Recommendation FMSB/1/2022 on applying the countercyclical capital buffer (CCyB)

31st meeting, March 1, 2022

The latest recommendation of Austria’s Financial Market Stability Board (FMSB) to the Financial Market Authority (FMA), in line with Article 23a para. 1 Austrian Banking Act, is to leave the countercyclical capital buffer (CCyB) unchanged at a rate of 0% of risk-weighted assets. This decision will apply from July 1, 2022, and will be reviewed also against the backdrop of the effectiveness of borrower-based measures.

The gap between the credit-to-GDP ratio and its trend, i.e. the credit-to-GDP gap, has narrowed to 1.9 percentage points and has thereby fallen below the threshold of 2 percentage points for activating the CCyB buffer. Hence, there is no case for immediate action.

At the same time, other indicators – relating to risk mispricing, the soundness of bank balance sheets, credit growth and property prices – have not improved and continue to signal a buildup of clearly elevated cyclical risks in the financial system. In particular, the risk weights of mortgage-backed loans and corporate loans have been lowered to levels that are very low by historical standards. Furthermore, the fundamentals indicator for residential property prices and the price-to-rent ratio have deteriorated further and risen to peak levels. Last but not least, credit growth continues to be highly robust, given strong annual growth of lending for residential purposes and to firms.

Yet, there is no case for changing the CCyB mechanistically, in particular when the credit-to-GDP ratio deviates from its trend as a result of a negative business cycle1. After all, annual GDP growth rebounded to 3.4% in the third quarter of 2021, following a sharp contraction in 2020. At the same time, the outlook for GDP growth remains fraught with heightened risks. Still, given the narrowing credit-to-GDP gap, the FMSB continues to recommend a CCyB of 0% for the time being in spite of the risks signaled by other CCyB-relevant indicators. Another factor that has informed this recommendation is that the proposed borrower-based measures for housing mortgages will reduce the risks arising from credit growth. Yet, the FMSB also emphasizes that credit growth is still overly high compared with GDP growth, and that the implementation period for the CCyB buffer may have to be shortened.

Any future decision on whether a higher CCyB requirement would be advisable will depend on the continued sustained improvement of the CCyB-relevant indicators as the economy recovers and on the absence of cyclical risks in financial markets. Another factor that feeds into the decision-making on activating a CCyB is the effectiveness with which borrower-based measures for housing mortgages will reduce the risks arising from the credit cycle.

Therefore, the review of the credit-to-GDP gap would need to be adequately balanced with the review of the indicators listed above. After all, the risks arising from the credit cycle will not necessarily evaporate even if the credit-to-GDP gap closes when output growth rises.

1 Baba et al. (2020), Drehmann et al. (2011 and 2014).