42nd meeting of Austria’s Financial Market Stability Board

The 42nd meeting of Austria’s Financial Market Stability Board took place on October 3, 2024. The main topics discussed were recommendations on: limiting systemic risks from commercial real estate financing, applying the systemic risk buffer and the other systemically important institutions buffer (O-SII buffer) and keeping the countercyclical capital buffer at 0%. The annual evaluation of systemic risks arising from leverage funding by alternative investment funds was also a topic on the agenda.

Systemic risks from commercial real estate financing

Growing risks from lending to the commercial real estate sector have been on the FMSB’s agenda for several meetings now. Both default rates and risk provisioning for commercial real estate loans have continued to rise, although the growth in risk provisions has lagged behind that of defaults – despite the FMSB’s repeated recommendation for banks to utilize the leeway from high profits for higher risk provisions and more prudent real estate valuations. In its 41st meeting, the FMSB had found that potential losses from commercial real estate loans, in the event of a further deterioration of the economic environment, can pose an increased risk to financial stability in Austria. That is why, in its recent meeting, the FMSB discussed how to proceed and voiced the following recommendation to the FMA: Against the background of banks continuing to record good profits, a sectoral systemic risk buffer should be applied.

The FMSB has evaluated the available instruments and identified the systemic risk buffer for the subset of commercial real estate loans (sectoral systemic risk buffer) as suitable. On this basis, the FMSB has advised the FMA to introduce a sectoral systemic risk buffer of initially 1% as of 1 July 2025. In the third quarter of 2025, when the related supervisory reporting data will become available for the first time, the FMSB will re-evaluate the necessity of further increases against the background of the effects the amendments to the EU Capital Requirements Regulation (CRR III¹) will have on banks’ capital requirements. The OeNB’s analysis found that loan exposures to limited-profit developers of affordable housing do not cause any systemic risk. The FMSB therefore recommends excluding such developers from the scope of the measure.

Details on the recommendation can be found on the FMSB’s website: FMSB/6/2024.

Structural systemic risks

In its 42nd meeting, the FMSB concluded the evaluation of the systemic risk buffer and O-SII buffer that it had started in its 41st meeting.

In its 41st meeting, the FMSB had found that structural systemic risks had not changed significantly over the previous two years. At the same time, the FMSB found that the uncertainties that had been the reason for limiting increases in buffer levels in 2022 had become less. For this reason, the FMSB recommends ending the phase-in period and applying buffer levels that are consistent with the identified systemic risks, i.e. those that were already published in the FMA’s explanatory remarks about the amendment of the Capital Buffer Regulation². Moreover, the FMSB advocates the introduction of new buckets for determining the O-SII buffer to ensure differentiated buffer rates that reflect banks’ systemic importance, as is common practice at the international level. The buffer levels recommended by the FMSB also take into account potential overlaps between the two buffers. As the phase-in period comes to an end and because of the introduction of the new buckets, the O-SII buffer level changes as follows: It will rise for three banks at unconsolidated level and for two banks at consolidated level; for one bank, it will decrease at consolidated level.

The systemic risk buffer rate can remain unchanged against 2022. However, the FMSB recommends applying the systemic risk buffer to an additional bank at unconsolidated level based on its position in the Austrian banking system.

Details on the FMSB’s recommendation can be found on its website, including the selected banks and their respective buffer rates. With this recommendation, the FMSB makes a contribution, in line with its mandate under Article 13 Financial Market Authority Act, toward strengthening the resilience of the Austrian banking system against financial crises, and reducing adverse effects caused by problems at a systemically important institution.

Countercyclical capital buffer

The FMSB reaffirmed its recommendation for a countercyclical capital buffer of 0%. After all, the credit-to-GDP gap remained well below the critical threshold until the first quarter of 2024 (recommendation FMSB/5/2024).

Use of leverage in alternative investment funds

Currently, the use of leverage in alternative investment funds (AIFs) in Austria does not pose any systemic risks for the financial system or risks for Austria’s long-term economic growth. Compared to their European peers, Austrian AIFs rely on leverage finance only to a limited extent. However, real estate funds show large liquidity mismatches between the asset and the liability side, which are striking when compared to the rest of Europe. Overall, Austrian investment funds only show a low level of liquidity mismatches, however.

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.
 

¹Amended version of Regulation (EU) 575/2013
²Amendment of the FMA Capital Buffer Regulation 2021 (KP-V 2021), Federal Law Gazette II No. 469/2022