A. Macrofinancial Setting

1. Growth in Austria and the CESEE has been strong, but the outlook has moderated. The output gap is positive, and the medium-term outlook indicates gradual growth convergence towards potential. Austrian banks’ foreign business continues to focus on CESEE countries, which have shown strong economic expansion—although activity has softened in 2019 (Table 3 and Figure 5).

Table 2.

Austria: FSAP Risk Assessment Matrix

Table 2.

Austria: FSAP Risk Assessment Matrix

Nature (Source) of Main Threats	Overall Level of Concern
	Likelihood of Realization of Threat in the Next 1–3 Years (high, medium or low)	Expected Impact on Financial Stability if Threat is Realized Risk assessment: high, medium, or low Supervisory assessment: amplifying (A), neutral (N), or mitigating (M)
1. Contagion from CESEE countries (Regional)	Medium • CESEE countries are subject to boom-bust cycles. They are vulnerable to a deterioration in investor sentiment, asset volatility, capital outflows, FX swings, and geopolitical risk. • Some countries are exposed to a sharp decline in commodity prices and waves of international sanctions. • Concerns over the adequacy of AML controls on foreign branches and subsidiaries within CESEE countries exposes Austrian banks to operational and reputational risk.	Risk Assessment: High • Austrian banks’ exposure to the CESEE region reached 24 percent in 2018. Foreign currency loans represent 25 percent of exposures (80 percent EUR, 10 percent in CHF, 9 percent in USD). Austrian banks source 42 percent of profits from CESEE. • A sharp slowdown in CESEE countries, and FX depreciation would lead to higher NPLs and lower profitability. • Breaches of AML obligations can lead to fines and sanctions increasing operational risk expenses, lower equity market valuations, and a spike in funding costs. Supervisory assessment: Neutral • Banking sector oversight: Weak requirements on transactions with related parties, major acquisition, and financial integrity add risks from CESEE exposures. (A) • Macroprudential: SyRB for CESEE cluster risk increases capital resilience. (M) • Crisis management: MPE for two large international banks reduces the potential to spread contagion. (M)
2. Sharp rise in risk premia (Global)	High • An abrupt deterioration in market sentiment (e.g., prompted by policy surprises, renewed stresses in emerging markets, or a disorderly Brexit) could trigger risk-off events such as recognition of underpriced risk. • Higher risk premia would cause higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; disruptive corrections to stretched asset valuations; and capital account pressures—all depressing growth.	Risk Assessment: Medium • Higher interest rates would increase borrowers’ income gearing and refinancing risks particularly for high-leveraged firms and households. The effect would be larger for borrowers with variable-rate loans: 80 percent (44 percent) of new loans for corporates (households). • Significant asset price changes would impact the fair valuation of banks’ financial investments. Supervisory assessment: Neutral • Banking sector oversight: Oversight of NPLs and foreborne exposures has strengthened but a look-back approach to default risk could hinder timely supervisory action. (A) • Macroprudential: the timely activation of the CCyB would help increase bank resilience through the cycle. (M) • Crisis management: Banks’ recovery plans are mature and tested. (M)
3. A sudden correction in the Austrian real estate market (Domestic)	Medium • Real estate prices have increased rapidly in Austria over the last 5–6 years and are estimated to be overvalued by around 10–15 percent. • The share of foreign currency housing loans is high compared to Austria’s peers. • There have also been signs of easing in banks’ lending standards in household loans with an increase in high risk mortgages (high LTV and DTI ratios).	Risk Assessment: Medium • A drop in real estate prices, would result in higher impairment charges for banks, caused by defaults or delayed loan repayments by highly leveraged households and construction firms. • Lower house prices could depress domestic demand through reduced consumption, hitting banks’ profits further. • The impact is lessened by the low exposure of Austrian banks to housing loans in Austria at 16 percent of assets. Supervisory assessment: Mitigating • Banking sector oversight: FMA minimum standards of the granting of FX and RPV loans (2013), revised in 2017, helped decrease default risk in mortgage loans. (M) • Macroprudential: 2018 FMSB’s guidance on sustainable lending standards in real estate financing has strengthened bank supervisory dialogue to prevent a deterioration in underwriting standards. (M) Crisis management: A synchronized decline in regional real estate prices could spread contagion through the DGS system. (A)
4. Weaker-than-expected global growth (Global)	Medium • Idiosyncratic factors in the U.S., Europe, China, and stressed emerging markets feed off each other to result in a synchronized and prolonged growth slowdown: • U.S.: Confidence wanes against a backdrop of a long expansion with stretched asset valuations, rising leverage, and policy uncertainty, leading to weaker investment and a more abrupt closure of the output gap. • Europe: Weak foreign demand, Brexit, or concerns about some high-debt countries makes some EA businesses delay investment, while faltering confidence reduces private consumption. Inflation expectations drift lower, and the region enters a prolonged period of anemic growth and low inflation. • China: In the near term, further escalation in trade tensions not only reduce external demand, disrupt supply chains, and depresses confidence and investment, but potentially also trigger tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. In the medium term, weaker external demand, the potential reversal of globalization, and the increasing role of the state could weigh on growth prospects. Moreover, excessive policy easing—reversing progress in deleveraging and rebalancing—increases risks over time of a disruptive adjustment or a marked growth slowdown. • Large stressed emerging economies: Policy missteps, idiosyncratic shocks, and/or contagion prevent expected stabilization or recovery in stressed economies from materializing, generating negative spillovers and reducing global growth.	Risk Assessment: Low • A widening in Italian spreads would depress asset valuations of Italian government bonds, even though Austrian banks’ exposure to Italy is limited (1.3 percent of total foreign claims). Another channel of contagion is through funding markets as the third largest Austrian banks is a subsidiary of an Italian G-SIB. Adverse developments in Italy could lead to financial distress through higher funding costs. • Austria is a very open economy, with exports comprising more than 50 percent of GDP. Therefore, any retreat from cross-border integration, trade dispute or a deepening of geopolitical uncertainties, can pose material downside risks to Austrian output. A balance-sheet recession in Austria would depress disposable income, increase affordability risk (particularly for export-driven corporates), and lead to higher default rates. • Persistent low interest rates would erode bank margins and become a major threat for life insurance companies, given their rate-sensitive products and investments. Supervisory assessment: Amplifying • Insurance sector oversight: Implementation of risk rating and stress testing methodologies need clear steer. (A) • Macroprudential: SyRB for systemic vulnerability and O-SII buffer increase capital resilience. (M) • Crisis management: A unified, single resolution process for a major Austrian bank with an Italian parent (SPE) could lead to a downgrade in its credit profile. (A) • Banking sector oversight: A weak framework for country risk and transfer risk could add losses from events in foreign countries. (A)

View Table

Table 2.

