Legal Basis
Pursuant to Article 23e para. 3 BWG the FMA may obtain an expert opinion from the Oesterreichische Nationalbank and may prescribe by way of a Regulation taking into consideration the relevant Recommendations and Guidelines of the EBA with the consent of the Federal Minister of Finance, that credit institutions and groups of credit institutions maintain on an individual basis, on a consolidated basis or a sub-consolidated basis a capital buffer requirement for the systemic risk buffer consisting of Common Equity Tier 1 capital. In doing so, the FMA bases the buffer level on a Recommendation by the Financial Market Stability Board (FMSB) as well as an expert opinion (in German only) by the Oesterreichische Nationalbank.
Objective and Composition of the Systemic Risk Buffer
The Systemic Risk Buffer (SyRB) is intended in accordance with Article 23e BWG to counteract systemic risks that may lead to a disruption with potentially significant detrimental effects on the domestic financial system or domestic real economy. The systemic risk buffer may be set for the banking sector as a whole or parts thereof, in relation to all exposures or a subgroup thereof. The possibility therefore exists to use several systemic risk buffers simultaneously for different exposures. One condition when defining a subset of sectoral exposures is the systemic relevance of the risks that arise from a subset of sectoral exposures. For further information, please consult the EBA Guidelines EBA/GL/2020/13 (Guidelines on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer in accordance with Article 133(5)(f) of Directive 2013/36/EU).
The buffer rate to be set shall be at least 0.5% with no upper limit. The systemic risk buffer to be met by an individual credit institution is the total of the individual systemic risk buffers. The systemic risk buffer shall not be allowed to cover any risks that are already covers by a Countercyclical Capital Buffer (CCyB) or a Capital Buffer for Systemically Important Institutions and must be appropriate in terms of its effect on the financial systems of other Member States and the European Union.
The objective of the systemic risk buffer is to limit the vulnerability of institutions to systemic risks arising from the financial system or parts thereof by building up additional capital and thereby increasing their risk bearing capacity.
Identified Systemic Risks
The higher than average size of the banking sector for a small open economy, the existence of a long-term and structure spread risk, the prevailing low level of profitability, the large levels of exposures towards emerging market economies in Europe (CESEE), the specific ownership structures (special public ownership structures), which in some cases would only partially be able to recapitalise credit institutions in the event of a crisis, have all been identified as material systemic risks for Austrian financial market stability.
Calibration of Buffer Levels
The SyRB and the O-SII buffer have a complementary effect, i.e. they supplement each other. During the transposition of CRD V into Austrian law, this interplay was taken into account accordingly through the additivity of the two buffers. The SyRB buffer level was reduced accordingly to avoid overlaps with the O-SII buffer (the same risk should not be addressed twice).
Identification of the parts of the banking sector required to maintain a systemic risk buffer
Pursuant to Article 23e para. 3 BWG, the FMA may set a Common Equity Tier 1 capital (CET1) systemic risk buffer for parts of or the entire banking sector for a subset of or all exposures (…), in order to avoid or mitigate systemic risks that are not covered by Regulation (EU) No. 575/2013 or by Articles 23a to 23d, that are manifested in such a way that it might lead to the disruption of the financial system with potentially significant negative impacts on the financial system and the domestic real economy (…).
The part of the banking sector that is exposed to a relevant extent to the identified systemic risks (see above) shall be required to maintain a systemic risk buffer.
The setting of the buffer amounts as well as the identification of the parts of the banking sector and specifically the institutions and groups of institutions impacted by the relevant systemic risks occurred based on an opinion by the Oesterreichische Nationalbank. Detailed descriptions about the methodology applied can be found on the website of the Oesterreichische Nationalbank.
The systemic risk buffer requirement relates to all the institution’s exposures irrespective of their location.
In the event that the credit institution fails to meet the combined capital buffer requirement (see Article 24b BWG), then this results in restrictions on distributions (see Article 24 BWG) and the obligation to prepare a capital conservation plan (see Article 24a BWG).
In its Recommendation dated 12 September 2022, the FMSB has determined that a heightened structural systemic risk exists in Austria. As is also apparent from the OeNB’s opinion, this results from the specific combination of the following factors: low structural profitability, specific ownership structures, high exposure to emerging economies in Europe, the size of the banking sector in relation to GDP, its interconnectedness within the financial economy and with the real economy and the long-term structural spread risk. Based on the FMSB’s Recommendation and the OeNB opinion, it is therefore necessary to activate a structural systemic risk buffer in the following components to address and mitigate systemic risks: (1) systemic vulnerability and (2) systemic cluster risk.
Systemic vulnerability is the risk emanating from the system that affects individual banks, e.g. as a result of market distortions in the wake of a bank’s failure and, in particular, through the risk of a burden on the public budget from banks that are in public ownership. Systemic cluster risk is a risk resulting from substantially similar risk positions across the banking industry and which may lead to disruptions at several credit institutions as a result of this similarity that may have serious negative effects on the financial system and the real economy. However, in accordance with a proportionate application of the capital buffers, only those banks were selected that are particularly exposed to these risks and fulfil a proportionality criterion. The structural capital buffers are only activated for these banks.
