IMF published its staff report and selected issues report under the 2018 Article IV consultation with Austria. Directors welcomed the progress in reducing banking system vulnerabilities through improved capitalization and asset quality as well as a further strengthening of the funding base of the foreign subsidiaries of Austrian banks. While risks have subsided, Directors recommended remaining vigilant and further increasing capital buffers of banks. They also underlined the need to continue efforts to improve cost efficiency to enhance long-term profitability, particularly of smaller banks.
The staff report reveals that the banking system in the country is well-capitalized, but additional buffers would be welcome as insurance against large adverse events. The sector-wide capital adequacy ratio stood at 18.2% at the end of 2017 while the common equity tier 1 ratio was 14.6%. Large banks have narrowed the gap between their capital levels and those of peers. The large banks have met targets under the authorities’ bank sustainability package that was introduced in 2012, although some banks continue to maintain relatively modest buffers above the regulatory minimum requirements. The thirteen largest banks are also set to meet the systemic risk capital buffer of up to 2%, which is to be fully phased in during 2019. Banks’ dependence on wholesale funding is low and all Austrian banks meet the recently fully phased-in liquidity coverage ratio (LCR), with a weighted average of 145% at the unconsolidated level. Profits have risen further in 2017, largely because of reduced risk provisioning, as nonperforming loans (NPLs) declined (adding to the case for additional capital buffers). The full LCR minimum requirement of 100%, measured as high-quality liquid assets to stressed net outflows arising over a period of 30 days, was fully phased in by 2018. The NPL ratio stood at 3.4% at the end of 2017.
The financial system is stable and large banks’ capital levels have risen, reducing the gap with peers and reaching levels targeted in the bank sustainability package. While further raising capital levels is warranted, the recommendation is that the focus should shift to boosting cost efficiency, where progress has been slow. Risks in the real estate market are currently limited but warrant continued monitoring. Directors agreed that real estate related risks to financial stability remain contained at present, but urged the authorities to continue to closely monitor house price developments and variable rate and foreign currency denominated housing loan exposures, to identify early any household balance sheet strains. Also, the legal basis for using targeted real-estate macro-prudential tools (loan-to-value caps, debt-service-to-income limits, term restrictions, debt-to-income ceilings and minimum amortization requirements) has been established. The authorities are collecting additional data to improve their analysis of the real estate market and its interaction with the financial system, including early identification of any household balance sheet strains. Directors welcomed the recently established legal basis for targeted real estate specific macro-prudential tools. While the use of the new macro-prudential instruments does not appear necessary at this time, Directors underscored the need to continue to provide clear guidance to banks to maintain sustainable lending standards.
The report highlights that the regulatory and supervisory frameworks have been strengthened. The authorities updated their supervisory guidance in 2017. With improved capitalization, a stable funding base in CESEE subsidiaries, and the development of recovery and resolution plans, the focus has now shifted to strengthening the business models of major internationally active banks. The Single Resolution Board and FMA are in the process of issuing binding targets for bail-in-able debt (MREL) for most of the banks under their remit and will complete this process in 2019. The case for Minimum Requirement for Own Funds and Eligible Liabilities (MREL), in excess of minimum capital requirements, is weaker for small deposit-taking banks (such as Austria’s local and regional banks) that have traditionally steered clear of debt markets. For such banks—which are mostly under the purview of national regulators—the expectation should be liquidation rather than resolution in case of difficulties, with no recourse to state aid. Large banks need to continue implementing their adjustment plans and raise further capital to bolster cushions above regulatory limits, including by limiting dividend payouts. For smaller banks, reducing costs, including through accelerating the development of digital banking and increasing fee-based activities to offset shrinking interest rate margins, is crucial. Supervisory and regulatory authorities need to ensure that banks further raise capitalization levels, continue to reduce vulnerabilities, and implement their cost-cutting plans.
Related Link: Staff Report
Keywords: Europe, Austria, Banking, NPLs, Article IV, LCR, MREL, Macro-prudential Policy, IMF
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