Recommendation FMSB/6/2022: guidance 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. Cyclical systemic risks will lessen if residential real estate loans, and above all new loans, continue growing at a slower pace. Nevertheless, the FMSB urges banks, for the sake of strengthening their resilience, to exercise great caution on dividend payouts in 2023.

The credit-to-GDP gap is currently below the critical threshold of 2 percentage points, having dropped to –3.4 percentage points in the second quarter of 2022 on the back of persistently high GDP growth.

Other indicators, however, continue to signal clearly elevated cyclical risks in the financial system; these indicators relate to risk mispricing, the soundness of bank balance sheets and corporate credit growth. In particular, the risk weights for mortgage-backed loans and corporate loans have decreased to levels that are very low by historical standards.

At the same time, growth of new housing loans has slowed considerably, which is attributable in particular to the development of interest rates, overall inflation, the economic slowdown and anticipatory effects in the run-up to the introduction of borrower-based measures. Current indicators point to a deceleration of real estate price growth starting from a high level.

In addition, nominal GDP growth, which had contracted sharply in 2020, rebounded by an unusually strong 9.6% year on year in the second quarter of 2022. The outlook is fraught with heightened risks, however, which is, among other things, corroborated by the Austrian Financial Stress Indicator (AFSI).

The FMSB points out that corporate credit growth is still high; it is, however, expected to cool off amid rising interest rates. The FMSB’s recommendation is therefore to leave the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, and to call on banks for prudence in dividends payout.

Several factors will inform the assessment of whether a CCyB is necessary in future: the development of the credit-to-GDP gap as well as the additional indicators relevant to the CCyB, the impact of borrower-based measures related to housing loans and changes to the macroeconomic outlook.