Austria: FSAP Risk Assessment Matrix

Nature (Source) of Main Threats	Overall Level of Concern
	Likelihood of Realization of Threat in the Next 1–3 Years (high, medium or low)	Expected Impact on Financial Stability if Threat is Realized Risk assessment: high, medium, or low Supervisory assessment: amplifying (A), neutral (N), or mitigating (M)
1. Contagion from CESEE countries (Regional)	Medium • CESEE countries are subject to boom-bust cycles. They are vulnerable to a deterioration in investor sentiment, asset volatility, capital outflows, FX swings, and geopolitical risk. • Some countries are exposed to a sharp decline in commodity prices and waves of international sanctions. • Concerns over the adequacy of AML controls on foreign branches and subsidiaries within CESEE countries exposes Austrian banks to operational and reputational risk.	Risk Assessment: High • Austrian banks’ exposure to the CESEE region reached 24 percent in 2018. Foreign currency loans represent 25 percent of exposures (80 percent EUR, 10 percent in CHF, 9 percent in USD). Austrian banks source 42 percent of profits from CESEE. • A sharp slowdown in CESEE countries, and FX depreciation would lead to higher NPLs and lower profitability. • Breaches of AML obligations can lead to fines and sanctions increasing operational risk expenses, lower equity market valuations, and a spike in funding costs. Supervisory assessment: Neutral • Banking sector oversight: Weak requirements on transactions with related parties, major acquisition, and financial integrity add risks from CESEE exposures. (A) • Macroprudential: SyRB for CESEE cluster risk increases capital resilience. (M) • Crisis management: MPE for two large international banks reduces the potential to spread contagion. (M)
2. Sharp rise in risk premia (Global)	High • An abrupt deterioration in market sentiment (e.g., prompted by policy surprises, renewed stresses in emerging markets, or a disorderly Brexit) could trigger risk-off events such as recognition of underpriced risk. • Higher risk premia would cause higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; disruptive corrections to stretched asset valuations; and capital account pressures—all depressing growth.	Risk Assessment: Medium • Higher interest rates would increase borrowers’ income gearing and refinancing risks particularly for high-leveraged firms and households. The effect would be larger for borrowers with variable-rate loans: 80 percent (44 percent) of new loans for corporates (households). • Significant asset price changes would impact the fair valuation of banks’ financial investments. Supervisory assessment: Neutral • Banking sector oversight: Oversight of NPLs and foreborne exposures has strengthened but a look-back approach to default risk could hinder timely supervisory action. (A) • Macroprudential: the timely activation of the CCyB would help increase bank resilience through the cycle. (M) • Crisis management: Banks’ recovery plans are mature and tested. (M)
3. A sudden correction in the Austrian real estate market (Domestic)	Medium • Real estate prices have increased rapidly in Austria over the last 5–6 years and are estimated to be overvalued by around 10–15 percent. • The share of foreign currency housing loans is high compared to Austria’s peers. • There have also been signs of easing in banks’ lending standards in household loans with an increase in high risk mortgages (high LTV and DTI ratios).	Risk Assessment: Medium • A drop in real estate prices, would result in higher impairment charges for banks, caused by defaults or delayed loan repayments by highly leveraged households and construction firms. • Lower house prices could depress domestic demand through reduced consumption, hitting banks’ profits further. • The impact is lessened by the low exposure of Austrian banks to housing loans in Austria at 16 percent of assets. Supervisory assessment: Mitigating • Banking sector oversight: FMA minimum standards of the granting of FX and RPV loans (2013), revised in 2017, helped decrease default risk in mortgage loans. (M) • Macroprudential: 2018 FMSB’s guidance on sustainable lending standards in real estate financing has strengthened bank supervisory dialogue to prevent a deterioration in underwriting standards. (M) Crisis management: A synchronized decline in regional real estate prices could spread contagion through the DGS system. (A)
4. Weaker-than-expected global growth (Global)	Medium • Idiosyncratic factors in the U.S., Europe, China, and stressed emerging markets feed off each other to result in a synchronized and prolonged growth slowdown: • U.S.: Confidence wanes against a backdrop of a long expansion with stretched asset valuations, rising leverage, and policy uncertainty, leading to weaker investment and a more abrupt closure of the output gap. • Europe: Weak foreign demand, Brexit, or concerns about some high-debt countries makes some EA businesses delay investment, while faltering confidence reduces private consumption. Inflation expectations drift lower, and the region enters a prolonged period of anemic growth and low inflation. • China: In the near term, further escalation in trade tensions not only reduce external demand, disrupt supply chains, and depresses confidence and investment, but potentially also trigger tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. In the medium term, weaker external demand, the potential reversal of globalization, and the increasing role of the state could weigh on growth prospects. Moreover, excessive policy easing—reversing progress in deleveraging and rebalancing—increases risks over time of a disruptive adjustment or a marked growth slowdown. • Large stressed emerging economies: Policy missteps, idiosyncratic shocks, and/or contagion prevent expected stabilization or recovery in stressed economies from materializing, generating negative spillovers and reducing global growth.	Risk Assessment: Low • A widening in Italian spreads would depress asset valuations of Italian government bonds, even though Austrian banks’ exposure to Italy is limited (1.3 percent of total foreign claims). Another channel of contagion is through funding markets as the third largest Austrian banks is a subsidiary of an Italian G-SIB. Adverse developments in Italy could lead to financial distress through higher funding costs. • Austria is a very open economy, with exports comprising more than 50 percent of GDP. Therefore, any retreat from cross-border integration, trade dispute or a deepening of geopolitical uncertainties, can pose material downside risks to Austrian output. A balance-sheet recession in Austria would depress disposable income, increase affordability risk (particularly for export-driven corporates), and lead to higher default rates. • Persistent low interest rates would erode bank margins and become a major threat for life insurance companies, given their rate-sensitive products and investments. Supervisory assessment: Amplifying • Insurance sector oversight: Implementation of risk rating and stress testing methodologies need clear steer. (A) • Macroprudential: SyRB for systemic vulnerability and O-SII buffer increase capital resilience. (M) • Crisis management: A unified, single resolution process for a major Austrian bank with an Italian parent (SPE) could lead to a downgrade in its credit profile. (A) • Banking sector oversight: A weak framework for country risk and transfer risk could add losses from events in foreign countries. (A)

Table 3.

Austria: Selected Economic Indicators, 2017–2025

(Annual percent change, unless otherwise indicated)

Sources: Authorities’ data and IMF staff estimates and projections.

Table 3.

Austria: Selected Economic Indicators, 2017–2025

(Annual percent change, unless otherwise indicated)

				2017	2018	2019	2020	2021	2022	2023	2024	2025
						Projections
NATIONAL ACCOUNTS
Real GDP (expenditure)				2.5	2.4	1.5	1.6	1.6	1.6	1.6	1.6	1.6
	Domestic demand			2.1	1.7	1.3	1.6	2.0	1.8	2.0	1.7	1.6
		Consumption		1.3	1.1	0.7	2.2	2.2	1.9	2.1	1.7	1.6
			Private	1.4	1.1	0.5	2.6	2.6	1.7	2.4	1.8	1.5
			Public	1.1	0.9	1.1	1.2	1.2	2.4	1.3	1.6	1.8
		Gross fixed capital formation		4.0	3.9	1.1	1.8	1.6	1.5	1.7	1.6	1.5
			Private	4.1	4.4	1.1	1.7	1.8	1.5	1.7	1.7	1.5
			Public	2.7	0.8	1.0	2.1	0.5	1.7	1.5	1.4	1.8
	GHFS exports			5.0	5.9	3.1	1.6	2.0	16	2.0	1.6	3.0
	GHFS imports			5.0	4.6	1.9	2.5	2.9	2.0	2.8	1.8	3.0
Contribution to GDP (percentage points)
	Final domestic demand			1.9	1.7	0.7	2.0	1.9	1.7	1.9	1.6	1.5
	Net exports			0.2	0.9	0.8	-0.4	-0.4	-0.1	-0.4	-0.1	0.1
	nventories and statistical discrepani			0.4	-0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.0
nvestment (% GDP)				24.8	25.1	25.5	25.2	25.1	25.1	25 1	25.2	25.2
	Public			3.9	3.7	3.7	3.9	3.8	3.8	3.8	3.8	3.8
	Private			20.9	21.4	21.9	21.3	21.3	21.3	21.3	21.4	21.3
Gross national savings (% GDP)				26.3	27.4	27.7	27.4	27.3	27.3	27.0	27.1	32.5
	Public			3.2	3.9	3.9	3.9	3.8	4.0	4.3	4.3	5.2
	Private			23.1	23.6	23.8	23.5	23.4	23.4	22.8	22.8	27.3
Potential output				1.5	1.6	1.7	1.7	1.7	1.7	1.7	1.7	1.6
Output gap (% potential GDP)				0.1	0.9	0.6	0.6	0.4	0.2	0.1	0.0	0.0
LABOR MARKET
Labor force				0.4	1.1	1.0	0.9	0.8	0.8	0.7	0.5	0.4
Employment				0.9	1.4	1.1	0.9	0.8	0.8	0.7	0.5	0.4
Wages (hourly)				3.4	3.5	2.4	2.3	2.4	2.5	2.7	2.9	3.0
Unemployment rate (% labor force)
	EU harmonized rate			5.5	4.9	4.7	4.7	4.7	4.7	4.7	4.7	4.7
	National definition			8.5	7.7	7.6	7.5	7.5	7.5	7.5	7.5	7.5
PRICES
Consumer prices (avg)				2.2	2.1	1.6	1.8	1.9	2.0	2.0	2.0	2.0
Consumer prices (eop)				2.3	1.7	1.6	1.9	1.9	2.0	2.0	2.0	2.0
Core CPI (eop)				2.2	1.5	1.5	1.7	1.8	2.0	2.0	2.0	2.0
GDP deflator				1.1	1.8	1.8	1.5	2.1	2.0	2.0	2.0	2.2
MACRO-FINANCIAL
Broad money				4.5	5.2	3.4	3.7	3.8	3.5	3.6	3.6	39
Credit to the private sector				3.9	3.9	3.4	2.1	2.5	2.5	2.5	2.5	2.8
	Corporations			5.3	3.9	34	1.2	15	15	16	16	1.9
	Households			2.5	3.9	3.4	2.9	3.4	3.3	3.3	3.4	3.6
GENERAL GOVERNMENT FINANCES (% GDP
Revenue				48.2	48.8	48.5	48.4	48.3	48.4	48.6	48.7	48.8
Expenditure				48.9	48.6	48.2	48.4	48.3	48.2	48.2	48.2	48.3
Net lending/borrowing				-0.7	0.2	0.2	0.0	0.0	0.2	0.4	0.5	0.5
Structural balance				-0.7	-0.3	-0.3	-0.4	-0.2	0.1	0.4	0.5	0.5
Structural primary balance				1.1	1.3	1.2	1.0	1.0	1.1	1.3	1.3	1.2
Gross debt				78.4	74.0	70.5	68.1	65.4	62.7	60.0	57.3	54.7
BALANCE OF PAYMENTS
Current account (% GDP)				16	2.3	2.2	2.2	2.1	2.2	1.9	1.9	1.9
Export volume (goods and services)				5.0	5.9	3.1	1.6	2.0	1.6	2.0	1.6	3.0
Import volume (goods and services)				5.0	4.6	1.9	2.5	2.9	2.0	2.8	1.8	3.0
Int’l investment position, net (% GDP)				2.8	3.7	7.4	9.3	11.0	12.8	14.2	15.5	16.8
MEMORANDUM ITEMS
Nominal GDP (bn €)				370	386	399	411	426	442	457	474	492
Population (million)				8.8	8.9	9.0	9.0	9.1	9.1	9.2	9.2	9.3
GDP per capita ($)				47,440	51,293	49,893	50,940	53,055	55,170	57,362	59,779	62,475
US$/€ (rate; annual avg)				1.13	1.18	1.12	…	…	…	…	…	…
Real effective exchange rate				0.3	0.5	-2.3	-0.3	0.0	0.0	0.0	0.0	0.0

Sources: Authorities’ data and IMF staff estimates and projections.

