Recommendation FMSB/3/2020: guidance on adjusting the systemic risk buffer (SyRB) and the other systemically important institution (O-SII) buffer

24th meeting, June 15, 2020

The Financial Market Stability Board (FMSB) completed the review of the other systemically important institution (O-SII) buffer and the systemic risk buffer (SyRB) which it had launched at its 23rd meeting. It found that the application of these two macroprudential capital buffers has strengthened investors’ confidence in the Austrian banking system. In the current crisis, the buffers will work as intended by ensuring that banks have adequate capital at their disposal. Making use of this capital might in part restrict profit distribution and bonus payments, but will not result in any immediate supervisory sanctioning.

Addressing the too-big-to-fail problem, the O-SII buffer aims to reduce the probability of large, systemically important credit institutions to malfunction or fail as well as to limit any related damage for the financial system.

The SyRB addresses the systemic risks arising from the structural characteristics of the Austrian banking system, given its size, geographic concentration on emerging market economies, specific ownership structures and low structural profitability.

The FMSB’s SyRB review

As already noted at the board’s 23rd meeting, the SyRB has, since its introduction in 2016, successfully addressed structural systemic risks, and lending to businesses and households has grown at a robust rate. The SyRB has also considerably helped improve the way investors, rating agencies and international financial institutions perceive the Austrian banking sector. Given this improvement in the rating of the Austrian banking system and of many individual banks, refinancing costs have gone down both for banks and for the real economy. The SyRB strengthens risk sharing in the banking sector and supports lending, particularly in the event of crises.

A disruption of the Austrian financial system as a whole, or of parts thereof, may have serious negative effects on the financial system itself and on the real economy. Factors that increase the risk of such disruptions are the Austrian financial sector’s low structural profitability, its specific ownership structures (which, in the event of a crisis, would partly impair banks’ recapitalization) and its high exposure to emerging European economies. The SyRB plays a central role in addressing these structural systemic risks, helping maintain the excellent rating of the Austrian banking system, keeping refinancing costs at low levels and avoiding the need for future government support for the banking sector.

The FSMB’s O-SII buffer review

The malfunctioning or failure of other systemically important institutions (O-SIIs) may disrupt the financial system as a whole or parts thereof, which may have serious negative effects on both the financial system and the real economy. The systemic importance of O-SIIs and the anticipation of potential government support in the event of a crisis may cause problems of moral hazard. The O-SII buffer reduces the likelihood of bank failures and therefore (partly) offsets the higher social costs that would result from the malfunctioning or failure of a credit institution.

The EBA guidelines (EBA/GL/2014/10) established a two-step process for identifying O-SIIs. In the first step, banks are given a score according to the following indicators: (1) size, (2) importance for the economy of the European Union or of the relevant Member State, (3) complexity/cross-border activity, and (4) interconnectedness of the institution or group with the financial system. In the second step, the national authorities use supervisory judgment, i.e. they draw on their expertise on the relevant banking sector to ensure that any further systemically important banks are identified as O-SIIs even if they might not have been identified as such in the first step.

In 2018, the FMSB adopted several quantitative tools to underpin such supervisory judgment. First, guaranteed deposits are used as an additional indicator, given that banks that hold a high share of guaranteed deposits are of high systemic importance. In an insurance event, they would (over)burden the deposit guarantee system. Second, a bank that would not qualify as O-SII based on its average EBA scores may still pose a threat to financial stability if any one of the indicators applied in line with the EBA guidelines shows that this bank is particularly exposed. In addition, banks may be systemically important not only at the consolidated but also at the unconsolidated, i.e. individual, level.

Banks for which SyRB and O-SII buffer should be applied

The FMSB recommends to continue to apply the SyRB and the O-SII buffer both at the consolidated and the unconsolidated level for these reasons: systemic risks may arise at both the consolidated and the unconsolidated level and, in particular within cross-border banking groups, capital allocation would not be flexible in a crisis situation.

According to the EU’s revised Capital Requirements Directive (CRD V), the O-SII buffer (Article 131 CRD V) and the SyRB (Article 133 CRD V) will be additive as of end-2020. The FMSB found that, as the future course of the crisis is highly uncertain, it will be best in the current setting to take a gradual approach to implementing this provision, which implies completely recalibrating both buffers. Subject to the transposition of the CRD V into Austrian law, the FMSB recommends to adjust the size of the buffers in a way that prevents effective buffer requirements from increasing between December 29, 2020, and end-2022 simply because of legal changes. The FMSB will evaluate the effects of the COVID-19 crisis at least annually, however. Regardless of the implementation of the CRD V in Austrian law, the FMSB recommends, in addition, to reduce the SyRB rate to 0.5% for four banks from the (state) mortgage bank sector, given that their contribution to systemic vulnerability has decreased as government guarantees have declined markedly. Moreover, the FMSB recommends to discontinue applying the SyRB to two banks (Sberbank and Denizbank) as their exposure to systemic cluster risk has declined significantly.

Bearing this in mind, the FMSB recommends the following sizes for the SyRB and the O-SII buffer at the consolidated and the unconsolidated level:

Overview of identified banks and buffer sizes at the consolidated level
  O-SII buffer SyRB O-SII buffer and SyRB
additive
Buffer size in % of RWA As of December 29, 2020 As of December 29, 2020 As of December 29, 2020
   
Erste Group Bank 1.00 1.00 2.00
Raiffeisen Bank International 1.00 1.00 2.00
UniCredit Bank Austria 1.00 1.00 2.00
BAWAG P.S.K. 0.50 0.50 1.00
Raiffeisenlandesbank Oberösterreich 0.50 0.50 1.00
Raiffeisen-Holding Niederösterreich-Wien 0.50 0.50 1.00
Volksbanken Verbund 0.50 0.50 1.00
HYPO NOE Landesbank für Niederösterreich und Wien   0.50 0.50
Oberösterreichische Landesbank   0.50 0.50
HYPO Tirol Bank   0.50 0.50
Hypo Vorarlberg Bank   0.50 0.50
Overview of identified banks and buffer sizes at the unconsolidated level
  O-SII buffer SyRB O-SII buffer and SyRB
additive
Buffer size in % of RWA As of December 29, 2020 As of December 29, 2020 As of December 29, 2020
   
Erste Group Bank 1.00 1.00 2.00
Raiffeisen Bank International 1.00 1.00 2.00
UniCredit Bank Austria 0.50 0.50 1.00
Raiffeisenlandesbank Oberösterreich 0.50 0.50 1.00
Raiffeisenlandesbank Niederösterreich-Wien 0.50 0.50 1.00
BAWAG P.S.K. 0.50   0.50
Erste Bank der österreichischen Sparkassen 0.50   0.50