33rd meeting of Austria’s Financial Market Stability Board
At its 33rd meeting on September 12, 2022, Austria’s Financial Market Stability Board (FMSB) evaluated and adjusted its recommendations on the counter-cyclical capital buffer (CCyB), the systemic risk buffer (SyRB) and the other systemically important institution (O-SII) buffer. The FMSB also conducted its regular review of systemic risks from the use of leverage in alternative investment funds (AIFs) and found no such risk to be present in Austria.
Review of the systemic risk and O-SII buffers
At its 32nd meeting the FMSB had elaborated on the positive effects of its buffer decisions of recent years, which had considerably contributed to enhancing the Austrian banking sector’s resilience. However, the FMSB had also stated that structural systemic risks persisted and that Austrian banks’ capital levels had remained below the European average.
In its current recommendation, the FMSB advises that the additivity of the SyRB and the O-SII buffer laid down in the amended EU Capital Requirements Directive (CRD V) be made effective now after having been limited due to the uncertainties surrounding the COVID-19 pandemic. The FMSB stated that the effects of the SyRB and the O-SII buffer complement each other so that their combined use made it possible to reduce both buffer requirements. The new buffer requirements effectively address heightened systemic risks by improving Austrian banks’ capital ratios also in an international comparison, which, in turn, will help guarantee the domestic banking system’s top rating. Austrian banks hence continue to be able to fulfill their role as financial intermediaries, efficiently providing funding to the real economy also in times of potential stress.
The FMSB therefore recommends that the Financial Market Authority (FMA) adjust the SyRB and O-SII buffers as required, arguing that while pandemic-related uncertainties have declined, the Russian invasion of Ukraine, increased energy prices and high inflation have contributed to renewed uncertainty. Against this backdrop, the FMSB advises that the cumulative SyRB and O-SII buffer requirements be set at an additional 0.5 percentage points for the time being. Banks’ buffers are to be raised gradually – by 0.25 percentage points a year – until the required level is reached. Details on the calibration of SyRB and O-SII buffer rates and a list of the banks for which buffer requirements have been identified can be found in Recommendation FMSB/5/2022. Based on previous experience in Austria and other EU countries, the FMSB does not expect its buffer decisions to significantly affect credit supply in Austria.
FMSB affirms its recommendation on the counter-cyclical capital buffer
The FMSB advises the FMA to maintain the countercyclical capital buffer (CCyB) at its current rate of 0% of risk-weighted assets. The credit-to-GDP is below the relevant threshold of 2 percentage points, having dropped to 0.3 percentage points in the first quarter of 2022 on the back of extraordinarily high GDP growth. Still, the indicators relating to risk mispricing, the soundness of bank balance sheets, credit growth and real estate price growth continue to signal elevated cyclical systemic risks in the financial system. Loans for housing purposes and to firms, in particular, have been growing at very robust rates. Data on the effectiveness of the FMA’s regulation for sustainable lending standards for residential real estate financing, which entered into force on August 1, 2022, will be on the table at the next – the 34th – meeting, when the FMSB can also be expected to discuss in-depth the impact of high inflation and rising interest rates on credit growth.
Evaluation of systemic risks arising from leverage in alternative investment funds
The FMSB has also completed its annual analysis of alternative investment funds (AIFs). The analysis did not indicate that leverage in AIFs poses significant systemic risks or significant risks of disruptions in individual or several market segments or risks to long-term economic growth. However, real estate funds continue to show a large structural liquidity gap because investors may take out their money daily despite such funds’ illiquid assets; the risks resulting therefrom may contribute to financial stability risks. The liquidity mismatches will be addressed from 2027, when the new liquidity provisions set out in Article 11 of the Real Estate Investment Fund Act will take effect (Federal Law Gazette Part I No. 198/2021). The FMSB hence advises real estate funds to use the intervening years to make the transition as smooth as possible.
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.