View Table

Table 3.

Austria: Selected Economic Indicators, 2017–2025

(Annual percent change, unless otherwise indicated)

				2017	2018	2019	2020	2021	2022	2023	2024	2025
						Projections
NATIONAL ACCOUNTS
Real GDP (expenditure)				2.5	2.4	1.5	1.6	1.6	1.6	1.6	1.6	1.6
	Domestic demand			2.1	1.7	1.3	1.6	2.0	1.8	2.0	1.7	1.6
		Consumption		1.3	1.1	0.7	2.2	2.2	1.9	2.1	1.7	1.6
			Private	1.4	1.1	0.5	2.6	2.6	1.7	2.4	1.8	1.5
			Public	1.1	0.9	1.1	1.2	1.2	2.4	1.3	1.6	1.8
		Gross fixed capital formation		4.0	3.9	1.1	1.8	1.6	1.5	1.7	1.6	1.5
			Private	4.1	4.4	1.1	1.7	1.8	1.5	1.7	1.7	1.5
			Public	2.7	0.8	1.0	2.1	0.5	1.7	1.5	1.4	1.8
	GHFS exports			5.0	5.9	3.1	1.6	2.0	16	2.0	1.6	3.0
	GHFS imports			5.0	4.6	1.9	2.5	2.9	2.0	2.8	1.8	3.0
Contribution to GDP (percentage points)
	Final domestic demand			1.9	1.7	0.7	2.0	1.9	1.7	1.9	1.6	1.5
	Net exports			0.2	0.9	0.8	-0.4	-0.4	-0.1	-0.4	-0.1	0.1
	nventories and statistical discrepani			0.4	-0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.0
nvestment (% GDP)				24.8	25.1	25.5	25.2	25.1	25.1	25 1	25.2	25.2
	Public			3.9	3.7	3.7	3.9	3.8	3.8	3.8	3.8	3.8
	Private			20.9	21.4	21.9	21.3	21.3	21.3	21.3	21.4	21.3
Gross national savings (% GDP)				26.3	27.4	27.7	27.4	27.3	27.3	27.0	27.1	32.5
	Public			3.2	3.9	3.9	3.9	3.8	4.0	4.3	4.3	5.2
	Private			23.1	23.6	23.8	23.5	23.4	23.4	22.8	22.8	27.3
Potential output				1.5	1.6	1.7	1.7	1.7	1.7	1.7	1.7	1.6
Output gap (% potential GDP)				0.1	0.9	0.6	0.6	0.4	0.2	0.1	0.0	0.0
LABOR MARKET
Labor force				0.4	1.1	1.0	0.9	0.8	0.8	0.7	0.5	0.4
Employment				0.9	1.4	1.1	0.9	0.8	0.8	0.7	0.5	0.4
Wages (hourly)				3.4	3.5	2.4	2.3	2.4	2.5	2.7	2.9	3.0
Unemployment rate (% labor force)
	EU harmonized rate			5.5	4.9	4.7	4.7	4.7	4.7	4.7	4.7	4.7
	National definition			8.5	7.7	7.6	7.5	7.5	7.5	7.5	7.5	7.5
PRICES
Consumer prices (avg)				2.2	2.1	1.6	1.8	1.9	2.0	2.0	2.0	2.0
Consumer prices (eop)				2.3	1.7	1.6	1.9	1.9	2.0	2.0	2.0	2.0
Core CPI (eop)				2.2	1.5	1.5	1.7	1.8	2.0	2.0	2.0	2.0
GDP deflator				1.1	1.8	1.8	1.5	2.1	2.0	2.0	2.0	2.2
MACRO-FINANCIAL
Broad money				4.5	5.2	3.4	3.7	3.8	3.5	3.6	3.6	39
Credit to the private sector				3.9	3.9	3.4	2.1	2.5	2.5	2.5	2.5	2.8
	Corporations			5.3	3.9	34	1.2	15	15	16	16	1.9
	Households			2.5	3.9	3.4	2.9	3.4	3.3	3.3	3.4	3.6
GENERAL GOVERNMENT FINANCES (% GDP
Revenue				48.2	48.8	48.5	48.4	48.3	48.4	48.6	48.7	48.8
Expenditure				48.9	48.6	48.2	48.4	48.3	48.2	48.2	48.2	48.3
Net lending/borrowing				-0.7	0.2	0.2	0.0	0.0	0.2	0.4	0.5	0.5
Structural balance				-0.7	-0.3	-0.3	-0.4	-0.2	0.1	0.4	0.5	0.5
Structural primary balance				1.1	1.3	1.2	1.0	1.0	1.1	1.3	1.3	1.2
Gross debt				78.4	74.0	70.5	68.1	65.4	62.7	60.0	57.3	54.7
BALANCE OF PAYMENTS
Current account (% GDP)				16	2.3	2.2	2.2	2.1	2.2	1.9	1.9	1.9
Export volume (goods and services)				5.0	5.9	3.1	1.6	2.0	1.6	2.0	1.6	3.0
Import volume (goods and services)				5.0	4.6	1.9	2.5	2.9	2.0	2.8	1.8	3.0
Int’l investment position, net (% GDP)				2.8	3.7	7.4	9.3	11.0	12.8	14.2	15.5	16.8
MEMORANDUM ITEMS
Nominal GDP (bn €)				370	386	399	411	426	442	457	474	492
Population (million)				8.8	8.9	9.0	9.0	9.1	9.1	9.2	9.2	9.3
GDP per capita ($)				47,440	51,293	49,893	50,940	53,055	55,170	57,362	59,779	62,475
US$/€ (rate; annual avg)				1.13	1.18	1.12	…	…	…	…	…	…
Real effective exchange rate				0.3	0.5	-2.3	-0.3	0.0	0.0	0.0	0.0	0.0

Sources: Authorities’ data and IMF staff estimates and projections.

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Austria: Overview of Decentralized Banking Segments in Austria

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB and FMA.

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Austria: Example of Support Mechanism – Raiffeisen Segment ¹

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

^1/ The Raiffeisen group (RBG) is the largest Austrian sector with over EUR 300 billion (30 percent total assets). The three-tiered structure includes 386 primary banks (RB), eight regional Landesbanken (RLB), and an internationally active bank (RBI). All RBs and their RLB are members of solidarity associations in each federal state to provide solvency support. In addition, participating members in six regional IPS (L-IPS) and a federal IPS (B-IPS) have contractual obligations to support each member and contribute to a customer protection scheme (RKO) in addition to the national DGS. RBI is the ‘central institution’ for the RLBs and provides liquidity management services. It holds participations with sector-wide activities in Austria (Poso, RBSK, RWBB) and is active in Central and Eastern Europe.

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2. The financial sector has benefited from the favorable macrofinancial environment, but late-cycle risks are building. Annual growth of lending to households was 4.2 percent in 2019Q1, supported by solid income growth and low interest rates. Although NFC loan growth, especially to real estate and construction services, has been strong, it is expected to moderate given lower credit demand due to a slowdown in investment growth. Cyclical risks in the CESEE region and potential spillover risks are high, as the economies are in the late stages of their business cycle.

3. House prices have become overvalued in recent years, but there are mitigating factors to the vulnerability to real estate. House prices are estimated to be overvalued by around 10–15 percent nationally, and by over 20 percent in Vienna (Figure 9). The high growth in real estate transaction volumes (13.3 percent in 2018) is suggestive of real estate market overheating. Yet, a range of built-in mitigating factors in the housing market could soften the impact of shocks on the real economy. These include a large and regulated rental market in Vienna and other urban areas, moderate household leverage, low ownership ratios (55 percent), and alternative arrangements for housing finance.¹

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Austria: Austrian Banking System Network

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB on Austria’s central credit registry data.The edges are shown for interbank exposures above EUR 25 million on a consolidated level. Therefore, intragroup exposures in the savings sector are netted out.

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Austria: Corporate Sector Debt-At-Risk ^1/

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: Orbis and IMF Staff calculations.^1/ Data as of 2017Q4;2/ Sectors included in the “Rest of the Nonfinancial corporate sector” are mining and quarrying; electricity, gas, steam, and air conditioning supply; wholesale and retail trade; transportation and storage; information and communication; professional activities; and administrative activities.

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Austria: Real Sector Developments

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

1/ New loans to nonfinancial corporations over EUR 1 million with rate fixation up to 1 yr (% p.a.) Source: Haver, Oesterreichische Nationalbank (OeNB); and IMF staff estimates.

