Recommendation FMSB/3/2022: guidance on applying the countercyclical capital buffer (CCyB)

32nd meeting, May 16, 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 October 1, 2022.

Based on the Basel credit-to-GDP gap alone, activating the CCyB would have been called for as the gap has been exceeding the benchmark threshold of 2 percentage points. In the fourth quarter of 2021, the credit-to-GDP gap widened to 2.6 percentage points, and in the third quarter, the gap was found to have been 2.5 percentage points following data revisions.

Other indicators – relating to risk mispricing, the soundness of bank balance sheets, credit growth and property price growth – also signal a buildup of clearly elevated cyclical risks in the financial system. In particular, the risk weights for mortgage-backed loans and corporate loans have decreased 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 to unprecedented levels. Last but not least, credit growth continues to be highly robust, given strong annual growth of lending for residential purposes and corporate lending.

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. In the period from the fourth quarter of 2020 to the fourth quarter of 2021, year-on-year GDP growth rebounded to 6.3%, following a sharp drop in 2020. The outlook for GDP growth remains fraught with heightened risks, however. All things considered, the FMSB continues to recommend a CCyB of 0% for the time being despite the risks signaled by other CCyB-relevant indicators. Among other things, this recommendation reflects the assumption that the proposed borrower-based measures for residential real estate loans will have a dampening impact on credit growth.

There are indications that the high credit growth observed is temporary, as companies have had higher liquidity needs following the war on Ukraine, have been seeking to lock in the prevailing favorable lending conditions in anticipation of any interest rate hikes and have been borrowing more short term in an effort to build up inventories.

Yet, the FMSB also emphasizes that credit growth is still overly high compared with GDP growth, and that the implementation period for activating the CCyB may have to be shortened. If credit growth were to stagnate at current levels or even rise, activating the CCyB would be called for.

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