Recommendation FMSB/4/2024: guidance on adjusting the systemic risk buffer and the other systemically important institutions buffer

The Financial Market Stability Board (FMSB) has completed the review of the other systemically important institutions buffer (O-SII buffer) and the systemic risk buffer (SyRB) launched at its 41st meeting.

Over the last years, the two buffers, which are part of the preventive macroprudential measures adopted in Austria, have once more helped maintain financial stability in Austria. Consequently, the FMSB continues to recommend a proactive strengthening of capitalization; on the one hand, because strengthened capital prevents higher costs and hence the need for government bailouts in the event of crisis and, on the other hand, because strong capitalization is essential for preserving the Austrian banking sector’s rating, which is excellent by international standards (Standard & Poor’s BICRA rating group 2). This excellent rating also benefits banks and the real economy because it ensures lower refinancing costs.

At its 41st meeting, the FMSB had already found that the major structural systemic risks identified in the previous combined assessment of the two buffers in 2022 (33rd meeting) persist. In its 33rd meeting, the FMSB had identified acute uncertainties in the wake of Russia’s war of aggression against Ukraine, soaring energy prices and high inflation. On this basis, the additive requirements from the two buffers were defined as an add-on of no more than 0.5 percentage points for the time being. The target rates excluding these uncertainties were published for individual banks in the FMA’s explanatory remarks about the amendment of the Capital Buffer Regulation¹ in 2022.

In its current meeting, the FMSB found that uncertainties have sufficiently calmed down and that there is no longer a need for this temporary cap on the add-on. The FMSB therefore recommends continuing the phase-in of the additive requirements started in 2022 and, consequently, prescribing the originally envisaged rates for the O-SII buffer and the systemic risk buffer. The overlap between the two buffers is taken into account.

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 systemic risk buffer (SyRB) is an adequate macroprudential measure designed to address the existing long-term, noncyclical systemic risks in the Austrian banking system. Overall, risk positioning has remained relatively constant since the previous evaluation in 2022. The coming years will tell in how far the high profits we are currently seeing will result in a temporary or long-term change in the low structural profitability of the Austrian banking sector. We continue to see a low level of capitalization among Austrian banks – in particular when compared to other banking sectors with top BICRA rating.

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. The O-SII buffer addresses this “too-big-to-fail” problem. In other words: 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 based on a weighted average of ten indicators that reflect: (1) size, (2) importance for the economy of the EU or of the relevant member state, (3) complexity/cross-border activity, and (4) interconnectedness 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.

The buffer rates defined are guided by the weighted average calculated from the indicators (EBA score). The higher the EBA score, the higher the estimated systemic importance and the associated buffer. So far, three buckets have been applied in Austria. This year’s evaluation has shown, however, that there has not been sufficient differentiation between banks with different levels of systemic importance. A larger number of buckets is also common practice at international level. That is why the FMSB has decided to adjust its buffer allocation tables. At the bottom of the range, there will now be a stronger differentiation between systemically important banks, based on a new bucket with an OSII buffer of 0.5% before adjusting for overlap. This will affect Volksbanken Verbund and Steiermärkische Bank und Sparkassen AG. At the top of the range, there will also be an additional bucket; currently no bank has a score that corresponds to this bucket. This new bucket was introduced to ensure that, if a bank gains more systemic importance, it also needs to strengthen its capital base further and hence its resilience.

SyRB and O-SII buffer: banks and buffer rates

No new systemically important institutions were identified compared to the last O-SII evaluation in the 38th meeting. The O-SII buffer rates are being raised for four banks because the temporary cap no longer applies (by 0.25 percentage points each for Erste Group Bank – consolidated, Raiffeisenbank International – consolidated, and UniCredit Bank Austria – unconsolidated; and by 0.40 percentage points for BAWAG – unconsolidated). Based on the newly introduced bucket 1 the O-SII buffer requirement for the Volksbanken Verbund will drop to 0.45% of its RWA, and the target value of the buffer for Steiermärkische Bank und Sparkassen to 0.45%. As the latter was only identified as systemically important in 2023 (for the first time) and currently records a phase-in buffer of 0.25% (FMSB/5/2022), its O-SII buffer requirement will now increase to 0.45% of RWA.

The FMSB recommends leaving the rates of the systemic risk buffer unchanged. Because of its role in the Austrian banking system, Erste Bank der österreichischen Sparkassen exhibits an increased level of systemic vulnerability. This is why the FMSB recommends including it under the SyRB’s scope of application at unconsolidated level. All other SyRB banks remain unchanged.

This means that the FMSB recommends the following SyRB and O-SII buffer rates at the consolidated and the unconsolidated levels from January 1, 2025, as shown below. Banks do not need any additional capital to meet regulatory requirements.

 

¹ Amendment of the FMA Capital Buffer Regulation 2021 (KP-V 2021), Federal Law Gazette II No. 469/2022.