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Austria: Overview of the Financial System

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

1/ Per Austrian Banking Act, the term “credit institution” refers to an institution authorised to carry out banking transactions on the basis of Article 4 or Article 103 no. 5 of this federal act, or on the basis of special provisions under Austrian federal law. Therefore, the terms “credit institution” and “bank” are used interchangeably.2/ GDP for year 2019 based on actual data for Q1 2019 and on WEO projections for Q2-Q4 2019.3/ Austria SIs include the six significant institutions supervised by the SSM (Raiffeisen Bank International, BAWAG Group, Erste Group Bank, Raiffeisenbankengruppe, Volksbank, and Sberbank Europe AG), excluding the Austrian systemic subsidiary of EA SI.4/ Data was not available for Volksbank for 2013.Sources: OeNB, Bloomberg; SNL; Haver; IMF, Financial Soundness Indicators; and IMF staff estimates.

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Austria: Vulnerability Indicators – Household Sector

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

1/ Residential real estate loans as % of total loansSource: Haver, OeNB, IMF staff calculations

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Austria: Vulnerability Indicators—Nonfinancial Corporate Sector

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: Haver, OeNB, IMF staff calculations

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Austria: Real Estate Market Developments

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

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B. Financial Sector Structure and Performance

4. Financial system is dominated by a large, concentrated, and diverse banking sector. The banking sector represents around 250 percent of GDP and about 75 percent of total financial system assets. Mutual funds, insurance firms, and pension funds account for 14 percent, 10 percent, and 2 percent of financial system assets, respectively. FinTech business, concentrated in Vienna, represents only 0.25 per mil of GDP² with about 100 firms operating with different business models. There are almost 600 banks. While their total number fell by 32 in 2018—driven mainly by consolidation in the credit cooperative sector—total assets grew by 3.9 percent. There are seven significant Austrian institutions (SIs) under the Single Supervisory Mechanism (SSM) representing 60 percent of total system assets. The banking sector is diverse and concentrated, with the top 3 banks representing 50 percent of the market. Authorities favor proportionality in regulation and supervision to sustain the diversity of the banking system.

5. The structure of ownership, control, and financial linkages in the banking system is complex (Figure 1). There are three “decentralized segments”.³ Together, the 49 Sparkassen have created a banking group (Erste Group Bank AG (EGB), which is internationally active and the largest Austrian bank), an IPS, thus forming a cross-guarantee scheme ex lege according to CRR, and a DGS to provide mutual resilience. In the three-tiered Raiffeisen segment, RBI (3^rd tier) is the “central institution” for the eight regional Landesbanken (RLB) (2^nd tier), which in turn play a similar role for the primary banks (1^st tier) (Figure 2). RBI is a listed bank, with foreign subsidiaries in CESEE and Russia, and is majority owned (58 percent) by the RBLs which, in turn, are owned by the 386 primary banks (“inverse ownership”). In the Raiffeisen segment, the IPS system is based on two levels, the national IPS and six regional IPSs.⁴ The two-tiered Volksbanken (VB) segment features eight regional banks, including the “central institution” VB Wien and a specialized bank. The VB segment has formed a liability association with unlimited cross-guaranteed schemes. In all segments, each “central institution” provides services to lower-tier members, such as liquidity management.

6. Austrian banks’ foreign business continues to focus on CESEE countries. The CESEE region represented 24 percent of exposures in 2018⁵ and over 42 percent of consolidated banking net profits. Austrian banks’ CESEE activities are concentrated in countries belonging to the EU, with the highest exposures in Czech Republic and Slovakia, accounting for half of total CESEE exposure. While aggregate exposure to Russia represents 7 percent of CESEE assets, it is significant for the Raiffeisen segment.

7. Austrian banks have strengthened their capital levels and credit quality has improved (Figure 6). Austrian banks have raised their capital levels from 11.6 percent common equity Tier 1 (CET1) in 2013 to 15.4 percent in 2018, supported by strong profits. However, the increase has subsided in the last two years, partly due to higher dividend payouts (as documented in Article IV reports). Despite recent improvement, banks’ operating profits are dampened by a structurally high cost-to-income ratio (CTI), at around 65 percent in 2018, with Austrian SIs posting CTIs slightly below the euro area (EA) average. Credit quality has improved significantly. Nonperforming loans (NPLs) shrank from 8.6 percent in 2013 to 2.6 percent in 2018. The increase in credit quality was especially pronounced among subsidiaries in CESEE (NPLs declined from 14.0 percent in 2013 to 3.2 percent in 2018). Customer deposits at around 40 percent of liabilities underpin banking system stability.

8. While in 2018 Austrian subsidiaries in CESEE saw above average profitability, performance has likely peaked. Profitability increased given a favorable cycle driving down loan-loss provisions at historically low levels. Net interest margin (NIM) has been declining but remains considerably higher than in Austria. Austrian subsidiaries’ CTI ratios are lower than at the consolidated level (51 percent) but have been on the rise during the last decade. After the 2012 sustainability guidance⁶, the reliance on local funding has improved considerably, and the share of intragroup liquidity transfers from Austrian parent banks declined from 15 percent of subsidiaries’ assets in 2011 to below 9 percent in 2018.⁷

9. In recent years, the life insurance sector has suffered from low growth, driven primarily by weaknesses in the domestic market. Premiums in the life segment have steadily decreased (-17 percent in 2014–18) with little new production in the domestic market. Profitability remains under pressure due to low investment returns and increased interest-related provisions. The industry is coping with the challenges through large scale mergers domestically, expansion of cross-border business, and portfolio rebalancing towards less liquid assets. The non-life and health segments are growing steadily (by 4 and 18 percent in 2014–18, respectively). While the coverage ratio of Solvency Capital Requirement (SCR) is higher than the European average⁸, health insurers are exposed to future profitability risk from long-term business.

C. Key Vulnerabilities and Risks

10. Structural vulnerabilities include a large and interconnected banking sector, high level of CESEE exposures across banks and insurers, and low domestic structural profitability. Stress in individual institutions or in Austrian foreign subsidiaries can potentially spread into the domestic financial system due to significant equity participation and collaboration arrangements. Concerns over AML controls expose Austrian banks to operational and reputational risks.⁹ As noted in Article IV consultations, structural profitability in domestic operations is on the lower end of the peers’ average.

11. Austrian banks remain exposed to risks from exposures to the CESEE and investors’ concerns on fiscal challenges in Italy. The CESEE region is vulnerable to financial market volatility, capital outflows, and FX swings. Although the stock of foreign currency loans has declined, it is still high and susceptible to home currency depreciation.¹⁰ Despite some successful refocusing of exposures across the region by major Austrian banks, subsidiaries’ real estate exposures—especially in Czech Republic and Slovakia—have increased against rising vulnerabilities in real estate markets. While direct exposures to Italy are manageable, at 1.3 percent of foreign claims, worries about sovereign risk could lead to funding pressures from (i) a downgrade in the rating of the Austrian SI with an Italian parent; (ii) market contagion through funding markets from common exposures to the CESEE; or (iii) a rise in cross-border intra-group banking flows.¹¹

12. Some risks are building up in real estate, and growing exposure by the financial sector may indicate potential systemic risk. Household debt—at 87 percent of disposable income—is lower than the EA average, the share of variable-rate mortgages in new loans has declined from 83 percent to 44 percent over the last four years, and FX mortgage loans have continued to decline. Nevertheless, a significant share of new mortgages shows high loan-to-value (LTV) and debt-service-to-income (DSTI) ratios. In parallel, real estate exposures have increased across the financial sector. Housing loans in total assets of banks doubled from 8 percent in 2008 to 16 percent in 2018. The rapid increase in corporate loans by domestic banks has been driven by construction and real estate-related activities, which accounted for half of corporate loans in 2019Q1.The Austrian insurance sector allocates about 8 percent of their total assets to real estate—the highest in the EU. Within the asset management industry, the number of real estate investment funds has doubled in recent years (Figure 9).

A. Stress Testing Approach

13. The FSAP team performed a macroprudential stress test in collaboration with the Austrian National Bank (OeNB), considering domestic sectoral linkages and cross-border exposures. In total, 440 banks were included in the exercise, accounting for over 95 percent of banking system’s total assets. The stress test was conducted using regulatory and supervisory data as of end-2018 and included a top-down solvency exercise; a top-down liquidity stress test exercise; and a network exercise.¹² For the solvency stress test, OeNB’s permanent stress testing infrastructure (ARNIE) was used with inputs estimated based on FSAP team’s satellite models.

B. Solvency

14. To assess banks’ resilience to severe macrofinancial conditions, the team calibrated two scenarios over a three-year horizon (Annex I).¹³ The baseline scenario is aligned with April 2019 WEO projections. The adverse scenario includes four key sources of systemic risk (Table 2): (i) a sharp weakening in the global outlook resulting in a prolonged growth slowdown in Austria; (ii) a sharp rise in risk premia leading to an increase in lending rates and triggering asset repricing; (iii) a balance sheet recession in CESEE countries amplified by large FX moves; and, (iv) a sharp correction in real estate prices in Austria, resulting in higher impairment charges from lower recovery values upon default. In terms of severity, the adverse scenario implies a deviation of Austrian real GDP growth from its baseline of 6.9 percent by 2021, with a 2.3 standard deviation move in two-year cumulative real GDP growth rate, and a 20 percent peak-to-trough decline in real estate prices. Output shocks in the CESEE region range between 8.1 and 13.6 percent deviation from baseline by 2021.¹⁴

15. The FSAP solvency stress test results were compared against OeNB’s results applying team’s scenarios to the OeNB’s satellite models and toolkit. The OeNB and FSAP teams collaborated on various aspects, including validation of the FSAP team’s results, and both teams’ projections are in the same order of magnitude across risk categories.¹⁵

16. Banks appear resilient to severe macrofinancial shocks, with most banks meeting the hurdle rates at the end of the stress testing horizon (Figure 10).

