37th meeting of Austria’s Financial Market Stability Board

The Financial Market Stability Board (FMSB) convened in its 37th meeting on June 28, 2023. The key topics on its agenda included the financing of commercial real estate and residential property, the countercyclical capital buffer (CCyB) and the use of leverage in alternative investment funds.

Commercial real estate financing

Over the past few quarters, commercial real estate financing has been gaining increased attention internationally, and the FMSB has already discussed this topic in depth during earlier meetings. Up until the first quarter of 2023, commercial real estate financing continued to grow strongly despite rising interest rates, considerably higher construction cost and a deterioration in the economic outlook, while loan defaults remained low. That said, risks in commercial real estate financing are emerging with a certain lag. In Austrian banks’ balance sheets, commercial real estate financing accounts for an above-average share in an EU-wide comparison. Moreover, the loan-to-value ratio is high for a large part of the portfolio. Although Austrian banks have stepped up risk provisioning for commercial real estate exposures in line with the FMSB’s earlier recommendation, sufficient provisions in combination with prudent real estate valuations remain a necessity in the FMSB’s view.

In its assessments of commercial real estate financing, the FMSB takes into account the funding of both residential real estate and nonresidential real estate owned by legal persons, which is in line with the approach recommended by the European Systemic Risk Board (ESRB).

Residential real estate financing

The FMSB has found that the introduction of borrower-based measures has led to a significant improvement in lending standards, in particular with regard to loan-to-value and debt service-to-income ratios. The measures are necessary to ensure sustainable lending standards. However, the FMSB has identified a high, and increased, share of variable rate loans with a debt service-to-income ratio of more than 30% and hence reiterates its guidance to limit debt service at 30% of net income if the interest rate fixation period is shorter than half the term of the loan, as previously communicated in the FMSB’s press release about its 31st meeting on March 1, 2022.

Countercyclical buffer

The FMSB advises the FMA to maintain the CCyB at its current rate of 0% of risk-weighted assets. Even after GDP and credit figure revisions (which were within the usual range), the credit-to-GDP gap remained clearly below the critical threshold of 2 percentage points, coming to –9.7 percentage points in the fourth quarter of 2022. Given that the outlook is still fraught with heightened risks, the FMSB reiterated its call for ensuring an adequate capital base – that also holds up to international standards – throughout the Austrian banking sector.

Use of leverage in alternative investment funds

As regards the use of leverage in alternative investment funds, the FMSB has not identified any associated significant systemic risks for the financial system or significant risks of disruptions in individual or several market segments or for long-term economic growth. The structural liquidity shortfalls in real estate funds are still high, however.

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.