40th meeting of Austria’s Financial Market Stability Board

In its 40^th meeting on March 12, 2024, the Financial Market Stability Board (FMSB) discussed the following topics, among others: commercial and residential real estate financing, the countercyclical capital buffer (CCyB), the 2023 annual report and the 2024 work program.

Commercial real estate financing

By end-2023, the growing challenges in the commercial real estate financing segment translated into rising loan defaults. The FMSB found that the banks had increased their risk provisioning accordingly. In light of their exceptionally good profits supported by monetary policy operations, the FMSB reiterates its advice to banks. They should continue exercising prudence in risk provisioning, particularly for commercial real estate loans, and taking a conservative approach to real estate valuations. Currently, banks’ high profitability and capitalization adequately cushion them from risks arising from the commercial real estate segment. At the same time, the FMSB requests the OeNB to evaluate, by the FMSB’s 41^st meeting, whether a further significant deterioration in the commercial real estate financing segment poses a risk to financial stability in Austria. Based on these findings, the FMSB will discuss possible macroprudential measures to further strengthen the resilience of the banking system.

Residential real estate financing

In its 40^th meeting, the FMSB examined the effectiveness and management of the regulation for sustainable lending standards for residential real estate financing (KIM-V), drawing on preliminary data on lending standards in the second half of 2023. To safeguard financial stability in Austria, the KIM-V primarily aims at improving lending standards. Lending standards continued to improve in the second half of 2023. The unutilized exemption buckets reported by banks amounted to around EUR 1 billion in 2023. The FMSB considers this a key indication that the decline in new lending is primarily due to higher interest rates and costs and that lending is currently not unduly constrained by the KIM-V. Given the current environment, new lending in other European countries and worldwide has also fallen significantly.

In addition to the exemption buckets, which are high by international standards, the KIM-V offers the following relief measures. Apart from exemptions for small loans and bridge loans, it is possible to use the previous or current period as the assessment basis for the exemption buckets. In addition, minimum exemption buckets have been introduced. The last two measures are meant to ensure planning certainty with respect to loans that do not comply with the upper limits of the KIM-V due to their specific design, although they meet a given bank’s lending standards.

To facilitate the management of the exemption buckets, the FMSB advises the FMA to reduce the complexity of the exemption bucket design in the KIM-V. An amendment to the KIM-V should provide for a single institution-related exemption bucket of 20% of new lending and should abolish the indicator-specific exemption buckets. Sustainable lending in accordance with the KIM-V criteria should remain the norm, however.

Countercyclical capital buffer

The FMSB advises the Financial Market Authority (FMA) to maintain the countercyclical capital buffer (CCyB) at its current rate of 0% of risk-weighted assets. At –15 percentage points, the credit-to-GDP gap, i.e. the difference between the credit-to-GDP ratio and its trend, remained well below the critical threshold of 2 percentage points in the third quarter of 2023. This notwithstanding, the FMSB reiterates its advice to banks: they should retain a significant portion of their current high profits to improve capitalization and should exercise prudence in risk provisioning. In this meeting, the FMSB also discussed advancing the framework, in particular the set of quantitative indicators, for informing decisions on the CCyB.

FMSB annual report for 2023 and work program for 2024

In 2023, the work of the FMSB focused on adjusting and monitoring measures to contain systemic risks arising from residential real estate financing, analyzing risks stemming from commercial real estate exposures, reviewing the other systemically important institutions buffer (O-SII buffer) and identifying the adequate size of the CCyB at quarterly intervals. The FMSB will submit its 2023 Annual Report to the Federal Minister of Finance and the Finance Committee of parliament in late April 2024, and subsequently publish the report on its website.

In 2024, the FMSB will analyze the effectiveness of the KIM-V as required by law. It will also focus on potential systemic risks arising from the financing of commercial real estate. Moreover, the FMSB will complete its evaluation of the indicator set that informs CCyB decisions. Regular activities include the quarterly provision of guidance on the CCyB, the annual review of the O-SII buffer and leveraged finance used by alternative investment funds as well as the biennial review of the systemic risk buffer.

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.