• In the baseline, the system’s aggregate CET1 ratio would increase by 2.3 percentage points by 2021 due to banks’ revenue-generating capacity.

• In the adverse scenario, the aggregate CET1 ratio would decline by 4.4 percentage points to 11.1 percent in 2021. Five small banks (out of a total of 440) would breach capital requirements, albeit the aggregate capital shortfall is small.¹⁶

• Credit impairments and lower net interest income (NII) are the key contributors to capital depletion. Credit losses stand at 4.9 percentage points of CET1 under the adverse scenario compared to a 1.0 percentage point decline in the baseline.¹⁷ The NII in the adverse scenario is also lower on average by almost 15 percent for the horizon.

• Stressed non-interest income, net trading income, and market risk losses have a small impact on CET1 depletion. Deteriorating credit quality would drive an increase in risk-weighted assets (RWA) contributing to an additional charge of 0.7 percentage points.

• The negative impact is only partially mitigated by reduced dividend distributions (since loss-making banks do not pay dividends) and lower tax expenses because of projected losses.

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Austria: Solvency Stress Test Results – System Wide Averages

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB; IMF staff calculations

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17. While there is broad consistency of impact across O-SII and non-O-SII banks, results suggest heterogeneity in the drivers of capital depletion (Figures 11 and 12). O-SII banks are relatively more exposed to market risk given their larger fair-value portfolios, and to interest-income shocks given their wider footprint and higher starting NIM (Figure 11). For the smaller banks belonging to the non-O-SII group, equity participation valuation is what drives the difference between the two scenarios. In the baseline, the positive valuation of participations is the main contributor to capital generation. Nevertheless, the same factor contributes to the negative result in the adverse scenario, with a negative contribution of 1.9 percentage points against a positive contribution of 1.8 percentage points in the baseline. The reason is that in the Raiffeisen sector the smaller lower-tier entities own the larger higher-tier entities (“inverse ownership”). This scheme enables smaller regional banks to benefit from the net revenue stemming from CESEE region operations of the central entity but acts as a significant amplifier of inward spillovers in a downturn.¹⁸

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Austria: Solvency Stress Test Results—OSIIs

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB, IMF staff calculations

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Austria: Solvency Stress Test Results—Non-OSIIs

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB, IMF staff calculations

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18. The IPS structure acts as a shock absorber for idiosyncratic shocks but may result in inward spillovers in case of a systemic event. The OeNB’s team conducted an exploratory analysis of the resilience of the two layered IPS structures (regional and federal IPSs).¹⁹ The adverse scenario was used as the base case and additional losses of gradually increasing severity were introduced to the central institution of the Raiffeisen structure. Entities with capital shortfalls were identified and the capital buffers of the IPSs were measured against projected shortfalls and a range of support measures.²⁰ The results shared with the FSAP team suggest that IPSs are effective in containing risks originating from the smaller institutions of the tiered cooperative structure. However, strong equity linkages between members create vulnerabilities when the stress occurs at a central institution. In the case of idiosyncratic shocks, the presence of an IPS provides additional capital and liquidity buffers that would enhance financial system resilience.

19. The impact of a low-for-long interest rate environment could lead to a decline in margins, challenging banks’ ability to generate profits. The analysis assumes a gradual decrease of the 10-year sovereign yield by 80 basis points from end-2018 to September 2019 and unchanged rates after that through 2021. For non-EU CESEE currencies, the scenario assumes constant interest rates at their end-2018 level over the entire three-year horizon. Results suggest system-wide NII would decline by 5 percentage points on average until end-2021.

20. An additional sensitivity test suggests that concentration risk is contained (Figure 14).²¹ Results suggest that no bank defaults are triggered from losses on the largest exposure and capital losses would be moderate (2 percent of RWAs) upon the default of three largest on aggregate exposures. Results are highly sensitive to the network structure of the cooperative sector. Performing the test on gross exposures, 5 percent of aggregate capital would be depleted following the default of the largest counterparty, although the system’s CET1 ratio would remain above the regulatory minimum even after the default of the ten largest exposures. Results are conservative as the simulation does not include the support provided by the IPS structure.

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Austria: Solvency Stress Test Results—Market Risk and NII Impact

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: OeNB; IMF staff calculations

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Austria: Concentration Risk ^1/

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source OeNB and IMF staff calculations based on Large Exposure Data. Exposures to central banks, sovereigns, and sub-sovereigns are excluded.^1/ The X-axis denotes the number of largest exposures that is defaulted in the simulation. The analysis assumes loss given default of 50 percent. A default is triggered when capital falls below 4.5 percent CET1 regulatory minimum.

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C. Liquidity

21. Top-down quasi-LCR and cash flow-based tests covered the entire banking system. The team conducted a Basel III quasi-LCR test over a period of 30 days (by aggregate currency position and by significant currency), and a cash flow-based liquidity test over a three-month period. Both tests considered a set of scenarios reflecting a systemic liquidity stress episode. After each scenario, liquidity conditions for all banks were simulated, and the relevant liquidity metrics calculated. An exploratory analysis of the current NSFR proxy was also conducted. The NSFR stress tests conducted were exploratory, given that compliance with NSFR will only come into force in 2021. The system-wide coverage of banks also enabled the evaluation of additional liquidity protection offered by contractual liquidity support commitments of the two-layered IPS scheme in the Raiffeisen sector.

22. The banking system is resilient to sizeable withdrawals of funding (Figure 15). The asset-weighted average LCR stands at 164.7 percent under Basel-prescribed assumptions. When additional funding outflows are considered, the average LCR continues above the 100 percent threshold. Under the severe scenario which includes a market price shock, the average LCR declines to 104.3 percent. By significant currency, the EUR LCR declines from 145.8 percent to 96.9 percent under the severe scenario. The system-wide USD LCR average, at 56.6 percent, decreases to 44.1 percent in the severe scenario. However, USD is not a significant currency for the overall Austrian banking system and the overall size of USD outflows remains manageable at 6.1 billion. There appears to be ample space for banks to accommodate outflows, given the stable deposit-based funding structure, solid buffers in security holdings, and significant short-term inflows.

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Austria: Liquidity Stress Tests Results

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

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23. These results are supported by findings over longer periods. The cash-flow-based tests over a three-month horizon identified small liquidity shortfalls for some small banks under severely adverse conditions. However, even in the extreme case, the combined shortfall of EUR 1.5 billion is manageable given OeNB’s ability to provide liquidity either through standard facilities or extraordinary measures. The aggregate net liquidity position of the banking system —measured as counterbalancing capacity minus net outflows relative to system assets—remains positive across scenarios. It declines from the initial 21 percent of system assets to 8.8 percent in the most adverse scenario. The asset-weighted aggregate NSFR proxy stands at 122 percent and declines to 112 percent under stress. Only a small proportion of the system (2.2 percent of system assets) has an NSFR below 100 percent, this share increases to over 28 percent of system assets under stress.

24. The IPS structure enhances the system’s resilience to liquidity risks. The cash flow-based tests show that, in the severely adverse scenario, some regional IPSs have a net liquidity shortfall. However, the additional liquidity buffers at the federal IPS layer are enough to support all liquidity needs of the regional IPSs. To analyze the role of the Raiffeisen IPS scheme in managing liquidity risks, the cash flow-based test was repeated in a scenario that assumes no additional IPS liquidity protection. Under this scenario, individual Raiffeisen banks withdraw contributions from the IPS and all contractual obligations to support other institutions in the Raiffeisen system are assumed to be terminated. In this scenario, banks can only rely on their own liquidity buffers. The results show that in the absence of IPS support, the combined liquidity shortfall increases to EUR 1.7 billion (compared to 1.5 billion with support arrangements in place) but remains small relative to the size of the system.

D. Contagion

25. The banking system is concentrated in clusters of many small banks around a few important nodes (Figure 3), and the network analysis assessed whether a bank’s outright default might cause material losses to the entire banking system. The analysis included a credit shock simulation whereby a credit counterparty default erodes the lender’s capital buffers, and a funding shock simulation whereby the default of a funding counterparty induces a liquidity shortfall and triggers losses through fire sales.

26. The analysis reveals the potential cascade effects induced from banks’ hypothetical defaults (Figure 16).²² Results are very sensitive to the treatment of exposures in the cooperative sector. When the network structure is based on gross exposures (including related-party exposures in the cooperative sector), both contagion and vulnerability index strongly increase.²³ The maximum contagion index from O-SIIs rises from 1.2 percent to 41 percent capital depletion, with the median impact increasing from 0.5 percent to 1.1 percent. The analysis was re-run using large exposure data and bank-specific calibrated parameters using the CoMap methodology.²⁴ The median contagion index from Austrian O-SII banks to the system is estimated at 0.8 percent with a wide distribution, ranging between 0.5 and 2.1 percent at the 10^th and 90^th percentile, respectively. The effects are highly skewed pointing at the central role played by the central institution in the tiered banking structures.

