Recent developments and macroprudential policy update

The Austrian banking sector further increased its profit in the first half of 2023 despite fading momentum in loan growth

The largest banks in Austria are required to hold a capital buffer for other systemically important institutions (O-SII buffer), which reflects their role for the financial system and the wider economy. The O-SII buffer is prescribed for banks whose malfunctioning or failure may trigger a systemic risk that could entail serious negative consequences for the financial system and the real economy. Systemically important institutions in Austria are identified based on the guidelines of the European Banking Authority (EBA) by considering a bank’s size and other factors such as its complexity and interconnectedness. ¹ Currently, seven banks at the consolidated level and eight banks at the unconsolidated level are identified as systemically important institutions and hold an O-SII buffer between 0.5% and 1.75%. The next periodic evaluation of this buffer will take place in 2024.

The Austrian banking sector earned a record profit, mainly due to higher interest margins. Austrian banks continued to increase their profits in the first half of 2023, supported, among other things, by rising policy interest rates on deposits in riskless overnight central bank accounts. Compared to the same period last year, they more than doubled their profits to EUR 7.3 billion (see chart 2). With the net interest margin amounting to over 2%, Austrian credit institutions expanded their net interest income by more than 40% over the last 12 months. High inflation, on the other hand, also led to an increase in administrative costs and wages in particular. Impairments on equity participations, which weighed on last year’s results, no longer had a significant impact on profits, while loan loss provisioning was only marginally higher than last year.

Improved operating efficiency pushed Austrian banks’ return on assets well above the European average in the first half of 2023. Rising income and lower expenses raised operating efficiency. The consolidated cost-to-income ratio of the Austrian banking sector improved to 50% in the first half of 2023. Provided that profits stay on a similar course in the second half of the year, Austrian banks will generate a consolidated return on assets of 1.3%. The comparative figure for the European banking sector would be 0.7%.

Due to rising interest rates and banks’ stricter lending conditions, bank lending is losing momentum in Austria. Companies’ short-term financing needs for inventories and operating resources remained at an elevated level, but demand for investment loans has been falling. In August 2023, corporate loans grew by 4.7% year on year, i.e. only at half the rate recorded at end-2022. At the same time, loans to households contracted by 1.3%, caused by a shrinking volume of mortgage loans, as increasing interest rates made the latter less affordable. In light of this, the annual growth rate of domestic loans to nonbanks declined to 1.1% in August 2023.

The credit-to-GDP gap remained negative, warranting a countercyclical capital buffer (CCyB) of 0%. The credit-to-GDP gap, which serves as the leading indicator for activating the CCyB, remained well below the critical threshold of +2 percentage points, which implied a CCyB of 0%. However, with GDP growth having proven increasingly volatile over the last few years, the credit-to-GDP gap may have become less reliable as an indicator of the buildup of cyclical risk. Consequently, supervisory authorities closely monitor additional relevant indicators that relate, for instance, to the correct pricing of risks in the financial system, the valuation of real estate markets and the indebtedness of households and corporates.

Since the introduction of binding borrower-based measures (BBMs) in Austria in August 2022, ² residential real estate (RRE) lending standards have improved significantly. The BBMs, which are a structural macroprudential instrument, define limits for new RRE lending with respect to the loan-to-value (LTV) ratio (90%), the debt service-to-income (DSTI) ratio (40%) and loan maturities (35 years). Since the fourth quarter of 2022, the share of sustainable lending has increased for all indicators defined in the BBMs. For the LTV ratio, the share of sustainable lending climbed from 70% to 79%. The shares of sustainable lending for the DSTI ratio and for loan maturities are even higher at 89% and 99% in the first half of 2023, which reflects an increase by 5 and 3 percentage points, respectively. Banks’ flexibility increased further in 2023 due to an amendment. In addition to the exemption bucket applicable to up to 20% of the volume of new loans, bridge loans, for instance, were exempted too. According to reporting data, banks only used around two-thirds of their total exemption bucket in the first half of 2023, which suggests that the decrease in mortgage volumes is demand driven. Further evidence that BBMs were not driving the deceleration comes from a comparison with the situation in Germany, where no such measures are in place and lending growth has shown a similar downward trend (see chart 3). Against this background and considering the current environment of higher interest rates, elevated economic uncertainties and lower loan demand, a recent evaluation suggests that it is necessary to keep the BBMs in place to prevent a rise in RRE-induced systemic risk.

