Recommendation (FMSB/3/2025): guidance on applying the countercyclical capital buffer

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.

Based on the new methodology, two indicators of the banks dimension, excess capital and liquidity buffer quality, point to cyclical risks as of June 30, 2025: Both indications are partly due to expansionary monetary policy.

A large amount of excess CET1 capital indicates a large degree of headroom capital, which can result from a cyclical underestimation of risk during a boom phase (Abad and Suarez (2017)).

The liquidity buffer quality indicates a high proportion of highly liquid assets and therefore (too) much liquidity in the market. High market liquidity can be a leading indicator of cyclical risks (Alessi and Detken (2018)). Excess liquidity can erode risk premiums and trigger a “search for yield.”

Both gap indicators were below their thresholds as of June 30, 2025. New loans moved rapidly toward the threshold, a trend that has moderated since the last quarter. This might be due to the sharp rise in newly originated real estate loans.

Furthermore, credit quality has been deteriorating, as reflected in the declining Texas Ratio and the increase in insolvencies in the macroeconomics dimension. However, this indicator does not yet point to cyclical risk.

Insolvency rates that remain high, gloomy economic expectations and geopolitical uncertainty call for additional risk provisioning by banks. This can mitigate effects from cyclical risks should they materialize.