32nd meeting of Austria’s Financial Market Stability Board – May 16, 2022

In its May 2022 meeting, Austria’s Financial Market Stability Board (FMSB) discussed the financial stability implications for Austria of Russia’s invasion of Ukraine and addressed the upcoming review of the structural macroprudential capital buffers to be held by Austrian banks, which will be on the agenda of the fall meeting. Moreover, the FMSB reviewed and reaffirmed its recommendation on the countercyclical capital buffer (CCyB).

Challenges arising from Russia’s invasion of Ukraine

The macroprudential measures that have been adopted in Austria in a forward-looking manner in recent years have proven effective in mitigating the challenges arising from the current climate of uncertainty that are a result of Russia’s war on Ukraine and especially of the combination of rising inflation and rising interest rates. Apart from the macroprudential capital buffers and standards for sustainable lending, these measures include above all supervisory guidance urging banks to cut foreign currency lending and reduce liquidity transfers to subsidiaries abroad (“Sustainability Package”). Efforts to strengthen deposit guarantee schemes and liquidity ratios, reflecting Austria’s integrated approach to macroprudential supervision, have paid off as well. In sum, this integrated approach has been strengthening the resilience of Austria’s financial system, so that the flow of funds to the real economy has been kept up, also during the pandemic as well as Russia’s invasion of Ukraine. Likewise, recent events have shown that we can rely on the deposit guarantee schemes to work. Still, risks remain to credit quality, profitability and refinancing conditions that may arise from second-round effects, elevated inflation rates and abrupt interest rate increases. 

Structural macroprudential capital buffers to be reviewed

The FMSB discussed the two structural macroprudential capital buffers that are coming up for review, the systemic risk buffer (SyRB) and the other systemically important institutions (O-SII) buffer. The FMSB acknowledged that the past buildup of buffers has helped increase risk resilience, brighten rating agency and investor sentiment and increase the absorption capacity of the deposit guarantee scheme, thus reinforcing financing stability in Austria and saving taxpayer money. Credit growth remained strong following the activation of the buffers, and corporate access to finance was not overly strained by funding conditions. At the same time, a European peer group analysis shows that the Austrian banking sector has been losing ground more recently in terms of capital ratios, following a catching-up process in recent years. Overall, the FMSB found the major structural systemic risks identified in the previous assessment from 2020 to continue to exist. The FMSB will formally review its recommendations on the SyRB and the O-SII buffer in its fall 2022 meeting, based on the established integrated approach and giving due consideration to the absorption capacity of the deposit guarantee scheme and the resolution regime.

FMSB recommendation on CCyB activation

The FMSB advises the Financial Market Authority (FMA) to maintain the CCyB rate at 0% of risk-weighted assets, even though the gap between the credit-to-GDP ratio and its trend widened to 2.6 percentage points in the fourth quarter of 2021, which would, as such, call for activating the CCyB. The buildup of clearly elevated cyclical risks in the financial system also continues to be signaled by the indicators relating to risk mispricing, the soundness of bank balance sheets, credit growth and property price growth. In particular, real estate lending and corporate lending growth rates have remained high when compared to GDP growth. As real estate-related credit growth continued to increase following the issuance of the FMSB’s recommendation on containing risks from real estate exposures, the urgency of taking timely action to keep systemic risks from rising any further has become even more clear. What matters with regard to corporate lending is the extent to which the current growth rates may be permanent or temporary. After all, the heightened liquidity needs may well be a current reflection of the uncertainty surrounding the war in Ukraine, the need for short-term funding to finance inventory buildup in anticipation of supply chain issues and efforts to lock in favorable financing conditions in view of rising interest rate expectations.

For the time being, the FMSB has thus decided against activating the CCyB for the reasons pointed out above, including the heightened uncertainty about economic developments driven by the war in Ukraine and the rise of inflation and interest rates. However, if the continued high credit growth rates do not fall to sustainable levels, the FMSB will have to consider activating the CCyB in a next step, possibly with a shortened implementation period.

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.