34th meeting of Austria’s Financial Market Stability Board

At its 34th meeting on December 5, 2022, Austria’s Financial Market Stability Board (FMSB) discussed the countercyclical capital buffer (CCyB) and both residential and commercial real estate financing.

FMSB affirms its recommendation on the countercyclical buffer

The FMSB advises the Financial Market Authority (FMA) to maintain the countercyclical buffer at its current rate of 0% of risk-weighted assets. The credit-to-GDP gap is currently below the critical threshold of 2 percentage points, having dropped to –3.4 percentage points in the second quarter of 2022 on the back of persistently high GDP growth. Other indicators continue to signal clearly elevated cyclical risks in the financial system; these indicators relate to risk mispricing, the soundness of bank balance sheets and corporate credit growth. New housing loans have declined notably recently. Moreover, GDP growth has proved increasingly volatile in the last few years, which is why the traditional CCyB indicator has become less meaningful. The economic outlook is fraught with heightened risks.

In light of this and with a view to strengthening banks’ capital base in a forward-looking manner, the FMSB urges banks to exercise caution in handing out dividend payments in 2023.

The FMSB’s take on residential real estate financing

Credit growth soared in the months leading up to the entry into force of the FMA’s regulation for sustainable lending standards for residential real estate financing. Since early August new real estate lending has dropped markedly, but the annual growth rate of housing loans has remained very high, both in historical terms and by European standards.

Amid rising interest and inflation rates and high real estate prices, real estate financing has become less affordable. Excessive household debt is no sustainable solution to this affordability issue. On top of this, uncertainty about general economic developments has increased significantly. As a result, real estate lending has been on a decrease not only in Austria, but also in most other European countries and around the globe.

As explained regularly by European and Austrian institutions – the FMSB, the FMA and the Oesterreichische Nationalbank (OeNB) – borrower-based measures are meant to curb excessive developments in real estate lending and thus to reduce systemic risks to the banking system. The regulation for sustainable lending standards for residential real estate financing aims at changing households’ financing behavior, while safeguarding sustainable lending standards. Sustainable financing for housing purchases continues to be available. The FMSB requests the FMA to draw up a proposal for refining the regulation with regard to short-term bridge financing to buy new real estate when selling existing real estate and with regard to nonrepayable government grants. The proposal will inform a decision to be made by the FMSB in early 2023.

As laid down in the joint strategy, Austria’s macroprudential policy-making institutions, i.e. the FMSB, FMA and OeNB, are committed to following an evidence-based approach.

The FMSB’s take on commercial real estate financing

While commercial real estate financing accounts for a lesser share of Austrian banks’ business than the residential counterpart, credit growth in this segment has likewise surged recently. A large portion of commercial real estate loans are moreover marked by high loan-to-value ratios. Even though rating migrations have not raised any red flags in the first half of 2022, in an environment of high inflation, rising interest rates and weakening growth prospects, banks should nevertheless pay heed to appropriate property valuations and adequate risk provisioning.

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.