Lending at variable interest rates remains an area of macroprudential concern. From 2022 onward, the share of new loans to households with variable interest rates rose again, reaching close to 50% in August 2023, which exposes borrowers to interest rate risks, and such risks have already started to materialize. Interestingly, this occurs at a time when interest rates for variable rate loans are higher than for fixed rate lending. This development warrants close monitoring, as variable rate loans carry an additional indirect credit risk for the banking system.

Credit quality remains high. Rising interest rates, subdued economic conditions and an increasing number of insolvencies, which are back at pre-pandemic levels, have not yet resulted in a deterioration of Austrian banks’ credit quality. This is in part because the effects of rising interest rates usually take some time to lead to credit defaults. Furthermore, amid lower household and corporate indebtedness, the consolidated nonperforming loan (NPL) ratio ³ remained at 2.0%. In mid-2023, the NPL ratios of corporate and household loans ran to 2.7% and 2.2%, respectively, as can be seen in chart 4. Consequently, Austrian banks kept credit risk provisioning stable year on year, and the relative cost of risk ⁴ at 0.2%. The consolidated coverage ratio continued to fall, however, as vintage NPLs with higher provisions were replaced by newly formed, less provisioned NPLs.

The Austrian banking sector’s liquidity ratios are high and comfortably above minimum requirements. The sector’s liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are high, with the median LCR amounting to 158% and the median NSFR equaling 127% in mid-2023. Austrian banks’ ratios are therefore comfortably above the minimum requirements of 100%. While reducing central bank deposits, banks’ repayments of amounts borrowed under the Eurosystem’s targeted longer-term refinancing operations (TLTROs) freed up collateral. In terms of liquidity ratios, Austrian banks thus match or slightly outperform the European average, while their central bank reserves still account for a major part of their liquid assets.

The capitalization of the Austrian banking sector has improved, but Austrian significant institutions (SIs) continue to trail behind their competitors. Driven by retained earnings, the Austrian banking sector’s common equity tier 1 (CET1) capital rose to EUR 90 billion in the first half of 2023. The corresponding CET1 ratio stood at 16.6%. At 7.9%, the consolidated leverage ratio, which offsets the weaknesses of risk-based capital requirements, was kept nearly stable. Despite the increased capitalization, Austrian SIs still trail behind both their smaller local competitors and European SIs on average. ⁵ Therefore, continued efforts are needed by Austrian SIs to increase their capital base. The gradual phase-in of increased structural buffer requirements until 2024 is an important step in this direction, not least because a strong capital base is crucial in times of high inflation, sharply rising interest rates, geopolitical tensions and a subdued economic outlook. ⁶

Austrian banks’ activities in CESEE are concentrated in EU member states, but Russia’s profit contribution continues to be considerable. With more than 80% of assets and 60% of profits originating from inside the EU, Austrian banks’ CESEE subsidiaries predominantly operate within the common European framework. Nonetheless, as highlighted by chart 5, six countries have dominated profit contributions over the last years, with Russia playing a significant role, although those profits are currently not transferable.

Austrian banks’ subsidiaries in CESEE earned a record EUR 2.7 billion in the first half of 2023. In a higher interest rate environment, the subsidiaries earned more than EUR 4 billion in net interest income (+16% year on year), while fees and commissions income rose by 10% to more than EUR 2 billion. Consequently, operating income amounted to EUR 6.5 billion and subsidiaries’ operating profit (EUR 3.6 billion) was up by almost 20%. Very much like in Austria, credit risks have not yet materialized, despite high interest rates, a cost-of-living crisis and higher input costs for companies. The NPL ratio ⁷ reached a historic low of 1.9% and credit risk provisioning dropped by more than one-third year on year. The share of IFRS 9 stage 2 loans started to increase, however, which points to rising risks (see chart 6). ⁸ The overall positive business development is reflected in the subsidiaries’ profit of EUR 2.7 billion (up more than one-third year on year) and their return on assets, which rose substantially from 1.4% in the first half of 2022 to 1.9% one year later.

