30th meeting of Austria’s Financial Market Stability Board – December 13, 2021

In its December 2021 meeting, Austria’s Financial Market Stability Board (FMSB) discussed in particular systemic risks arising from real estate financing and adopted its recommendation on applying the countercyclical capital buffer (CCyB).

Systemic risks from residential real estate financing continue to build

Systemic risks that may arise from residential real estate financing remained at the top of the agenda, with the FMSB concluding that such risks were mounting. Both property prices and real estate lending have continued growing at a marked pace, loan interest rates remain at unprecedented low levels and market conditions continue to be driven by very strong competition. The share of variable rate loans has declined substantially in recent years, but many borrowers are still vulnerable to changes in short-term interest rates. Furthermore, a considerable share of new real estate loans continues to be offered at elevated loan-to-value and debt-service-to-income ratios. In other words, banks have failed to comply to a sufficient degree with the FMSB’s guidance on sustainable mortgage lending. 

At some point, the steady increase of systemic risks may prove highly relevant to Austria’s financial stability – notwithstanding a number of mitigating factors that the FMSB identified as well. Austria has a well-developed rental market with a high share of nonprofit providers, renting out debt-financed private property plays but a minor role, Austrian borrowers tend to dispose of high incomes and wealth by international standards, and Austrian households’ indebtedness is comparatively low. Still, if a real estate crisis were to emerge, the financial system might face disruptions that could trigger negative repercussions to the real economy. Hence it is important to address the systemic risks in an adequate and timely manner. Measures considered adequate by the FMSB are tools specified in Article 23h Austrian Banking Act. The FMSB has therefore requested the OeNB to prepare an FMSB recommendation to the Financial Market Authority (FMA) aiming at measures to become legally binding preferably by mid-2022. The use of such measures has been evaluated and advised also by international organizations such as the European Systemic Risk Board (ESRB), the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

Enhanced monitoring of commercial real estate financing

The FMSB also addressed the issue of commercial real estate financing. Compared with European peers, Austrian banks’ commercial real estate financing accounts for an above-average share of the aggregated total assets of the Austrian banking sector, while remaining below the volume of private real estate financing. Besides, commercial real estate financing records lower loan growth rates than private real estate financing. Monitoring will benefit from improved data availability, especially regarding commercial property indicators, specifically a commercial property price index1. It will, however, take a few years until the corresponding time series for compiling the indicators become available. The FMSB advises the OeNB and the FMA to evaluate any other options for improving data availability in this segment.

FMSB affirms its recommendation on the CCyB

The FMSB advised the FMA to maintain the CCyB rate at its current level of 0% of risk-weighted assets from April 1, 2022. While the gap between the credit-to-GDP ratio and its trend continues to be positive, it has been narrowing following the recovery of output growth in the second quarter of 2021. Thus, the FMSB emphasizes that credit growth is still too high compared with GDP growth. Other CCyB-relevant indicators continue to be quite high compared with historical data. Any future decision on whether a higher CCyB requirement should be advised will depend on whether the CCyB-relevant indicators continue to see a sustained improvement as the economy recovers, and whether property-related measures succeed in reducing the risks from the credit cycle.

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.

1 OeNB reporting regulation “GIMPI” 2022, Federal Law Gazette Part II No. 425/2021. The data to be collected will serve to calculate purchase price, rental price and yield indices for commercial real estate.