OeNB Calls on Austrian Banks to Strengthen Their Capital Base FurtherPresentation of the Financial Stability Report 26 of the Oesterreichische Nationalbank (OeNB)
Tensions in global financial markets have abated, with central banks providing increased liquidity to credit institutions and European governments taking action to counteract the crisis. Overall, these measures have had positive effects on financial stability. Nevertheless, financial markets in the euro area are still highly fragmented. As OeNB Governor Ewald Nowotny pointed out during the presentation of the Financial Stability Report 26, consolidation efforts and efficiency gains need to continue even though the Austrian banking system is considered to be solid (apart from the known problem banks).
Subdued economic activity in 2013 has translated into reduced corporate earnings in Austria. Lending to domestic companies has slowed down further in the course of 2013 on account of both supply- and demand-side factors. Corporate bonds, by contrast, have remained highly sought after. With companies’ equity share edging up in the first half of 2013 and real interest rates staying at current low levels, corporate debt-servicing capacity has remained broadly stable.
Household financial investment declined further, and the household sector’s bank deposits likewise decreased in absolute terms in the first half of the year. In the third quarter, however, deposits rose again slightly. Lending to households remained weak, with housing finance playing the most important role. New housing loans are now denominated primarily in euro, as new foreign currency loans have decreased markedly in recent years. Nevertheless, the volume of foreign currency loans outstanding continues to pose a material risk both to households and to Austrian banks.
In the first half of 2013, Austrian banks’ profitability reflected the difficult market conditions and banks’ persistently weak domestic performance. Amid the low interest rates, interest income contracted, and the ongoing worsening of credit quality – above all in Central, Eastern and Southeastern Europe (CESEE) – kept credit risk costs at high levels. At the same time, banks faced growing operating expenses, which resulted in reduced operating profits. Banks are therefore best served by focusing on core business areas and subjecting their cost structures to scrutiny.
In CESEE, in contrast, Austrian banks continued to fare well on the whole, not least thanks to their strategy of the past years to broadly diversify assets across this region. In the course of 2013, losses in some countries have again been offset by higher gains in others. Naturally, the resulting stronger concentration of gains in a few highly profitable countries makes banks more vulnerable to adverse developments in CESEE markets. Banks should therefore expand with due caution and on the basis of effective risk management strategies.
Bank capitalization in Austria has improved continuously over the past years. In June 2013, the average tier 1 capital ratio of Austrian banks was 11.5%, which corresponded to an increase by 0.5 percentage points against end-2012. At the same time, banks’ leverage ratio improved to 6.4%. Yet, according to the OeNB, Austrian banks need to strengthen their capital base further, given the risk profile of their CESEE exposures, market expectations that demand caution beyond regulatory requirements, the higher capitalization of benchmark banks and the imperative to reduce state participation capital.
As from 2014, two new dimensions will be added to banking supervision in Austria. First, the Austrian Bank Intervention and Restructuring Act (Bankeninterventions- und -restrukturierungsgesetz – BIRG) and the EU-wide implementation of Basel III mark the switch from a supervisory system limited to banks’ compliance with regulatory provisions to a forward-looking crisis planning and early intervention regime. Second, new macroprudential supervisory instruments will be introduced that are better suited to safeguarding financial stability. To heed a lesson from the financial crisis, all these measures are meant to strengthen the supervision of systemic risks and to minimize potential risks to stability by early intervention. According to OeNB Vice Governor Andreas Ittner, the supervisory authorities will face great challenges as they assume their new responsibilities resulting from the Austrian BIRG at a time when Basel III takes effect and the Financial Market Stability Board is set up in Austria to coordinate national macroprudential policy. Most importantly, the Austrian financial system is set to benefit from these new instruments.