As of mid-2023, the aggregate CET1 ratio of Austrian banks’ CESEE subsidiaries stood at 18.1% (up 2 percentage points year on year). Their loan-to-deposit ratio was 71%. ⁹ These solid levels are a testament to past efforts by banks and supervisors to make local banking systems more resilient, by increasing the subsidiaries’ risk-bearing capacity and ensuring a balanced refinancing structure. ¹⁰ The outlook for banking in CESEE remains clouded, given uncertainties related to the effects of the war in Ukraine, inflation as well as monetary policy. Hence, credit risk costs may start to rise and net interest margins might be squeezed as deposits are termed out.

The systemic risk buffer (SyRB) addresses, among other risks, the high and concentrated banking exposure to emerging economies in Europe. Disruptions in the whole or in parts of the Austrian financial system may entail severe negative consequences for the entire financial system and the real economy. The SyRB addresses structural systemic risks, inter alia the domestic banking sector’s specific ownership structures and its high exposure to emerging economies in Europe. Although the SyRB is a structural buffer that is expected to stay fairly stable over time and is not affected by short-term developments, the OeNB evaluates it on a regular basis. The next evaluation will take place in 2024.

Recommendations by the OeNB

• Continue to strengthen the capital base by exercising restraint regarding profit distributions.
• Adhere to sustainable lending standards for residential and commercial real estate financing.
• Ensure that interest rate risk management practices adequately reflect changes in the risk environment and that credit risk provisioning levels are conservative at the current juncture.
• For commercial real estate loans, be proactive in provisioning and use conservative collateral valuations.
• Maintain cost efficiency improvements to ensure structurally strong profitability.
• Further develop and implement strategies to deal with the challenges of new information technologies, increased cyber risks and climate change.

Special topics

Nontechnical summaries in English

The effects of cost-push inflation on Austrian banks

Christian Wipf

This study examines how cost-push inflation resulting from import price shocks, e.g. due to higher energy prices, affected the Austrian economy and banking sector during the current high inflation period (2021 to 2023). It finds that the import price shocks were responsible for an 8% rise in Austrian consumer prices, a 1% drop in Austrian GDP and a 180 basis point increase in interest rates following central bank reactions to higher inflation in this period. In the Austrian banking sector, the cost-push inflation shocks, on the one hand, drove up banks’ staff costs, administrative expenses and risk provisions (e.g. for credit risks) as inflation and interest rates went up. On the other hand, they also increased banks’ income (net interest income, fees and commissions income). Net interest margins, for instance – that is, the difference between interest income and expenses as a share of total assets – are estimated to be 25 basis points higher for small banks and 14 basis points higher for large banks in the period under observation due to cost-push inflation. The net effect on bank profitability depends on a bank’s size. For small banks, cost push-inflation drove up costs and risk provisions more than income, causing the return on assets (ROA) from 2021 to 2023 to be 35 basis points lower than without cost-push shocks. For large banks, the shocks led to smaller increases in costs and risk provisioning, resulting in a ROA that was 13 basis points higher in the same period.

Repricing of bank assets and liabilities in the current rate hike cycle: historical perspective and impact on bank profitability

Peter Breyer, Stefan Girsch, Jakob Hanzl, Mario Hübler, Sophie Steininger, Elisabeth Wittig

Having been low or even negative for several years, interest rates have been rising significantly since mid-2022. The banking sector benefited from this development, with Austrian banks making higher profits. In July 2023, the average overnight deposit rate in Austria was higher than the euro area average. For loans, however, both the interest rate level and pass-through rate are also higher in Austria. This is especially true for consumer loans. In sum, Austrian banks’ credit spreads widened faster in the current rate hike cycle than the euro area average. We find low cumulative betas – that is, a slow pass-through of the policy rate to deposit rates – for overnight deposits and higher betas for new term deposits. One of the main reasons for the historically low betas observed in the current cycle is the excess liquidity in the market. Finally, we find that interest rates are passed on to depositors at a slower rate during times of increasing interest rates than during times of declining interest rates. Bank profitability went up in the current rate hike cycle. In light of macroeconomic uncertainties and potentially rising credit risk costs, banks should use their profits to further strengthen their capital position.

