Financial Stability Report

Opinions expressed by the authors of studies do not necessarily reflect the official viewpoint of the Oesterreichische Nationalbank or of the Eurosystem.

Reports

International Environment 
International Economic Developments 
International Financial Markets 
Central and Eastern Europe 

The Real Economy and Financial Markets in Austria 
Economic Activity 
Nonfinancial Corporations 
Households 
Stock Markets 
Bond Market 

Financial Intermediaries in Austria 
Framework Conditions 
Banks 
Other Financial Intermediaries 

Special Topics

A Macroeconomic Credit Risk Model for Stress Testing the Austrian Credit Portfolio 
This study presents a credit risk model for stress testing the aggregate credit portfolio of Austrian banks on the basis of individual loan data. The model captures credit risk in dependence on macroeconomic variables and accounts for the correlations between them. We select multivariate credit risk models based on univariate regressions to explain the credit risk by means of macroeconomic indicators, such as industrial production, inflation and the Austrian Traded Index (ATX). By introducing a dynamic component, we can use these models to assess the future losses on Austrian banks" credit portfolio on the basis of simulations considering the evolution of these macroeconomic variables. The model is used in particular to perform stress tests drawing on historically observed maximum changes in these macroeconomic indicators. Moreover, we conduct a stress test assuming a severe three-year recession. The outcomes for all crisis scenarios under examination attest to a sound risk-bearing capacity of the Austrian banking system.

Foreign Currency Loans in Austria — Efficiency and Risk Considerations 
Since the mid-1990s foreign currency borrowing by businesses and households — first mainly in Swiss francs, later also in Japanese yen — has increased markedly in Austria. This study aims to analyze this development and examines its implications for the risks to the Austrian economy. A discussion of the key features of foreign currency borrowing in Austria will be followed by an attempt to find appropriate theoretical approaches to explain this phenomenon. Efficiency considerations fail to explain the pronounced increase in foreign currency borrowing, but taking into account a range of Austrian particularities, the theory of rational herd behavior may offer some plausible insights into the causes. The study also takes a closer look at the specific risks involved in foreign currency funding and the exposure of lenders and borrowers. The findings show that the economic risks caused by the high share of foreign currency loans in total lending are substantial. Therefore, the trends in foreign currency borrowing deserve to be closely monitored.


Financial Liberalization in Austria: Why so Smooth? 
This paper analyzes some reasons for the apparent success of financial liberalization in Austria. Remarkably, Austria"s ambitious program of deregulation between 1977 and 2000 did not result in a financial crisis, but yielded large and tangible benefits. While the Austrian experience has so far not attracted much attention in the literature, it may contain important lessons on international best practices. Three clear policy implications emerge from this study: First, gradualism worked well. The slicing of reforms into manageable pieces helped avoid a cumulation of risk factors and the emergence of financial bubbles. Second, financial reform was timed in a countercyclical manner, which added stability to the economy. Finally, the predominance of credit cooperatives and savings banks in Austria had stabilizing effects and gave rise to a slightly countercyclical lending behavior, i.e. a financial decelerator.

Private Capital Flows to Emerging Markets in the 1990s and Their Impact on Financial Markets 
This paper reviews trends in and determinants of private capital flows to the transition and emerging economies of Latin America, Asia, and Central and Eastern Europe in the 1990s. It portrays the divergent impact of financial crisis periods on direct, portfolio and other investment flows to the emerging markets. A special focus is put on the development of capital flows to the financial and capital markets of Central and Eastern Europe in general and of the accession countries in particular, highlighting the share of Austrian investment in this region. The analysis of the determinants of foreign investment is complemented by an assessment of the impact of cross-border financial investment and of the ensuing challenges for financial markets.

Legend, Abbreviations 
Editoral close: October 29, 2002