Austrian banking sector is resilient, but binding standards for residential real estate financing are called for

(, Vienna)

Presentation of the 43rd Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

The OeNB’s Financial Stability Report published today shows that financial stability has been maintained in Austria throughout the pandemic. While the war in Ukraine is significantly dampening the outlook, the Austrian banking sector is able to cope with its first-round effects, also thanks to a range of risk-mitigating supervisory measures. The systemic risks arising from unsustainable residential real estate financing in Austria have been steadily increasing over the past few years and now need to be addressed through legally binding measures.

Corporate sector debt sustainability stabilized in 2021
Euro bond market yields have been rising considerably since Russia invaded Ukraine. “These increases reflect higher inflation expectations, but credit risk spreads have also widened and returned to around the levels seen before the onset of the COVID-19 pandemic. Against this backdrop, the Eurosystem is moving toward exiting its expansive monetary policy,” OeNB Governor Robert Holzmann said at the press conference presenting the OeNB’s 43rd Financial Stability Report. In 2021, Austrian companies’ financing volumes increased considerably. Internal financing accounted for a large part of funding, while external equity financing remained at low levels. Debt made up just about half of corporate financing in the past two years, with bank loans playing an important role. Still, companies’ debt sustainability improved in 2021 because the rise in gross operating surplus compensated for higher debt.

Unsustainable residential real estate financing in Austria needs to be addressed through supervisory measures
The growth of housing loans to households has gathered pace, driven by favorable financing conditions, continued housing demand and brisk price growth. The deviation of residential real estate prices from fundamentals has continued to accelerate, giving rise to signs of a significant overheating in the Austrian residential property market. “The systemic risks emanating from these dynamics in the residential real estate market have increased steadily over the past few years and now need to be addressed through supervisory action,” OeNB Vice Governor Gottfried Haber explained. Therefore, Austria’s Financial Market Stability Board (FMSB) issued a recommendation for the implementation of borrower-based macroprudential instruments. These instruments will serve to prevent potential losses in the banking sector and reduce related risks to the stability of the financial system and the real economy. At the same time, they will protect borrowers from taking on excessive debt. In particular, the FMSB advises to adopt (1) an upper limit of 90% for loan-to-value ratios in residential real estate loans (which translates into minimum borrower down payments of around 20% if ancillary expenses are taken into account), (2) an upper limit of 40% for debt service-to-income ratios and (3) a maximum loan maturity of 35 years. All these measures will be subject to exemptions that give banks sufficient flexibility. To counter the accelerating buildup of systemic risks, these measures should become applicable to new residential real estate loans to households as soon as possible.

Austrian banking sector recovered from the pandemic in 2021, supervisory measures have cushioned first-round effects from the war in Ukraine
The Austrian banking sector continued to grow in 2021, recording an aggregate annual profit of EUR 7.2 billion, the highest result since the global financial crisis. The war in Ukraine and its repercussions are significantly clouding the outlook, however. Even though a large part of Austrian banks’ international business is based in the EU, activities in Russia and, to a certain degree, Ukraine contributed substantially to profits from the CESEE business over the past few years. That said, the balance sheets of Austrian banks’ subsidiaries in Russia and Ukraine show mostly locally funded retail loans in domestic currency, which is also thanks to supervisory measures taken previously. In addition, Austrian parent banks active in CESEE have additional capital buffers. This is the reason why the domestic banking sector has been able to cope with first-round effects triggered by the war. However, future developments may weaken business prospects.

The OeNB’s recommendations for strengthening financial stability in Austria
Just as the pandemic situation has started to ease, the Austrian banking sector is facing new challenges. While domestic banks’ capitalization has improved considerably since the global financial crisis, their aggregate capital ratio fell slightly in 2021. This drop widened the gap vis-à-vis the European average, especially for large Austrian credit institutions. Hence, it is crucial that banks remain resilient and hold sufficient capital to be able to tackle new risks and challenges. The OeNB therefore recommends that banks

  • focus on a solid capital base, inter alia by exercising restraint with regard to profit distributions;
  • ensure sustainable lending standards in Austria and CESEE;
  • ensure an adequate level of loan loss provisions;
  • continue efforts to improve cost efficiency and operational profitability;
  • further develop and implement strategies to deal with the challenges of information technologies, increased cyber risks and climate change.

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering insights into specific topics related to financial stability.