Austria’s deposit guarantee scheme – resilient in uncertain times

Judith Eidenberger, Katharina Steiner

Austria’s deposit guarantee scheme (DGS) is multilayered, consisting of three separate DGSs. Despite this complex structure, the Austrian DGSs managed four deposit insurance cases effectively between 2020 and 2022. Despite the systemic dimension of the related payouts in times of exceptional macroeconomic uncertainty and although uncovered depositors incurred losses, the Austrian DGSs have remained credible, and the payout cases had no significant negative effects on banks or financial stability. Our study identifies three key aspects that helped maintain the credibility of Austria’s DGSs: (1) a well-functioning setup combined with a clear funding structure, (2) the efficient operational management of the payouts and (3) the superiority of the DGSs vis-à-vis other creditors in the distribution of insolvency assets combined with sound insolvency procedures.

What do people in Austria think about green finance?

Andreas Breitenfellner, Heider Kariem

This paper analyzes the results of the 2022 OeNB Barometer survey, which asked households in Austria about their opinions and knowledge about green finance. Put simply, green finance is any financial activity, product or service that contributes to sustainable development. We find that a majority expects that due to climate change, they will be financially worse off in 15 years’ time. At the same time, respondents seem to have mainly positive opinions and attitudes about green financial products and businesses. This is especially true for women as well as people who have a higher level of education and middle incomes and who are able to save more. By contrast, age, job status, town size and financial literacy appear to play a rather minor role. We also see that despite positive attitudes, there is low interest in buying green financial products – a finding that matches those of comparable Austrian and international studies. Only relatively few respondents seem to be prepared to do a certain amount of research on green investments and even accept lower returns. That said, contradictory answers suggest that some respondents struggle to understand green finance and related concepts. We also see skepticism about the credibility of financial products marketed as sustainable: A majority thinks that the financial sector deceives the public, cultivating an image of sustainability only to maximize profits (“greenwashing”). As greenwashing can undermine the trust of (potential) customers and may consequently jeopardize confidence in the financial sector and financial stability, it is an issue that financial supervisors should address.

Nontechnical summaries in German

Die Auswirkungen angebotsseitiger Inflation auf die österreichischen Banken

Christian Wipf

Diese Studie untersucht, wie sich die von Importpreisschocks – z. B. aufgrund höherer Energiepreise – ausgelöste Inflation von 2021 bis 2023 auf die österreichische Wirtschaft und den Bankensektor ausgewirkt hat. Die Studie zeigt, dass die Importpreisschocks zu einem Anstieg der österreichischen Verbraucherpreise um 8 %, einem Rückgang des österreichischen BIP um 1 % und – infolge der Reaktion der Zentralbanken auf die höhere Inflation – zu einer Steigerung der Zinssätze um 180 Basispunkte geführt haben. Im österreichischen Bankensektor haben die Schocks sowohl zu einem Anstieg der Kosten (Personal- und Sachaufwand sowie Risikokosten) als auch zu einem Anstieg der Erträge (Nettozinserträge und Provisionserträge) geführt. Die Nettozinsmargen – d. h. die Differenz zwischen Zinsertrag und -aufwand im Verhältnis zur Bilanzsumme – waren beispielsweise aufgrund der Inflation im Beobachtungszeitraum bei kleinen Banken um 25 Basispunkte und bei den Großbanken um 14 Basispunkte höher. Der Nettoeffekt der Inflation auf die Profitabilität der Banken hängt von der Bankengröße ab. Bei kleineren Banken stiegen die Kosten von 2021 bis 2023 stärker als die Erträge, d. h. die Inflation führte zu einer um 35 Basispunkte niedrigeren Gesamtkapitalrendite. Bei den Großbanken stiegen die Kosten aufgrund der Schocks geringfügiger an, d. h. die Inflation führte im selben Zeitraum zu einer um 13 Basispunkte höheren Gesamtkapitalrendite.

