29th meeting of the Financial Market Stability Board

In its 29th meeting on September 15, 2021, the Financial Market Stability Board (FMSB) carried out the regularly scheduled evaluation of the other systemically important institutions buffer (O-SII buffer), the countercyclical capital buffer (CCyB) and the systemic risks associated with alternative investment funds’ leverage funding activities. Furthermore, the FMSB once again discussed systemic risks arising from private real estate financing.

Recommendation on the O-SII buffer

The FMSB renewed its recommendation on the O-SII buffer following its annual review of banks identified as O-SIIs in Austria. Both the group of identified institutions and the buffer levels did not change materially compared to the previous year.

Macroprudential buffers have significantly contributed to preparing the Austrian banking sector for crisis conditions like those seen in the current pandemic. This shows that the right lessons have been learned from the financial crisis of 2008.

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 FMSB recommends, as in the last two years, applying an O-SII buffer to seven banks at both the consolidated and the unconsolidated level.

For details and bank-specific information, see recommendation FMSB/3/2021.

FMSB affirms its recommendation on the CCyB

The FMSB recommended that the Financial Market Authority (FMA) maintain the CCyB rate at its current level of 0% of risk-weighted assets from January 1, 2022. The gap between the credit-to-GDP ratio and its trend, which has been positive since the second quarter of 2020, continues to reflect the sharp contraction of Austria’s GDP caused by the COVID-19 pandemic. At the same time, credit growth appears to be less and less aligned with economic growth. Up until the first quarter of 2021, credit growth had remained high relative to GDP growth. Additional indicators suggest low risk differentiation and high financial market valuations, a visible risk appetite among banks and a rising overvaluation of real estate. Thanks to government intervention and support measures, the number of insolvencies dropped markedly in 2020 and 2021 compared to 2019. Uncertainty about future developments remains high. 

Therefore, the FMSB points out that any future decision on whether a higher CCyB requirement should be recommended will depend on whether the CCyB-relevant indicators see a sustained improvement as the economy recovers. Among the indicators monitored, special attention is given to credit growth, lending standards for mortgage loans, banks’ risk appetite, household and corporate indebtedness and uncertainty surrounding economic developments.

Systemic risks from residential real estate financing

The FMSB also discussed systemic risks from residential real estate funding for households at its 29th meeting, finding that the conditions described in its press release after the 28th meeting remain unchanged: The situation is still characterized by high price and credit growth, low interest rates on loans, intense competition and low margins amid high debt service-to-income and loan-to-value ratios. The FMSB hence requested that the OeNB prepare a comprehensive analysis of systemic risks (in line with Article 44c Federal Act on the Oesterreichische Nationalbank), which is to provide the basis for a possible FMSB recommendation to the FMA in line with Article 23h Austrian Banking Act.

Evaluation of systemic risks arising from leverage funding by alternative investment funds

The FMSB has also completed its annual analysis of alternative investment funds (AIFs). The analysis did not indicate that AIFs’ leverage financing activities pose significant systemic risks or significant risks of disruptions in individual or several market segments or risks to long-term economic growth. Real estate funds continue to show a large structural liquidity gap because investors may take out their money daily (as set out in the Real Estate Investment Fund Act) despite such funds’ illiquid assets; the risks resulting therefrom may contribute to financial market risks. The FMSB supports an amendment to the relevant legislation to mitigate these risks.

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.