Recommendation FMSB/4/2022 on applying the countercyclical buffer (CCyB)

The latest recommendation of Austria’s Financial Market Stability Board (FMSB) to the Financial Market Authority (FMA), in line with Article 23a para. 1 Austrian Banking Act, is to leave the countercyclical capital buffer (CCyB) unchanged at a rate of 0% of risk-weighted assets. This decision was also taken against the backdrop of recently introduced borrower-based measures.

The credit-to-GDP is currently below the critical threshold of 2 percentage points, having dropped to 0.3 percentage points in the first quarter of 2022 on the back of extraordinarily high GDP growth.

At the same time, other indicators may have decreased somewhat but continue to signal clearly elevated cyclical risks in the financial system; these indicators relate to risk mispricing, the soundness of bank balance sheets, credit growth and real estate price growth. In particular, the risk weights for mortgage-backed loans and corporate loans have decreased to levels that are very low by historical standards. Furthermore, the fundamentals indicator for residential property prices and the price-to-rent ratio have deteriorated further and risen to peak levels. Finally, credit growth has remained robust given strong annual growth of loans for residential purposes and loans to businesses.

Annual nominal GDP growth, which had contracted sharply in 2020, rebounded by an unusually strong 10.4% in the period from the first quarter of 2021 to the first quarter of 2022. The outlook is fraught with heightened risks, however. Therefore, the FMSB recommends a CCyB of 0% for the time being, despite the risks signaled by the other indicators. This decision takes into account that in December 2022, it will be possible to conduct an initial assessment of how the borrower-based measures adopted to ensure sustainable lending standards in residential real estate financing affect credit growth.

This notwithstanding, the FMSB also emphasized that credit growth was still too high.

Any future decision on whether a higher CCyB requirement would be advisable will depend on whether the CCyB-relevant indicators continue to see a sustained improvement. Another factor that will feed into the decision-making on activating a CCyB is the effectiveness with which borrower-based measures in residential real estate financing will reduce the risks arising from the credit cycle.

The assessment will be based equally on the credit-to-GDP gap and the indicators listed above because there may still be risks arising from the credit cycle even if the credit-to-GDP gap closes.