Recommendation FMSB/6/2023: 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. Capital levels that are adequate by European standards and prudent risk provisioning are necessary to help mitigate the impact of cyclical risks, given that uncertainties are rising, as are credit risks against the backdrop of higher interest rates, and the economy is cooling. Retaining profits is an effective means to strengthen the capital base, especially in times of high profits from interest income.

Nominal GDP expanded by 6.1% year on year between Q2 2022 and Q2 2023. Outstanding loans to Austrian households and businesses declined by 2.7% year on year, according to financial accounts data. As a result, the credit-to-GDP gap dropped further, standing at –18.2 percentage points in Q2 2023, still 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.

Current average risk weights of mortgage-backed loans and corporate loans, which include a high share of commercial real estate loans, are at a historically very low level. The OeNB fundamentals indicator for residential property prices and the price-to-rent ratio continue to decrease but remain at elevated levels in a long-term comparison. In light of historically low default rates, low risk weights and rising interest rates, the FMSB reiterates its calls on banks to engage in prudent risk provisioning for potential loan defaults, irrespective of whether the CCyB has been activated or not.