Recommendation FMSB/3/2023: 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. In an environment of ongoing uncertainty, banks need to ensure capital levels that are adequate by international standards and they need to build up sufficient risk provisions to be prepared for dealing with cyclical risks should they materialize.

The credit-to-GDP gap for Q4 2022 has changed slightly following data revisions that were within the usual range. Reflecting slower credit growth and strong GDP growth, it now amounts to –9.7 percentage points, which is clearly below the critical 2 percentage point threshold.

In its analysis, the FMSB also takes into account other indicators because there may be risks from the credit cycle even if the credit-to-GDP gap is negative. These indicators also indicate slight improvements.

That said, currently available data on the risk weights of mortgage-backed loans and corporate loans (commercial real estate loans accounting for a large share) are at a historically very low level. The OeNB fundamentals indicator for residential property prices and the price-to-rent ratio were falling in Q1 2023 but are still close to their historical highs. April 2023 data show that the growth of Austrian banks’ loans to firms is still robust, with annual growth rates slightly above historical averages. A slowdown is in the offing, however, as interest rates have been rising. Given historically low default rates and increases in interest rates, banks need to step up risk provisions for potential loan defaults, irrespective of an activation of the CCyB.

As outlined in the FMSB’s latest recommendation, nominal GDP expanded unusually strongly year on year from Q4 2021 to Q4 2022, after a slump in 2020. This still holds, even though the cited growth figure has been revised down to 9.3% from 10.2%. Amid heightened risks, the outlook is still fraught with uncertainty.