Weitergabe von Zinsschritten bei Krediten und Einlagen im aktuellen Umfeld steigender Zinsen: historischer Rückblick und Auswirkungen auf die Profitabilität der Banken

Peter Breyer, Stefan Girsch, Jakob Hanzl, Mario Hübler, Sophie Steininger, Elisabeth Wittig

Nach einigen Jahren mit niedrigen beziehungsweise sogar negativen Zinsen sind die Zinsen seit Mitte 2022 deutlich angestiegen. Dies wirkte sich auf den Bankensektor positiv aus: Die österreichischen Banken erzielten höhere Gewinne. Der durchschnittliche Zinssatz für täglich fällige Einlagen in Österreich war im Juli 2023 höher als im Durchschnitt des Euroraums. Allerdings ist in Österreich auch bei Krediten das Zinsniveau höher und die Weitergabe der Zinserhöhungen rascher als im Euroraum-Durchschnitt. Das gilt insbesondere für Konsumkredite. Insgesamt sind die Kreditmargen der österreichischen Banken im derzeitigen Umfeld steigender Zinsen deutlicher gestiegen als im Euroraum-Durchschnitt. Die Ergebnisse der Studie zeigen niedrige kumulative Betas (d. h. eine langsame Weitergabe der steigenden Leitzinsen bei Einlagen) für täglich fällige Einlagen und höhere Betas für neue gebundene Einlagen. Ein wesentlicher Grund für die langsame Zinsweitergabe ist die Überliquidität am Markt. Zuletzt zeigt die Studie, dass Zinsänderungen auf der Einlagenseite in einem Umfeld steigender Zinsen langsamer weitergegeben werden als in einem Umfeld fallender Zinsen. Die Profitabilität der Banken ist seit Beginn der Zinsanhebungen gestiegen. Vor dem Hintergrund makroökonomischer Unsicherheiten und potenziell steigender Kreditrisikokosten sollten die Banken die Gewinne nutzen, um ihre Kapitalausstattung weiter zu stärken.

Das österreichische Einlagensicherungssystem – belastbar in unsicheren Zeiten

Judith Eidenberger, Katharina Steiner

Die österreichische Einlagensicherung besteht aus drei separaten Einlagensicherungssystemen. Trotz dieser Komplexität konnten zwischen 2020 und 2022 vier Einlagensicherungsfälle erfolgreich abgewickelt werden. Dies gelang ohne signifikante negative Auswirkungen auf Banken und Finanzstabilität, obwohl die entsprechenden Auszahlungen in Zeiten außergewöhnlicher gesamtwirtschaftlicher Unsicherheit systemisch relevant waren und bei ungesicherten Einlagen Verluste verzeichnet wurden. Das Vertrauen in die österreichische Einlagensicherung blieb weiterhin aufrecht. In dieser Studie konnten drei wesentliche Faktoren für die Glaubwürdigkeit der österreichischen Einlagensicherung ermittelt werden: (1) der gut funktionierende Aufbau und die klare Finanzierungsstruktur, (2) die gute operative Durchführung der Auszahlungen und (3) die Vorrangigkeit der Einlagensicherung gegenüber anderen Gläubigern bei der Verteilung der Insolvenzmasse, gepaart mit einem soliden Insolvenzverfahren.

Was halten die Menschen in Österreich von Green Finance?

Andreas Breitenfellner, Heider Kariem

In dieser Studie analysieren wir die Ergebnisse der OeNB-Barometer-Umfrage 2022, bei der die Meinung und das Wissen österreichischer Haushalte zum Thema Green Finance erhoben wurden. Der Begriff Green Finance bezeichnet – vereinfacht ausgedrückt – jegliche Aktivitäten, Produkte und Dienstleistungen im Finanzsektor, die zu einer nachhaltigen Entwicklung beitragen oder zumindest die Risiken einer nicht nachhaltigen Entwicklung berücksichtigen. Laut den Ergebnissen der vorliegenden Umfrage geht eine Mehrheit davon aus, dass sich ihre finanzielle Situation in den nächsten 15 Jahren aufgrund des Klimawandels verschlechtern wird. Gleichzeitig haben die Befragten überwiegend eine positive Meinung bzw. Einstellung zu grünen Finanzprodukten und Unternehmen. Dies ist insbesondere unter Frauen sowie Menschen mit höherem Bildungsniveau, mittlerem Einkommen bzw. ausgeprägterem Sparverhalten zu beobachten. Andererseits dürften Faktoren wie Alter, Beschäftigungsstatus, Größe der Wohngemeinde und Finanzbildung in dieser Hinsicht eine eher geringe Rolle spielen. Ferner zeigt unsere Analyse, dass ungeachtet der positiven Einstellung gegenüber grünen Finanzprodukten das konkrete Interesse, in solche zu investieren, noch gering ist; dieses Ergebnis deckt sich mit jenen vergleichbarer österreichischer und internationaler Studien. Nur ein relativ kleiner Teil der Befragten scheint bereit zu sein, aktiv Informationen über grüne Investitionen einzuholen oder gar geringere Erträge in Kauf zu nehmen. Allerdings deuten zum Teil widersprüchliche Antworten darauf hin, dass einige der Befragten Schwierigkeiten haben, Green Finance und damit zusammenhängende Begriffe zu verstehen. Skepsis herrscht gegenüber als nachhaltig beworbenen Finanzprodukten: Eine Mehrheit ist der Meinung, dass der Finanzsektor nur zur Gewinnmaximierung ein Nachhaltigkeitsimage pflegt („Greenwashing“). Da Greenwashing das Vertrauen (potenzieller) Kund:innen und somit das Vertrauen in den Finanzsektor und die Finanzstabilität untergraben kann, sollten sich die Finanzaufsichtsbehörden mit diesem Thema befassen.

