Recommendation FMSG/2/2018: guidance on adjusting the systemic risk buffer

The Financial Market Stability Board (FMSB) first reviewed the systemic risk buffer (SyRB) in its 12th and 13th meetings, drawing up an interim report. At the time, the FMSB recommended the Austrian Financial Market Authority (FMA) to activate a SyRB for two additional banks at the consolidated level and to also apply a SyRB to a total of seven banks at the unconsolidated level. The recently finalized report on the SyRB evaluation (based on year-end 2017 data) shows that the activation of the SyRB (on January 1, 2016) has produced adequate effects. Several factors helped to mitigate and – ideally – reduce long-term structural systemic risks as intended: (1) Austrian banks improved their capitalization (without scaling back lending in Austria) and (2) downsized their relatively high-risk foreign business, which (3) led to a decrease in the overall size of the Austrian banking sector (relative to GDP). This reduction of systemic risks, helped along by the introduction of the SyRB, for instance, caused the rating agency Standard and Poor’s (S&P) to upgrade their rating of the Austrian banking system on May 30, 2018. S&P hence considers the Austrian banking system to be one of the most stable banking systems worldwide.

Risk-mitigating factors notwithstanding, the structural systemic risk in the Austrian banking sector continues to be elevated. As before, risks for the banking system emanate in particular from the still substantial exposures to emerging markets in Europe, weak structural profitability and banks’ specific ownership structures, which do not ensure the adequate recapitalization of banks in the event of a crisis. Moreover, banks continue to be exposed to systemic risks stemming above all from the risk-sharing mechanism in the financial system and from reputation effects (spread risk). The SyRB is key to countering these long-term, noncyclical systemic risks in the Austrian banking system.

Given that these systemic risks may manifest themselves at both the consolidated and the unconsolidated level and that, in particular within cross-border banking groups, capital allocation in crisis situations would not be flexible, the FMSB recommends retaining the SyRB at the unconsolidated level.

Overall, compared with the interim report endorsed in the 13th meeting, no new banks were identified. As UniCredit Bank Austria has transferred its foreign subsidiaries to its parent bank, the systemic risk arising from foreign business with emerging economies has declined. To address the risk emanating from the malfunctioning or failure of a credit institution that is significant for the Austrian financial market by setting adequate capital buffers, the FMSB recommends to leave the respective SyRB unchanged at 2%.

The transitional provision the FMSB had recommended to apply to credit institutions directly supervised by the ECB under the Single Supervisory Mechanism (SSM) is due to expire on January 1, 2019. However, as the SyRB for Volksbanken Verbund was only activated on January 1, 2018, the FMSB recommends to switch to a full-rate SyRB for this credit institution on January 1, 2020.

The FMSB hence recommends to apply the following SyRB rates at the consolidated level (including the transitional provision for Volksbanken Verbund) from January 1, 2019:

For setting the SyRB at the unconsolidated level, the FMSB recommendation issued in 2017 continues to apply.