39th meeting of Austria’s Financial Market Stability Board

In its 39th meeting on December 11, 2023, the Financial Market Stability Board (FMSB) evaluated the countercyclical capital buffer (CCyB) and discussed recent developments in commercial and residential real estate financing.

Countercyclical capital buffer

The FMSB advises the Financial Market Authority (FMA) to maintain the CCyB at its current rate of 0% of risk-weighted assets. The credit-to-GDP gap dropped further in the first quarter of 2023 and at –18 percentage points remained well below the critical threshold of 2 percentage points. Nevertheless, the FMSB is urging banks to use their current high profits for improving their capitalization. A stronger capital base will ensure that banks are prepared for rising risks associated with higher interest rates and the cooling of the economy.

Commercial real estate financing

The FMSB again discussed commercial real estate financing at its latest meeting, as increased funding and construction costs along with declining demand pose a growing challenge – and in some cases have already led to defaults – at both the national and international level. The current problems of individual companies in the commercial real estate sector, which have also become a topic of public debate, are not of a magnitude that would represent a direct threat to financial stability in Austria.

The FMSB reiterates its advice to banks released after its 37th meeting: Banks should exercise prudence in risk provisioning and caution in the valuation of real estate collateral, and, in doing so, use the financial leeway created by their current high profits. Moreover, the FMSB emphasizes that defaults on real estate loans lead to higher risk weights. The FMSB endorses the assessments of the Oesterreichische Nationalbank1, the FMA2, the European Central Bank3, and the European Systemic Risk Board4, which have all warned about vulnerabilities in the commercial real estate market.

Residential real estate financing

The FMSB notes that the regulation for sustainable lending standards for residential real estate financing (KIM-V) has been serving its purpose in the Austrian banking market, as reflected in a significant improvement of lending standards. At the same time, the high share of variable rate loans is a cause for concern. Borrowers of long-term variable rate real estate loans are exposed to interest rate risk and may encounter repayment problems if this risk materializes.

Moreover, the KIM-V provides for exemption buckets that allow banks to grant loans that comply with internal lending standards but whose design does not align with the – inevitably – more general requirements of the KIM-V. However, in the first half of 2023, banks did not make full use of the exemption buckets, with the volume unused totaling EUR 650 million (at the banking sector level). In fact, three-quarters of banks used less than 80% of the potential loan volume from the exemption buckets, and half used less than 50%. Furthermore, exceptions for very small loans and bridge loans add to the amount of loans that are effectively exempt from the KIM-V. All this unutilized potential suggests that lending is currently not unduly constrained by the KIM-V. The FMSB will continue to monitor the regulation’s effectiveness and management and carry out a thorough analysis when 2023 data are available.

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.

1Oesterreichische Nationalbank. 46. Financial Stability Report. November 2023. https://www.oenb.at/en/Media/Press-Archives/2023/20231123.html.
2Financial Market Authority. Facts and Figures, Trends and Strategies 2024. December 2023. https://www.fma.gv.at/en/facts-and-figures-trends-and-strategies-2024/.
3European Central Bank. Real estate markets in an environment of high financing costs. Financial Stability Review. November 2023. https://www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202311_02~75cf0710b9.en.html#toc5.
4European Systemic Risk Board. Vulnerabilities in the EEA commercial real estate sector. January 2023. https://www.esrb.europa.eu/pub/pdf/reports/esrb.report.vulnerabilitiesEEAcommercialrealestatesector202301~e028a13cd9.en.pdf?94fa2bfacc0cf836fa9f5003bd5a1651.