeting of the FMSB addressed the annual report for 2020, which was clearly the year of the COVID-19 pandemic. So, also the FMSB’s activities revolved around the impact the coronavirus pandemic had on financial stability in Austria. The FMSB considered the pandemic-induced challenges accordingly when updating its recommendations on the systemic risk buffer (SyRB) and on the buffer for other systemically important institutions (O-SII) in June 2020. This helped improve the Austrian banking sector’s resilience further – a process that had started already in June 2016, when macroprudential capital buffers were introduced. The FMSB has thus been instrumental in strengthening the Austrian banking sector’s preparedness for times of crisis and especially for withstanding the pandemic fallout. Moreover, the FMSB reconfirmed in 2020 that financial stability also very much depended on sustainable real estate lending.
To shore up banks’ resilience amid the pandemic, the FMSB agreed with the recommendations on limiting profit and capital distributions by banks and insurance companies that had been voiced by the European Systemic Risk Board (ESRB), the European Central Bank (ECB), the European Insurance and Occupational Pensions Authority (EIOPA) and the Austrian Financial Market Authority (FMA). Furthermore, in light of payment moratoria and government guarantees, the FMSB called on banks to ensure transparency in their balance sheets in order to allow banks – as well as investors and banking supervisors – to adequately assess risks. The FMSB also asked banks to establish, in a timely manner, adequate loan loss provisions.
By end-April 2021, the FMSB will submit its annual report for the year 2020 to the Finance Committee of parliament and the Federal Minister of Finance, and subsequently publish the report on its website.
FMSB reiterates its recommendation on applying the CCyB
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, 2021 (FMSG/1/2021). The gap between the credit-to-GDP ratio and its trend turned positive in the second quarter of 2020, but this was attributable to a strong decline in GDP growth. Given the government’s economic policy course and measures, credit growth continued to be not excessive.
Real estate indicators still require close monitoring
Among the indicators monitored by the FMSB, those related to real estate still call for close scrutiny. The risk weights applied to mortgages have reached historically low levels, the OeNB’s fundamentals indicator for residential property prices points to an overvaluation of 19%, and households’ debt-to-income ratio has risen to 83%.
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.