The effects of cost-push inflation on Austrian banks

Christian Wipf ¹²

To better understand what the current inflationary surge means for financial stability, this study analyzes how cost-push inflation resulting from import price shocks affected key Austrian macroeconomic variables during the current high inflation period (Q2 21 to Q1 23). Broadly in line with the expectable effects of a negative supply shock, the import price shocks are estimated to have caused an 8% rise in Austrian consumer prices, a 1% drop in Austrian GDP and a 180 basis point increase in interest rates following central bank reactions to higher inflation. The effects on Austrian banks’ income statements are more nuanced. On the one hand, the inflationary shocks drove up costs (staff costs and administrative expenses) and banks’ risk provisions; on the other hand, they also caused banks’ income to rise (net interest income and income from fees and commissions). Net interest margins, for instance, are estimated to be 25 basis points (14 basis points) higher for small (large) banks in the period from 2021 to 2023 due to cost-push inflation. The net effects on bank profitability turn out to be heterogenous. For small banks, cost push-inflation drove up costs and risk provisions more than income, causing the return on assets (ROA) to be 35 basis points lower in the period from 2021 to 2023. For large banks, the shocks led to smaller increases in costs and risk provisioning, resulting in a ROA that was 13 basis points higher in the same period.

JEL classification: E31, E44, G21, Q43

Keywords: cost-push inflation, import prices, banks, Austria

This paper follows similar studies on the effects of terms-of-trade, import or oil price shocks on macroeconomic aggregates. ¹⁴ It is structured as follows: Section 1 identifies inflationary cost-push shocks from the import side. Section 2 estimates the effects of such shocks on Austrian macroeconomic variables (GDP, CPI inflation and short-term interest rates) to clarify the macroeconomic scenario. Finally, section 3 estimates the effects of these shocks on key components of Austrian banks’ income statements. All models employed in this study are estimated using data up until Q4 19 only, given the extreme effects of the COVID-19 pandemic, ¹⁵ and are then applied to the current high inflation period in Austria. Since the transmission of import price shocks to macroeconomic and bank variables takes time, all models are estimated with lags of up to two years.

1 Shock identification

Chart 1 shows the VAR model estimates of the supply shocks επ,t and the actual commodity price changes. As the left-hand panel indicates, cost-push shocks explain most of the changes in actual commodity prices. The right-hand panel also shows the model-implied shocks for the high inflation period from Q2 21 to Q1 23. The cost-push shocks were particularly strong in the second half of 2021 and in the first quarter of 2022.

2 Macroeconomic effects

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Table 1: Macroeconomic variables used in this study  

	Description of variable	Period	Source
CPI inflation	Yearly change in Austrian consumer price index in %	Q1 93 to Q4 19	Statistics Austria
Interest rate	Quarterly change in euro area three-month interbank rate in basis points	Q1 94 to Q4 19	OECD; FRED1
GDP	Quarterly Austrian GDP growth in %, seasonally adjusted	Q2 95 to Q4 19	Statistics Austria
Source: Author’s compilation.
1 FRED = Federal Reserve Economic Data database (series ID:IR3TIB01EZM156N).