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Austria: Domestic Contagion Analysis

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source OeNB and IMF staff calculations based on Austrian credit registry data. The data was consolidated in line with the stress test.Note: The Index of Contagion shows the percent of total capital impairment in the system due to the failure of each bank. The Index of Vulnerability is the average percent capital impairment for a bank due to the failure of other banks. “Ex-RB” in panels denotes results calculated based on exposures net of bilateral exposures in the Raiffeisen network. The acronym “RB” denotes exposures among IPS members in the Raiffeisen sector.”

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27. Outward and inward spillovers between Austrian banks’ and foreign banks in the EA and the CESEE appear manageable (Figure 17). The FSAP team examined interbank cross-border contagion of Austrian banks using CoMap. Results suggest that the median contagion from Austrian O-SIIs to the EA is low at 0.12 percent capital depletion whereas outward spillovers to the CESEE are limited to a few Austrian banks. Inward spillovers to Austrian banks from defaulting banks in the EA and CESEE are negligible.

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Austria: Cross-Border Contagion Analysis

Citation: IMF Staff Country Reports 2020, 035; 10.5089/9781513528786.002.A001

Source: ECB and IMF staff calculations. The analysis is based on large exposure data using Covi, G., Gorpe, Z., and Kok, C. (2019), “CoMap: mapping contagion in the euro area banking sector”, ECB Working Paper No. 2224.Note: The Index of Contagion shows the percent of total capital impairment in the system due to the failure of each bank. The Index of Vulnerability is the average percent capital impairment for a bank due to the failure of other banks.

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E. Corporate Sector Risk

28. The debt servicing capacity of the Austrian corporate sector has improved, although the real estate and construction sectors are most exposed to financial risks (Figure 8). Austrian corporates’ debt-to-equity ratio has remained higher than the EA average, but the debt-to-income ratio stands below the EA average. The low interest rate environment, a high share of NFC variable-rate loans, and robust operating profits have contributed to improved debt servicing capacity. FX loans continued to fall and currently stand at only 2 percent. At the same time, the high share of variable-rate loans exposes the sector to interest rate shocks. An interest coverage ratio (ICR)-based test was conducted to assess the affordability risk of Austrian firms.²⁵ The dispersion in ICRs across the 57 listed Austrian NFCs suggests that certain leveraged sectors are more vulnerable to shocks than others.²⁶ Under an adverse scenario, the real estate and construction sectors appear more vulnerable. This is reflected in a much lower post-shocked weighted ICR of the real estate and construction sectors compared to other sectors (Figure 4). Theses vulnerabilities can adversely affect the banking sector, as almost half of banks’ loans to NFCs in 20219Q1 went to real estate and construction.

F. Exploratory Analysis: Solvency Risk and Macroprudential Policy

29. The FSAP used a semi-structural model to project losses on banks’ mortgage portfolios and to analyze the potential mitigating role of different macroprudential policies. The model was modified to incorporate Austria-specific characteristics and used to simulate mortgage default rates and losses in the stress test scenarios. The drivers of borrowers’ debt servicing capacity included changes in i) house prices, ii) income, iii) unemployment rate, and iv) mortgage interest rates. The results suggest that losses on mortgage portfolios would remain relatively moderate in the adverse stress scenario, although would increase more than threefold compared to the baseline.

30. The use of macroprudential borrower-based limits could reduce the losses on mortgage portfolios in the adverse scenario. To study the impact of macroprudential borrower-based limits, the portfolio of mortgages was simulated for eight quarters into the future, before the adverse stress scenario was triggered. It was assumed that during this time the macroprudential limits would push the LTV, DTI, and DSTIs of new mortgages towards safer levels in terms of affordability, while some of outstanding loans would mature. In this counterfactual scenario, banks’ losses on mortgage portfolios decline by 35 percent if a combination of LTV-DSTI limits of 80 and 40 percent, respectively, with a speed-limit of 10 percent were introduced. The losses are around 25 percent smaller if the speed-limit is increased to 20 percent instead. Results confirm that the credit quality of the most recent loan vintages is the key driver of total mortgage portfolio losses, which is also broadly consistent with the observed worsening in the portfolio risk profiles in recent years.

G. Key Findings and Recommendations

31. Given the substantial footprint and complexity of the banking system, the stress testing function should be further strengthened. Stress testing is fundamental in assessing, evaluating, and informing the authorities on the impact of policy decisions on the financial system. Stress tests are resource-intensive, requiring specialized staff, systems and IT infrastructure, and authorities should ensure that resources and organizational structure are adequate. Stress testing should be further strengthened to fully integrate sensitivity, contagion, and interconnectedness analysis tools. The existing framework should be further developed to capture second round effects, behavioral elements, dynamic balance sheet stress tests, and separation of the prudential and accounting layers. Finally, it is key to increase the level of modelling granularity to fully capture the diversity of risks facing the banking system (for example, by geographical breakdown).

A. Macroprudential Policy Framework and Tools

34. The institutional framework for macroprudential policy is sound but could be strengthened to ensure effective and timely action. The framework encourages cooperation and coordination across different institutions. To benefit from OeNB’s operational independence and the synergies offered by its role in monitoring and analyzing financial stability risks, the FMSB could be chaired by the OeNB, and its representation in the FMSB should be increased.²⁹ Adequate resources are needed to implement responsibilities related to European policy coordination.

35. The systemic risk monitoring framework is advanced but could be enhanced in some areas, including by closing data gaps. The analysis of real estate-related risks could be deepened and a more systematic analysis of interlinkages between different financial sector segments through common exposures is desirable. Several ongoing initiatives by the OeNB and FMA will increase the granularity of corporate and household lending data. However, data gaps remain. Authorities are encouraged to collect CRE data, gather detailed data on residential real estate exposures, enhance the granularity of CESEE exposures, and broaden the collection of NFC indicators, including on credit quality, profitability, debt and firm characteristics.

36. The expected weakening of credit demand and still negative credit-to-GDP gap justify the current countercyclical capital buffer (CCyB) of 0 percent (Figure 9). In terms of sectoral developments, growth of domestic bank credit to NFCs has picked up considerably over the last couple of years, driven primarily by real estate activities. If the strong credit growth in the NFC sector continues and credit in the real estate picks up, increasing the CCyB should be considered. Going forward, the planned introduction of sectoral macroprudential capital buffers to the European macroprudential framework may help address sector-specific risks stemming from credit growth.

37. Given the build-up of risks in residential real estate, authorities should be prepared to introduce binding borrower-based limits. The authorities took steps to contain deterioration in risk profiles of new mortgages, such as the September 2018 guidance on sustainable lending standards. However, a considerable share of new mortgages still does not comply with the recommended DSTI limit or the minimum down-payment. Considering increasing overvaluation pressures and continued low interest rates, the introduction of hard limits could help ensure that mortgage lending risk remains contained. For example, a combination of limits on maximum LTV and DSTI ratios, along with speed limits³⁰, would allow the FMSB to better control the volume of loans with high indebtedness indicators, while allowing banks some flexibility in granting loans to customers.³¹

38. The authorities use a sophisticated framework based on complementarities between the O-SII and SyRB buffers to address risks from structural vulnerabilities, and the framework could be further expanded to reflect inward contagion. The identification of institutions subject to the O-SII buffer is based on EBA guidelines, but in 2018 the buffer was extended to the unconsolidated level. As of January 2019, seven banks were subject to an O-SII buffer (ranging from 0.5 to 2 percent of RWA) at the consolidated level, and seven also at the unconsolidated level. The SyRB buffer consists of i) the systemic vulnerability buffer of up to 1 percent of RWA, capturing vulnerabilities related to an institution’s interconnectedness; and ii) the systemic cluster risk buffer of up to 1 percent of RWA, capturing risks related to concentration of exposures in the CESEE region. As of January 2019, 13 banks were subject to a SyRB buffer at the consolidated level, and 7 also at unconsolidated level. Nevertheless, inward contagion risks may warrant enhanced monitoring capacity and oversight by authorities, given the significant implications for financial stability.

B. Banking

39. The implementation of EU-level regulations and guidance has enhanced the regulatory and supervisory framework since the last FSAP, but some areas still require attention. The Banking Act (BWG) was amended to incorporate EBA Guidelines on internal governance and suitability of members of the management body and key function holders. FMA’s regulation on credit risk management issued in 2013 reflects key EU Directives. The new Bank Recovery and Resolution Act (BaSAG) and the Deposit Guarantee Schemes and Investor Compensation Act (ESAEG) also improved the early intervention powers of the FMA. Nevertheless, as noted in the 2013 FSAP, FMA’s operational independence might be endangered due to the presence of industry representatives on the Supervisory Board, the BMF’s role in approving FMA regulations—including for macroprudential oversight—the BMF’s very broad right to gather information from the FMA, and inadequate legal protection for supervisors (see Annex III).

40. A detailed framework for early intervention and application of supervisory measures has been established, but most triggers are quantitative and based on risks and violations that have already materialized. BWG establishes that FMA may impose supervisory measures when there is evidence that a bank will breach Capital Requirements Regulation (CRR) or Capital Requirements Directive (CRD) within 12 months. To facilitate this determination, it is recommended that more structured internal guidance is developed to aid supervisory staff in making decisions based on qualitative factors before impacts on the bank’s performance materialize.