Buffer levels are calibrated for the individual systemic risk components. In so doing, structural changes in systemic risks and any overlaps with other regulatory micro- and macroprudential measures are duly accounted for. In its expert opinion on the quantification of the overlap between the systemic risk buffer and the capital buffer for systemically important institutions, the OeNB states that the latter maybe reduced by a maximum of 12.5% in the case of additivity and the former by a maximum of 25%. In calculating the buffer levels, the minimum requirements for own funds and eligible liabilities (MREL) and the resources of the Single Resolution Fund (SRF) that have already been built-up have also been taken into account, because this provides a greater degree of manoeuvrability in cases of resolutions.
As the identified systemic risks manifest themselves at all affected institutions or groups of institutions both at the consolidated and individual institution level, the FMSB recommended the systemic risk buffer should be set on both the consolidated and individual institution level.
According to the OeNB’s opinion, the public ownership of the Landes-Hypothekenbanken hampers their recapitalisation in the event of a crisis (systemic recapitalisation risk). It also states that state guarantees have increased incentive distortions in the past, and continue to exist despite a reduction (expiry of the guarantee obligation). When the Capital Buffer Regulation 2021 (KP-V 2021) was enacted, the reduction of state guarantees was already taken into account where the buffer requirements for the systemic risk buffer for the affected regional mortgage banks were reduced from 1% to 0.5% (cf. Article 8 para. 1 KP-V 2021 compared to Article 7 para. 1 of the Capital Buffer Regulation (KP-V) published in Federal Law Gazette II No. 435/2015 in the version amended by Regulation in Federal Law Gazette II No. 586/2020). As these systemic risks manifest themselves in all affected institutions or groups of institutions both at the consolidated and individual institution level, the FMSB recommended the systemic risk buffer should be set on both the consolidated and individual institution level. The systemic risk buffer is therefore required to also be held by the four identified regional and mortgage banks at the individual institution level. Following the re-evaluation, BAWAG exceeds the relevant criteria for the application of the systemic risk buffer at the individual institution level for the first time. Addiko Bank AG was identified as an additional bank for the application of the systemic risk buffer at the consolidated level due to having a higher systemic cluster risk, while the systemic risk buffer was reduced for UniCredit Bank Austria due to the lower significance of systemic cluster risk at the consolidated level.
The other changes in buffer levels are as a consequence of the implementation of the additivity of systemic risk buffers and capital buffers for systemically important institutions following the amendment to the Austrian Banking Act (BWG), published Federal Law Gazette I No. 98/2021. At that time at the time of the recasting of the KP-V 2021 buffer levels for the capital buffer for systemically important institutions were reduced. The reason for the reduction was that in the midst of an economic environment characterised by high uncertainty due to COVID-19, no buffer increase should occur solely due to a regulatory change. The increases in capital buffer requirements for systemically important institutions that have occurred despite there being no significant change in EBA scores compared to the 2021 evaluation, are therefore due to the fact that the temporary buffer reduction expires when additivity is introduced for the first time. In the final calculation of the buffer levels, the complementary effect of the two capital buffers was however taken into account as part of the overlap analysis.
In addition, the FMSB’s Recommendation is followed to limit the additive requirements from the systemic risk buffer and the capital buffer for systemically important institutions to an additional maximum 0.5 percentage points. Without such a limit, the expiry of the temporary reduction of the buffer in conjunction with the first time introduction of additivity would have led to a stronger increase in effective buffer rates for a few institutions. The reasons for a limit of an additional maximum 0.5 percentage points are both the uncertainties arising from war in Ukraine, increased energy prices and high inflation, as well as the expiry of one-off effects from macro and financial policy assistance during the course of the COVID-19 pandemic, that posed new challenges for banks’ business models (e.g. due to borrowers’ reduced ability to service debts and increased operating costs).
The FMA must review at least once a year whether the capital buffer requirement for the systemically important institutions pursuant to Article 23d para. 8 no. 2 BWG, and the the capital buffer requirement for the systemic risk buffer pursuant to Article 23e para. 5 BWG at least every two years. During the next evaluation of the macroeconomic capital buffers the financial economic and macroeconomic environment including the credit institutions’ and the financial system’s reactions until then are taken into account.
With regard to the impact of the structural capital buffers on the granting of credit it can be determined based on the relevant data that the building-up of capital since the introduction of buffers in July 2016 has not restricted the granting of credit. Since July 2016, the granting of credit by Austrian institutions has continued to develop dynamically, and has always shown positive growth. The impact of the additional capital buffers on growth were explicitly modelled and quantified in the OeNB’s opinion. It was analysed whether an actual capital requirement arises for banks as a result of buffer increases, and what additional costs arise for banks as a result and how they affect key macroeconomic indicators (investments, consumption). The projected negative economic effect of increasing capital buffers is very small, with a maximum reduction in GDP growth of 0.001 percentage points over the next 3 years.