Chart 2 shows the reactions of these variables after a supply shock initially increased commodity prices by 10 percentage points, as shown in the bottom right-hand panel, over the following two years (eight quarters). ¹⁷

The other panels show that such a shock increases consumer prices by 1.3% and short-term interest rates – through central bank reactions – by about 20 basis points in the course of two years. After an initial rise, GDP finally decreases by 0.1% after a period of two years.

Chart 3 applies the model to the current high inflation period. It shows the marginal effects of the cost-push inflation shocks of the period from Q2 21 to Q1 23 on the three macroeconomic variables until Q4 23, i.e. it shows how the variables would have developed if they had only been affected by the cost-push shocks of the high inflation period.

The model suggests that the shocks caused Austrian consumer prices to rise by about 8%, interest rates to increase by 180 basis points and GDP to decline by about 1%. Given the long lags in the effects on GDP, however, this decline is not expected to materialize until mid-2023. These results are broadly in line with the expected effects of an imported negative supply shock: Higher energy and commodity prices should lead to a rise in production costs and inflation, reduce output and increase interest rates as central banks react to rising inflation. ¹⁸ The results are also broadly in line with actual data. Actual inflation increased by 8.0 percentage points between Q2 21 and Q1 23 while the model predicts a rise in inflation by 7.7 percentage points. However, the model underestimates the actual interest rate increase. Actual interest rates rose by 317 basis points between Q2 21 and Q1 23, while the model only predicts an increase by 161 basis points. This is no surprise as the current interest rate hikes were exceptionally strong by historical standards. ¹⁹

3 Effects on banks

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Chart 4 and chart 5 show the reactions of the bank variables to the same supply shock that initially increased commodity prices by 10 percentage points over the following two years (eight quarters). They provide five main takeaways: First, except for large banks where administrative expenses hardly react, the inflationary shock tends to increase banks’ staff costs and administrative expenses. This is consistent with the idea that cost-push inflation increases input prices and wages. Second, the fees and commissions income of both groups of banks also goes up, suggesting that banks can pass part of the cost increases on to customers. Third, cost-push inflation shocks tend to improve Austrian banks’ NIM. This is consistent with the view that banks can pass on most of the interest rate increases to their borrowers due to the high share of variable rate loans. In contrast, customer deposits, especially those of households, are rather insensitive to interest rate changes, which means deposit repricing is slow. ²³ Fourth, the inflation shock drives up bank risk provisions, which is consistent with the idea that higher inflation, higher interest rates and lower growth tend to increase credit and market risk. Fifth, the overall effect on banks is heterogenous: While the overall profitability of an average small bank tends to go down after the inflationary shock, the effect on the overall profitability of an average large bank is slightly positive. For small banks, rising costs and higher risk provisions outweigh increasing net interest margins and fees and commissions income. For large banks, smaller cost increases and smaller risk provisioning turn the balance the other way.

To put this into a quantitative perspective, chart 6 shows how the inflationary shocks of the current high inflation period (Q2 21 to Q1 23) affected bank variables, starting from their 2021 means. For an average small bank, it is estimated that the cost-push shocks increased the NIM by 25 basis points (19%) and fees and commissions income by 20 basis points (10%) until end-2022. They also caused administrative expenses and staff costs to rise by 9 basis points (8%) and 19 basis points (12%), respectively. Their most significant effect is the increase in small banks’ risk provisions by 35 basis points (150%) though. This is the main reason why the shocks reduced the ROA of small banks by 45% from around 75 basis points in 2021 to 40 basis points in 2023. For large banks, the model predicts that the current inflationary shocks increased the NIM and fees and commissions income by 14 basis points (18%) and by 7 basis points (17%), respectively, while the effect on costs was concentrated on staff costs increasing by 14 basis points (30%). Risk provisions went up only by 8 basis points (33%) due to the inflationary shocks, contributing to a modest increase in large banks’ ROA by 13 basis points (31%). Comparing the predicted values with actual data, we find that the model’s underestimation of NIM increases is particularly striking. Between Q1 21 and Q1 23, the actual average NIM for small (large) banks increased by 111 (38) basis points, while the model predicts increases of 24 (6) basis points. This probably has two reasons: First, as explained above, the model underestimates interest rate increases as such. Second, the pass-through of interest rate increases to deposit rates has been exceptionally low in the current hiking cycle, as documented e.g. by Ferrer et al. (2023).