41. The legacy role of State Commissioners is not compatible with international standards and needs to be reconsidered. As a legacy of the time when the BMF was directly involved in banking, commissioners are full-time employees of the BMF, serve in more than one board, and can veto supervisory board decisions. Based on international corporate governance standards, the role of the supervisory board has become more intrusive and technical and requires a greater interaction between the supervisors and the board.

42. The regulatory framework for related-party risk and significant investments needs enhancement, which is particularly important in the highly interconnected Austrian financial system. There is no requirement that transactions with related parties should not be undertaken on market terms, the FMA does not have the power to set aggregate limits or require collateralization for such exposures, and standards or regulations for intra-group transactions have not been adopted. In addition, there is no requirement for ex-ante approval or notification of investment by LSIs in nonfinancial undertakings. Transactions with sister banks, affiliated nonfinancial companies and group members should be monitored to ensure they are priced on market values, performed in a safe and sound manner, and to avoid shifting of problem assets between entities. Risks from entities in the wider group, foreign or domestic, and including nonfinancial entities, need to be considered, and investments which present obstacles for consolidated supervision should not be allowed.

C. Insurance

43. The FMA has implemented Solvency II with enhanced data quality and analytical capacity, but maintenance requires adequate resources. Implementation of Solvency II was relatively smooth, and all insurers met capital requirements without relying on transitional and Long-Term Guarantees (LTG) Measures in 2017. New risk management and reporting requirements helped FMA and insurers to monitor risks more closely and accurately. FMA has made significant efforts to improve data quality and analytical capacities and has established stress testing as a yearly practice. Nevertheless, Solvency II needs ongoing validation and scrutiny by supervisors, which require resources with skills and expertise. Without proper and ongoing monitoring, there is a significant risk of manipulation and delay of regulatory actions. In addition, asset allocation is shifting to less liquid assets, which makes reliable valuation more difficult. The FMA and the OeNB jointly validate internal models for market risk. This close cooperation and adequate resources are key to ensure the reliability of models.

44. The prolonged low interest rate environment challenges the insurance sector. The duration gap between asset and liabilities is one of the highest among the European peers. The average guaranteed rates remain high, while the investment returns continue to be declining. In addition, Solvency II allows insurers to recognize expected profits in future premiums as part of their own funds, and these make up a substantial part of the own funds of the two largest insurance groups. The reliance on future profitability to meet capital requirements challenges the entities’ business models over the medium term, especially that of composite insurers.³² It is recommended that the FMA conducts more targeted stress testing on the segments/business lines for which future profitability is material. Moreover, supervisors should clearly communicate to higher risk insurers their concerns regarding major strategic issues such as business model shifts. Objective actions should be required, such as capital add-ons or other measures to address medium-term uncertainty.

D. AML/CFT

45. Significant progress has been made since the 2016 AML/CFT Mutual Evaluation to align Austria’s framework with the FATF standards, including recent standards on VA/VASPs. Several initiatives, such as amendments to the Financial Markets Anti-Money Laundering (FM AML Act) and sectoral laws covering DNFBPs, have led to significant enhancements of the legal and regulatory framework. A Register of Beneficial Owner of Companies, other Legal entities and Trusts was created in 2017 (BORA Act) in implementation of the 4^th EU Anti-Money-Laundering Directive (AMLD). In July 2019 the BORA was amended to transpose the 5^th AMLD. These initiatives resulted in upgrades of technical compliance ratings by the FATF in the two follow-up reports. The FM AML Act has recently been amended to assign the FMA the responsibility over the registration and monitoring of VA/VASPs. The law defines VA/VASPs following the FATF definition, but effective implementation will need continuing efforts.

46. The authorities have demonstrated strong commitment to strengthening banking AML/CFT supervision and addressing cross-border related risks, but there is room for improvement. The FMA has adopted a risk-based approach to AML/CFT supervision and has developed an offsite risk rating tool to classify financial institutions in terms of ML/TF risk, which forms the basis for its supervisory strategies and resource allocation. Authorities should consider revising the approach to onsite activities to ensure that even lower risk banks are subject to onsite inspections on a more regular basis. In addition, the authorities should continue to place greater focus on monitoring cross-border risks, and effectively implementing the Customer Due Diligence (CDD) obligations to ensure that financial integrity risks are properly mitigated. In addition, a review of the National Risk Assessment should help developing additional measures to mitigate ML/TF risks, including from exposures to CESEE countries.

47. The current legal and regulatory framework generally allows for cross-border cooperation with EU/EEA countries, but legal obstacles hinder information exchange with some third countries. The information sharing with authorities in third countries is only allowed if they are subject to or have agreed to an equivalent level of professional secrecy to the respective European legal acts (EBA assessment of equivalence). Given this limitation, the authorities should ensure and closely monitor that strong AML/CFT controls are applied at the group level and in case of concerns, apply remedial actions. Rules on confidentiality, professional secrecy, data protection and information exchange should be analyzed on a case-by-case basis.

A. Institutional Framework

48. While institutional arrangements for crisis management are generally sound, improvements can be made. Although supervisory and resolution functions are operationally separated within the FMA, decision making is unified, and the authorities should consider separating them to avoid potential or perceived conflicts of interest and provide an effective backstop for timely action. It is recommended that an interagency body should be mandated to ensure that each authority has contingency plans and a regular testing program, that the individual plans dovetail into a coherent national plan, and that interagency tests are regularly conducted.

B. Recovery, Resolution, and Financial Stability

49. For resolution purposes, eleven Austrian banking groups are under the remit of the Single Resolution Board (SRB) and the others are under the FMA. The FMA, supported by the OeNB, has grouped the banks under their remit into three categories for resolution planning purposes. The first category consists of 16 banks for which “fully-fledged” resolution plans are prepared. The second category, which needs to have “proportionate” resolution plans, has “deposit-focused” banks for which the use of bankruptcy may be credible and feasible in the case of idiosyncratic problems but likely not in a time of broader financial instability or system-wide events. The third category of banks consists of 404 “harmonized” banks for which use of bankruptcy proceedings is deemed credible and feasible without putting in jeopardy resolution. In the third category the resolution strategy is use of bankruptcy proceedings.

50. The envisioned MPE approach to bail-in for two Austrian groups would mitigate inward spillovers from risks in the CEESE region, but implementation is still underway. For these groups, bail-in under an MPE approach involving multiple resolution groups has been deemed more appropriate.³³ The MPE resolution approach would in principle allow the subsidiaries to absorb loses, mitigating contagion into Austria, but the effectiveness of the mechanism depends on the subsidiaries being able to issue Minimum Requirement for own funds and Eligible Liabilities (MREL) into the local market. Given less-developed capital markets in some jurisdictions, there may be limited capacity to issue MREL-eligible debt, and the small size of some banks makes issuing into international markets not feasible. The FMA and SRB recognize this constraint and are considering assisting national resolution authorities by providing a transitional period during which required MREL could be held by a group entity in Austria, with an agreed phase-out during which internally issued-MREL would be replaced by MREL instruments issued to third parties.

51. Regarding institutions under SPE, close collaboration is needed with the home supervisors and European authorities to ensure system-wide risks are contained and financial stability preserved. Authorities must think through in advance how they would deal with a situation where capital or liquidity is directed to a parent bank. The financial crisis contingency plan should include this situation. Eventually the national plan should address how the authorities would interact with the European authorities in the case of a system-wide crisis involving other EA jurisdictions to ensure financial stability and protect the Austrian economy.

52. Overall, recovery and resolution planning are well advanced but additional flexibility could be provided in the bankruptcy regime. For the non-systemic banks, authorities should consider amending the bankruptcy regime to explicitly provide the ability to transfer a non-systemic bank’s covered deposits and its sound assets to an acquirer.

53. As noted in the EA FSAP, ensuring that a bank in resolution can maintain enough liquidity is another key challenge. The provision of Emergency Liquidity Assistance (ELA) by the OeNB could be enhanced by formulating a policy on lending to a bank prior to and within resolution, and by expanding the types of assets eligible as collateral—which could be adjusted if required once the EA framework for liquidity in resolution is completed. The BMF should take steps to be able to support funding in resolution without requiring additional legislation at the time of need.

C. Deposit Protection

54. Deposit guarantee arrangements are sound and have suitable funding, but steps can be taken to strengthen deposit protection arrangements and their integration with the overall crisis management and safety net regime. There are two DGSs. The Einlagensicherung Austria GmbH is the so-called “uniform DGS” for Austrian banks that are not members of the second DGS, the Sparkassen-Haftungs GmbH. The DGSs have the right to access the funds of the other DGS (including contingent contributions) should the available resources of the fund and the contingent contributions from its members prove insufficient in amount. As a last resort both schemes can borrow, and the BMF may guarantee such borrowing, though no ex ante guarantee is in place and the BMF would need to table legislation to provide for it. The DGSs do not have the power to finance the transfer of assets and liabilities in the context of bankruptcy proceedings. The BMF should secure ex ante standing authority to provide a guarantee for the borrowing of either DGS in case of last resort.³⁴

D. Insurance Resolution

55. Austria’s ongoing discussions on an insurance resolution framework are a welcome step, and going forward, FMA’s powers should be substantially reinforced. The team supports the formal adoption of the overarching principle that losses must be first borne by shareholders and other creditors, before they affect policyholders’ and beneficiaries’ claims. FMA restructuring powers should be extended to all kinds of insurance and all types of creditors. It should also be given the power to mandate a portfolio transfer. A strong resolution framework, building on the existing Deckungsstock³⁵, should be supported by a combination of different funding arrangements that provide adequate private ex-ante resources for resolution purposes and benefit from the credible support of provisions for public funding.

