31st meeting of Austria’s Financial Market Stability Board – March 1, 2022

In its March 2022 meeting, Austria’s Financial Stability Board (FMSB) adopted new recommendations for action by the Austrian Financial Market Authority (FMA) to contain systemic risks arising from housing mortgages and for setting the size of the countercyclical capital buffer (CCyB). Other items on the agenda included a review of the FMSB’s annual report for 2021 and its work plan for 2022. Moreover, the FMSB discussed potential repercussions of the war in Ukraine for financial stability in Austria. It concluded that the macroprudential capital buffers built up in recent years have been instrumental in strengthening the banking system. In addition, the level of liquidity that is available within the financial system will suffice to meet any heightened short-term liquidity needs.

FMSB issues a recommendation on containing systemic risks arising from real estate exposures

As observed in the FMSB’s previous meetings, systemic risks from housing mortgages have been mounting steadily in recent years, with the pace quickening in 2020 and 2021. While systemic risks in this segment have been increasing in many euro area countries, the developments in Austria stand out. Therefore, the European Systemic Risk Board (ESRB1) formally advised Austria on February 11, 2022, to adopt borrower-based measures to mitigate vulnerabilities to financial stability that stem from the residential real estate sector. The use of such measures by Austria has also been advised by the Organisation for Economic Development and Co-operation (OECD2) and the International Monetary Fund (IMF3). Supporting the reasoning and argumentation put forth by these institutions, the FMSB has therefore adopted a recommendation addressed to the FMA to activate macroprudential measures as specified in Article 23h Austrian Banking Act.

Specifically, the FMSB has advised the FMA to enforce upper limits for loan-to-value ratios4 (90%), debt service-to-income ratios (40%) and loan maturities (35 years) – subject to an exemption bucket of 20% that would give credit institutions adequate operational flexibility.

Furthermore, the FMSB adjusts its existing guidance on sustainable mortgage lending to households to include an upper limit of 30% for the debt service-to-income ratio for loans with a maturity of more than five years if the period for which interest rates have been locked in is less than half of the maturity period. The FMSB will keep monitoring new lending closely, paying particular attention to the development of the share of variable interest loans.

The primary goal of these borrower-based measures is to proactively address the ongoing buildup of systemic risks to mitigate vulnerabilities to potential losses in the banking sector. Moreover, these measures protect borrowers from the consequences of excessive debt. The proposed measures reduce aspects of excess in mortgage lending, such as inadequate provision of collateral, too high a debt servicing burden and overly long maturities. The purpose of the exemption buckets is to ensure adequate operational flexibility.

International developments have shown that financial crises related to real estate crises may trigger high welfare losses. Austria has not suffered a real estate crisis for decades. The proposed measures are meant to help keep a crisis at bay also in the future. The effectiveness of borrower-based measures in lowering systemic risks has been evidenced by empirical studies. Out of the 30 countries that form the European Economic Area, 24 have already adopted such measures.

FMSB affirms its recommendation on the CCyB

The FMSB advises the FMA to maintain the CCyB rate at its current level of 0% of risk-weighted assets from July 1, 2022. While the gap between the credit-to-GDP ratio and its trend has narrowed and dropped below the threshold of 2 percentage points for activating the CCyB buffer, the indicators relating to risk mispricing, the soundness of bank balance sheets, credit growth and property prices have not improved and continue to signal a buildup of clearly elevated cyclical risks in the financial system. Lending for housing purposes and to firms, in particular, has been growing at very robust rates. Thus, credit growth is still overly high compared with GDP growth, which may ultimately require shortening the implementation period for the CCyB buffer. Moreover, the effectiveness of the borrower-based measures will crucially inform future decision-making about the need for activation of the CCyB buffer and its size.

FMSB annual report for 2021 and work plan for 2022

In 2021, the work of the FMSB focused on analyzing systemic risks arising from residential and commercial real estate exposures, reviewing the other systemically important institutions buffer (O-SII buffer), and identifying the adequate size of the CCyB at quarterly intervals. In its annual review of the six intermediate objectives laid down in the macroprudential policy strategy for Austria, the FMSB concluded that the measures taken in 2021 were adequate for achieving these objectives.

In 2022, the FMSB will continue to keep a close tab on the systemic risks arising from residential and commercial real estate exposures. Other tasks include the quarterly provision of guidance on the CCyB, the regular review of the systemic risk buffer as well as the annual review of the O-SII buffer and leveraged finance used by alternative investment funds.

In late April 2022, the FMSB will submit its annual report for the previous year to the Finance Committee of parliament and the Federal Minister of Finance, and subsequently publish the report on its website.

Information on the FMSB

The FMSB, which became operational in 2014, works toward strengthening financial stability. Its members are representatives of the Austrian Federal Ministry of Finance, the Fiscal Advisory Council, the Financial Market Authority and the Oesterreichische Nationalbank. In particular, the FMSB may issue recommendations to the Financial Market Authority and provide risk warnings.

1 https://www.esrb.europa.eu/pub/pdf/recommendations/220207_ESRB_AT_recommendation.en.pdf?385471ba050cc4008919ce4b336048cb
2 https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-austria-2021_eaf9ec79-en
3 https://www.imf.org/en/Publications/CR/Issues/2021/09/07/Austria-2021-Article-IV-Consultation-Press-Release-Staff-Report-Staff-Supplementary-465350
4 The loan-to-value ratio measures the total level of debt in relation to mortgage collateral or other financial assets securing the repayment of debt.