Recommendation FMSB/5/2023: guidance on applying the countercyclical capital 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. Amid ongoing uncertainty and increasing credit risks caused by higher interest rates, Austrian banks need to ensure capital levels that are adequate by European standards and they need to proactively build up risk provisions to be prepared for dealing with cyclical risks should they materialize. Retaining profits is an effective means to strengthen the capital base.

In the first quarter of 2023, nominal GDP grew by 9.3% year on year, while real GDP growth was 3.2%. The gap between the credit-to-GDP ratio and its trend, i.e. the credit-to-GDP gap, dropped further, namely to –13 percentage points in the first quarter of 2023. This indicator therefore remains well below the critical threshold of 2 percentage points.

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.

According to currently available data, risk weights of mortgage-backed loans and corporate loans are at a historically very low level. In the corporate loans segment, commercial real estate loans account for a large share. The OeNB fundamentals indicator for residential property prices and the price-to-rent ratio have been decreasing but remain at elevated levels by historical standards. June 2023 data show that Austrian banks’ corporate lending growth remains robust, while annual growth rates are decelerating due to rising interest rates. With default rates remaining at historically low levels and interest rates having increased, banks are advised to engage in prudent risk provisioning for potential loan defaults, irrespective of an activation of the CCyB.