56. In the short-term, requesting pre-emptive and proportional recovery plans from selected insurers is strongly recommended. This requirement should be imposed on selected insurers based on microprudential and macroprudential considerations, with proportional requirements regarding content and granularity, preparation timeframe, and periodicity of updates.

Table 4.

Austria: Financial Soundness Indicators for the Banking Sector, 2013–2018

(Percent)

Sources: IMF FSI.

^1/Domestically controlled, cross-border and cross sector consolidation basis.

^2/Domestic consolidation basis.

^3/Total loans include loans to financial institutions.

^4/Starting in 2014, NPLs are reported on a borrower rather than single loan basis, which results in a break in the series.

Table 4.

Austria: Financial Soundness Indicators for the Banking Sector, 2013–2018

(Percent)

				2013	2014	2015	2016	2017	2018
Capital adequacy
	Regulatory capital to risk-weighted assets 1/			18.0	16.3	16.5	18.0	18.8	18.4
	Regulatory Tier 1 capital to risk-weighted assets 1/			13.7	12.3	13.2	14.5	15.6	15.6
	Capital to assets (percent) 2/			8.0	6.8	7.4	7.3	7.5	7.7
	Large exposures to capital 2/			52.6	70.5	59.2	60.7	51.2	55.6
	Nonperforming loans net of loan-loss provisions to capital 2/4/			5.8	13.8	13.2	11.2	10.9	8.0
Asset quality
	Nonperforming loans to total gross loans 2/ 4/			2.9	3.5	3.4	2.7	2.4	1.9
	Sectoral distribution of loans to total loans 3/
	Residents			70.2	70.0	73.5	74.7	76.3	75.9
		Deposit-takers		22.6	20.2	19.8	19.0	18.0	17.8
		Central bank		1.7	1.6	3.1	3.0	5.5	6.2
		Other financial corporations		2.7	3.0	3.1	3.0	2.3	2.1
		General government		3.9	4.3	4.5	4.5	3.9	3.8
		Nonfinancial corporations		19.8	20.0	20.7	21.5	22.4	22.4
		Other domestic sectors		19.6	20.8	22.4	23.7	24.1	23.6
	Nonresidents			29.8	30.0	26.5	25.3	23.7	24.1
Geographical distribution of loans to total loans 2,3/
	Domestic economy			70.2	70.0	73.5	74.7	76.3	75.9
	Advanced economies			14.6	16.4	14.5	15.1	13.5	14.0
	Emerging market and developing countries			15.2	13.7	12.0	10.2	10.3	10.0
		Africa		0.1	0.1	0.2	0.2	0.2	0.3
			Of which: Sub-Sahara Africa	0.1	0.1	0.1	0.2	0.2	0.3
		Central and Eastern Europe		12.3	10.7	9.6	8.2	8.5	8.4
		Commonwealth of Independent States and Mongolia		2.1	2.0	1.5	0.8	0.7	0.5
		Developing Asia, including China		0.5	0.5	0.5	0.5	0.5	0.4
		Middle East		0.1	0.1	0.1	0.2	0.2	0.2
		Western Hemisphere		0.1	0.2	0.2	0.2	0.2	0.2
Earnings and profitability 1/
	Return on assets			0.1	-0.2	0.5	0.5	0.3	0.3
	Return on equity			1.2	-3.2	7.2	7.0	10.0	9.9
	Net interest income to gross income			65.7	58.7	58.8	59.0	59.1	61.1
	Noninterest expenses as a percentage of gross income			96.5	77.3	69.6	74.8	67.0	68.3
Liquidity 2/
	Liquid assets to total assets			24.5	22.8	24.8	25.4	23.7	24.4
	Liquid assets to short-term liabilities			68.9	67.0	68.5	67.2	65.7	68.2
	Net open position in foreign exchange to capital			0.2	0.7	0.2	1.0	0.1	0.7
Other FSIs 2/
	Trading income as a percentage of gross income			2.6	1.8	2.5	1.7	1.7	1.5
	Personnel expenses as a percentage of noninterest expenses			50.7	53.1	50.2	49.9	46.9	48.1
	Spread between reference lending and deposit rates (basis points]			181.0	196.0	193.0	190.0	179.0	177.0
	Foreign currency-denominated loans to total loans			18.8	18.8	15.5	13.8	11.2	11.2
	Foreign currency-denominated liabilities to total liabilities			10.0	9.9	7.5	6.6	6.5	6.3

Sources: IMF FSI.

^1/Domestically controlled, cross-border and cross sector consolidation basis.

^2/Domestic consolidation basis.

^3/Total loans include loans to financial institutions.

^4/Starting in 2014, NPLs are reported on a borrower rather than single loan basis, which results in a break in the series.

View Table

Table 4.

Austria: Financial Soundness Indicators for the Banking Sector, 2013–2018

(Percent)

				2013	2014	2015	2016	2017	2018
Capital adequacy
	Regulatory capital to risk-weighted assets 1/			18.0	16.3	16.5	18.0	18.8	18.4
	Regulatory Tier 1 capital to risk-weighted assets 1/			13.7	12.3	13.2	14.5	15.6	15.6
	Capital to assets (percent) 2/			8.0	6.8	7.4	7.3	7.5	7.7
	Large exposures to capital 2/			52.6	70.5	59.2	60.7	51.2	55.6
	Nonperforming loans net of loan-loss provisions to capital 2/4/			5.8	13.8	13.2	11.2	10.9	8.0
Asset quality
	Nonperforming loans to total gross loans 2/ 4/			2.9	3.5	3.4	2.7	2.4	1.9
	Sectoral distribution of loans to total loans 3/
	Residents			70.2	70.0	73.5	74.7	76.3	75.9
		Deposit-takers		22.6	20.2	19.8	19.0	18.0	17.8
		Central bank		1.7	1.6	3.1	3.0	5.5	6.2
		Other financial corporations		2.7	3.0	3.1	3.0	2.3	2.1
		General government		3.9	4.3	4.5	4.5	3.9	3.8
		Nonfinancial corporations		19.8	20.0	20.7	21.5	22.4	22.4
		Other domestic sectors		19.6	20.8	22.4	23.7	24.1	23.6
	Nonresidents			29.8	30.0	26.5	25.3	23.7	24.1
Geographical distribution of loans to total loans 2,3/
	Domestic economy			70.2	70.0	73.5	74.7	76.3	75.9
	Advanced economies			14.6	16.4	14.5	15.1	13.5	14.0
	Emerging market and developing countries			15.2	13.7	12.0	10.2	10.3	10.0
		Africa		0.1	0.1	0.2	0.2	0.2	0.3
			Of which: Sub-Sahara Africa	0.1	0.1	0.1	0.2	0.2	0.3
		Central and Eastern Europe		12.3	10.7	9.6	8.2	8.5	8.4
		Commonwealth of Independent States and Mongolia		2.1	2.0	1.5	0.8	0.7	0.5
		Developing Asia, including China		0.5	0.5	0.5	0.5	0.5	0.4
		Middle East		0.1	0.1	0.1	0.2	0.2	0.2
		Western Hemisphere		0.1	0.2	0.2	0.2	0.2	0.2
Earnings and profitability 1/
	Return on assets			0.1	-0.2	0.5	0.5	0.3	0.3
	Return on equity			1.2	-3.2	7.2	7.0	10.0	9.9
	Net interest income to gross income			65.7	58.7	58.8	59.0	59.1	61.1
	Noninterest expenses as a percentage of gross income			96.5	77.3	69.6	74.8	67.0	68.3
Liquidity 2/
	Liquid assets to total assets			24.5	22.8	24.8	25.4	23.7	24.4
	Liquid assets to short-term liabilities			68.9	67.0	68.5	67.2	65.7	68.2
	Net open position in foreign exchange to capital			0.2	0.7	0.2	1.0	0.1	0.7
Other FSIs 2/
	Trading income as a percentage of gross income			2.6	1.8	2.5	1.7	1.7	1.5
	Personnel expenses as a percentage of noninterest expenses			50.7	53.1	50.2	49.9	46.9	48.1
	Spread between reference lending and deposit rates (basis points]			181.0	196.0	193.0	190.0	179.0	177.0
	Foreign currency-denominated loans to total loans			18.8	18.8	15.5	13.8	11.2	11.2
	Foreign currency-denominated liabilities to total liabilities			10.0	9.9	7.5	6.6	6.5	6.3

Sources: IMF FSI.

^1/Domestically controlled, cross-border and cross sector consolidation basis.

^2/Domestic consolidation basis.

^3/Total loans include loans to financial institutions.

^4/Starting in 2014, NPLs are reported on a borrower rather than single loan basis, which results in a break in the series.