Recommendation FMSB/4/2021: guidance on applying the countercyclical capital buffer (CCyB)

The latest recommendation of the Financial Market Stability Board (FMSB) to the Financial Market Authority (FMA), in line with Article 23a para. 1 of the Austrian Banking Act, is to leave the countercyclical capital buffer (CCyB) unchanged at a rate of 0% of risk-weighted assets The corresponding decision enters into force on January 1, 2022.

Both the main indicator (credit-to-GDP gap) and the additional indicators guiding this decision continue to show an adverse tendency. The credit-to-GDP gap has been positive – above 2% – since the second quarter of 2020, which would imply that CCyB requirements are called for. Recent data suggest that this gap widened again from the fourth quarter of 2020 to the first quarter of 2021, from 5.6% to 7.7%. Moreover, the additional indicator dropped to a historically low level, signaling substantial financial market mispricings, increased risk-taking by banks and a significant overvaluation of property prices. The additional indicator is based on an aggregation of indicators relating to mispricing in the financial system, risk mispricing, the soundness of bank balance sheets, credit growth, property prices and the current account balance. In particular, the risk weights of mortgage-backed loans and corporate loans are at historically low levels, even if they have been on the rise more recently. At the same time, insolvencies have decreased markedly compared to pre-pandemic 2019 levels thanks to government intervention and support measures, although the number of insolvencies may increase once support measures expire.

However, according to Baba et al. (2020), Drehmann et al. (2011) and Drehmann et al. (2014), there is no case for changing the CCyB mechanistically in line with a given credit-to-GDP gap, in particular when this gap is caused by a negative business cycle. Annual GDP growth plummeted by 5.5% from the first quarter of 2020 to the first quarter of 2021. Therefore, the FMSB recommends a CCyB of 0% for the time being but also emphasizes that credit growth is still too high compared with GDP growth.

Any future decision on whether a higher CCyB requirement should be recommended will depend on whether the CCyB-relevant indicators see a sustained improvement as the economy recovers. Among the indicators monitored, special attention is given to credit growth, banks’ risk appetite, household and corporate indebtedness and uncertainty surrounding economic developments.