41st meeting of Austria’s Financial Market Stability Board

The 41st meeting of Austria’s Financial Market Stability Board took place on June 10, 2024. The main topics discussed were structural systemic risks as the basis for structural capital buffers, the countercyclical capital buffer and commercial real estate financing.

Structural systemic risks

Since 2018, the Austrian banking system has been among the most stable banking systems in the world, according to the “Banking Industry Country Risk Assessment (BICRA)” carried out by rating agency S&P Global1. As a result, Austrian banks and, therefore, also the real economy benefit from lower financing costs. Macroprudential capital buffers have significantly contributed to this by addressing systemic structural risks. In light of this, the capitalization of the Austrian banking system and particularly the capitalization of large Austrian banks have increased considerably last year.

At its 41st meeting, the FMSB found that the major structural systemic risks identified in the previous assessment from 2022 continue to exist. Due to the size of and strong interconnectedness in the banking sector, systemic banking crises can have high economic costs. In addition, there is high cluster risk as Austria’s banks are heavily exposed to Central, Eastern and Southeastern Europe.  While the interest rate turnaround has led to improved structural profitability, it remains to be seen to what extent this is sustainable over the medium term. For this development takes place against the backdrop of fierce competition, high bank branch density, the need to invest in digitalization, and risk costs that are still low in a long-term comparison.  In the event of a banking crisis, recapitalization by the owners is challenging due to the specific ownership structures in Austria. At the next meeting, the FMSB will discuss its recommendations concerning the systemic risk buffer and the systemically important institutions (O-SII) buffer.

Countercyclical capital buffer

The FMSB reaffirmed its recommendation for a countercyclical capital buffer of 0%. After all, the credit-to-GDP gap remained well below the critical threshold until the fourth quarter of 2023. In addition, the FMSB will validate a new framework with a broader perspective on the drivers of cyclical risks by the end of 2024, with a view to applying a new methodology in 2025. 

Commercial real estate financing

The commercial real estate financing segment remains challenging. Both default rates and risk provisioning for commercial real estate loans have continued to rise, although the growth in risk provisions has lagged behind that of defaults. The market values of real estate collateral reported by banks remained largely unchanged or even increased in 2023, with only a smaller proportion being adjusted downwards. The FMSB therefore points to its repeated recommendation to banks to utilize the leeway from high profits for higher risk provisions and more prudent real estate valuations.

Based on an assessment by the Oesterreichische Nationalbank, the FMSB found that potential losses from commercial real estate loans, in the event of a further deterioration of the economic environment, can pose an increased risk to financial stability in Austria. The FMSB will therefore discuss the need for macroprudential measures for this segment at the next meeting.

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 S&P Global. Banking Industry Country Risk Assessment Quarterly Monitor: Q4 2023.