Recommendation FMSB/5/2022 on adjusting the systemic risk buffer (SyRB) and the other systemically important institution (O-SII) buffer33rd meeting, September 12, 2022
The Financial Market Stability Board (FMSB) has completed the review of the other systemically important institution (O-SII) buffer and the systemic risk buffer (SyRB) launched at its 32nd meeting.
Then the FMSB had stated that the two buffers, which are part of the preventive macroprudential measures adopted in Austria, had helped enable the Austrian banking sector to effectively mitigate challenges like high inflation, rising interest rates and faltering economic growth as well as the COVID-19 pandemic. The FMSB had also said, however, that the material structural systemic risks identified during the last all-encompassing review of the SyRB and the O-SII buffer in 2020 were still present, and that Austrian banks’ capital levels had deteriorated compared to their European peers’.
Both buffers have strengthened financial stability in Austria by increasing risk resilience, improving rating agencies’ and investors’ assessments of the domestic banking system and enhancing the capacity of deposit guarantee schemes. Hence, the buffers have contributed to the sustained supply of bank credit to the real economy. In fact, lending conditions have not been found to limit the flow of credit to businesses since the introduction of the buffers. Ultimately, the buffers serve the purpose of enabling the Austrian banking system to cope with endogenous and exogenous shocks without having to resort to taxpayer money.1
Review of the systemic risk buffer
Disruptions in the whole or parts of the Austrian financial system may entail severe negative consequences for the entire financial system and the real economy. The domestic banking sector’s structurally low profitability, specific ownership structures and its high exposure toward emerging economies in Europe increase the risks of such disruptions. The SyRB is necessary to address these structural systemic risks, help maintain the Austrian banking system’s excellent rating, keep refinancing costs at low levels and avoid the need for future government support for the banking sector.
Review of the O-SII buffer
The malfunctioning or failure of systemically important institutions may disrupt the whole or parts of the financial system, which may have severe negative effects on both the financial system and the real economy. Addressing the too-big-to-fail problem, the O-SII buffer aims to reduce the probability of large, systemically important credit institutions to malfunction or fail and to limit any related damage for the financial system, the real economy and public finances.
The EBA/GL/2014/10 guidelines establish a two-step process for identifying O-SIIs. In the first step, banks are given a score according to the following indicators: (1) size, (2) importance for the economy of the EU or of the relevant member state, (3) complexity/cross-border activity, and (4) interconnectedness of the institution or group with the financial system. In the second step, the national authorities use supervisory judgment, i.e. they draw on their expertise on the relevant banking sector, to ensure that any other systemically important banks are identified as O-SIIs even if they were not identified as such in the first step. Hence, since 2018, the FMSB has conducted its annual review of the O-SII buffer taking into account guaranteed deposits as an additional indicator, given that banks that hold a high share of guaranteed deposits, which would (over)burden the deposit guarantee system in an insurance event, are highly relevant to the entire system. Moreover, a bank that would not qualify as O-SII based on its average EBA score may still pose a threat to financial stability if any one of the indicators applied in line with the EBA guideline shows that this bank is particularly exposed.
SyRB and O-SII buffer: banks and buffer rates
Given that systemic risks manifest themselves both at the consolidated and the individual-bank levels, it is advised that the SyRB and O-SII continue to be applied at both levels. As a result, the SyRB will also be applied to the four identified regional and mortgage banks at the unconsolidated level. Further, BAWAG is now exceeding relevant thresholds so that the SyRB will be applied at the unconsolidated level. Addiko Bank was newly identified as requiring a SyRB at the consolidated level on the grounds of systemic concentration risk. For UniCredit Bank Austria, the SyRB at the consolidated level was reduced because of lower systemic concentration risk.
As Austria implemented the EU Capital Requirements Directive in domestic law in 2021 (with Articles 131 and 133 specifying the relevant provisions), the SyRB is now cumulative with the O-SII buffer, i.e. the SyRB must be held in addition to the O-SII buffer (and vice versa). Owing to the challenges brought about by the COVID-19 pandemic, the FMSB adjusted its recommendation in 2020 with a view to ensuring that the effective buffer requirements would not rise before end-2022 solely because of the changed legal framework. The FMSB now advises letting this transitional provision expire as planned by year-end 2022 while taking into account the complementary effect of the two buffers. The SyRB increases the financial system’s absorption capacity needed when a systemically important bank runs into difficulties, and the O-SII buffer reduces the probability of an endogenous shock to the banking system. This means that the two buffers need not be fully cumulative to achieve the objective of improving financial stability. The impact of the adjusted SyRB and O-SII buffer rates on credit margins will be very small even if very conservative assumptions are applied in an impact assessment. As a result, the supply of credit to the real economy will not be dampened.
While pandemic-related uncertainties have declined significantly, new uncertainties have emerged since the FMSB’s last decision, in particular in connection with the Russian invasion of Ukraine, increased energy prices and high inflation. Against this backdrop, the FMSB advocates a gradual approach that limits the additional requirement resulting from the cumulative application of the SyRB and the O-SII buffer to 0.5 percentage points for the time being. Banks’ buffer requirements are to be raised gradually – by 0.25 percentage points a year – until the full level is reached.
This means that the FMSB recommends the following SyRB and O-SII buffer rates at the consolidated and the unconsolidated levels:
|Buffer size in % of risk-weighted assets||OSII buffer since 2021||SyRB since 2021||OSII buffer + SyRB since 2021||OSII buffer end-2022||SyRB end- 2022||OSII buffer + SRYB end-2022||OSII buffer end-2023||SyRB end-2023||OSII buffer + SyRB end-2023||Difference|
|Erste Group Bank||1.00||1.00||2.00||1.75||0.50||2.25||1.75||0.50||2.25||0.25|
|Raiffeisen Bank International||1.00||1.00||2.00||1.75||0.50||2.25||1.75||0.50||2.25||0.25|
|UniCredit Bank Austria||1.00||0.50||1.50||1.25||0.50||1.75||1.50||0.50||2.00||0.50|
|Erste Bank der österreich. Spk||0.50||0.00||0.50||0.75||0.00||0.75||0.90||0.00||0.90||0.40|
|HYPO Tirol Bank||0.00||0.00||0.00||0.00||0.25||0.25||0.00||0.50||0.50||0.50|
|Hypo Vorarlberg Bank||0.00||0.00||0.00||0.00||0.25||0.25||0.00||0.50||0.50||0.50|
|Buffer size in % of risk-weighted assets||OSII buffer since 2021||SyRB since 2021||OSII buffer + SyRb since 2021||OSII buffer end- 2022||SyRb end-2022||OSII buffer + SRYB end-2022||OSII buffer end-2023||SyRB end-2023||OSII buffer + SyRB end-2023||Difference|
|Erste Group Bank||1.00||1.00||2.00||1.25||1.00||2.25||1.50||1.00||2.50||0.50|
|Raiffeisen Bank International||1.00||1.00||2.00||1.25||1.00||2.25||1.50||1.00||2.50||0.50|
|UniCredit Bank Austria||1.00||1.00||2.00||1.75||0.50||2.25||1.75||0.50||2.25||0.25|
|HYPO Tirol Bank||0.00||0.50||0.50||0.00||0.50||0.50||0.00||0.50||0.50||0.00|
|Hypo Vorarlberg Bank||0.00||0.50||0.50||0.00||0.50||0.50||0.00||0.50||0.50||0.00|