The unfolding sovereign debt crisis has had the greatest impact on the stability of the European banking system so far in 2011. The sovereign debt crisis not only raised many banks’ provisioning charges but also contributed to higher volatility in the financial markets, the renewed loss of confidence among banks and the beginning slowdown in cyclical activity. “Despite their comparatively low exposure to highly indebted countries, Austrian banks have not been able to escape these negative effects,” observed Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB) during the presentation of the 22nd issue of the OeNB’s Financial Stability Report.
Growth in the euro area continued to be outpaced by growth in Central, Eastern and Southeastern Europe (CESEE) and other emerging markets in 2011. Following a robust recovery in the first half, euro area growth, and subsequently CESEE growth, slowed down considerably in the second half of 2011, though.
The current financial crisis has not yet had an impact on the financing costs of Austrian enterprises and households. Low interest rates have made for lower loan costs for companies and for households in the past two years. This development was additionally supported by the above-average share of variable rate loans, through which companies and households have, however, incurred interest rate risks. For households, the continued high ratio of foreign currency loans represents another risk factor. Although the exchange rate-adjusted volume of foreign currency loans has fallen throughout the past two years, the share of foreign currency loans in total loans has decreased only little, given the development of exchange rates in recent years, and still accounted for nearly 30% of all credits at the end of the third quarter of 2011.
The uncertainties in the international financial markets have also had a negative impact on Austrian banks’ profitability since mid-2011. While some of Austria’s major banks have had to make additional large-scale loan loss provisions and while their domestic performance remains weak, Austria’s regional banks reported stable results, and the CESEE business of Austrian parent banks remained fairly profitable. Austrian banks’ CESEE exposure is characterized by a comparatively favorable development of profitability, but also by relatively high risks. “The set of measures devised by the Financial Market Authority (FMA) and by the OeNB is designed to strengthen business model sustainability for Austria’s large banks with international business ties,” emphasized OeNB Executive Director Andreas Ittner. He added: “This will help ensure financial stability in Austria as well as in CESEE.” To reinforce banks’ business models, more stringent capital adequacy requirements apply at the group level, as do provisions meant to prevent excessive lending in CESEE during booms without triggering credit supply constraints during more difficult economic periods.
The capital ratios of Austrian banks improved further in the period under review. At mid-2011, the consolidated core capital ratio of Austria’s banks stood at 10.3%. Nevertheless, the OeNB sees a need for banks to improve their capital situation, as their average capital ratios are lower than those of their international peers. The European Banking Authority (EBA) also sees a need for those Austrian banks that participated in the 2011 EU capital exercise to raise capital to meet the new threshold for the core tier-1 capital ratio.