From March 2020 onward, measures aimed at mitigating the impact of the COVID-19 pandemic on banks and their customers were adopted in Austria, which included payment moratoria and public guarantees for loans. Data reported by banks to the Oesterreichische Nationalbank allow for an analysis of the utilization, expiry and residual maturities of these measures on the basis of consolidated quarterly data covering the period from June 2020 to December 2020 and provide input for a first assessment of financial stability implications. The bulk of payment deferrals has expired by the end of the first quarter of 2021. Starting from a level of nonperforming loans (NPLs) well below the European average, Austrian banks are well prepared for potential deteriorations in credit quality, having increased their capital buffers in the aftermath of the 2007–2008 financial crisis, and having implemented measures to address future increases in NPLs. In 2020, Austrian banks proactively started to reclassify loans according to IFRS 9, which resulted in an increase of risk provisioning to address potential defaults. This frontloading should help reduce the burden on banks’ 2021 balance sheets. We observe a first slight uptick in NPL ratios at the end of 2020 in the nonfinancial corporate loan segment, which at the same time still showed dynamic credit growth. To assess the impact of potential defaults and their implications for financial stability, we analyze the impact of a severe hypothetical scenario. If half of the loans subject to COVID-19related support measures (i.e. loans to households and nonfinancial corporations) were to default, the overall NPL ratio would increase to 5.8%, up from 2% as at December 2020. While severe, such a hypothetical scenario would still be manageable for the Austrian banking sector. We do not take into account structural changes in the economy, however, that might be triggered by the pandemic. Given the payment deferrals, the impacts of the COVID-19 pandemic on credit quality will be reflected in banks’ balance sheets with a time lag. While having already established risk provisions in 2020, banks will need to be prepared to handle a potential deterioration in credit quality in 2021 and later on. It therefore remains paramount for banks to monitor the credit quality of their portfolios in order to avoid any cliff effects once all support measures expire. To maintain financial stability in the banking sector in an environment of ongoing uncertainty, two things continue to be very important: proper risk provisioning at an early stage as well as acting in a forward-looking manner regarding the allocation of profits.
This supplement contains the formal write-up of the sectoral carbon price model as described in detail, albeit in natural language in section 3.1 of the paper “OeNB climate risk stress test – modeling a carbon price shock for the Austrian banking sector” in the OeNB’s Financial Stability Report 42. The sectoral carbon price model is implemented as a multiregional input-output analysis for 21 NACE sectors in the 27 countries of the European Union. We start with a short introduction to input-analysis and carbon prices, section 2 is then structured along the five calculation steps of our input-output model: 1) carbon price shocks, 2) price model with incomplete cost pass-through, 3) final demand model, 4) quantity model and 5) second-round effects.
Climate change poses several risks to the value of financial assets and to financial stability. In this study, we estimate the exposure of the Austrian banking sector to climate risks that might arise from a disorderly transition to a carbon-neutral economy. To this end, we identify climate policy-relevant sectors (CPRSs), i.e. sectors which are particularly sensitive to these transition risks, and match that information with granular data of outstanding credits and bonds held by Austrian banks. We find that the Austrian banking sector’s direct exposure to CPRSs is comparable with banks’ exposure in other countries and relevant to financial supervision. As some banks are particularly exposed to climate transition risk, both banks and supervisors should take this risk seriously and monitor it closely.
This paper presents results of an analysis of the spatial distribution of bank branches in Austria over the period from January 2000 to December 2019 from two perspectives: First, we analyze the temporal development of bank branch availability at the municipality level. Second, we present estimates of travel distances to the nearest bank branch. At the end of 2019, 555 municipalities (27% of 2,096 Austrian municipalities) did not have a bank branch, which compares with 271 municipalities in January 2000. We show that the bulk of the increase in “branchless” municipalities occurred after 2014. The closure of the last branch in a municipality occurred predominantly in municipalities with fewer than 2,000 inhabitants, and, overall, only a relatively small share of the Austrian population live in municipalities that became branchless (4.6% or 410,000 inhabitants). Given this trend, which we also see at the international level, we study travel distances to bank branches (as of 2019). On average, Austrian residents have to travel 1.5 km from their homes to the nearest bank. This distance varies from 2.7 km in municipalities with fewer than 2,000 inhabitants to 0.7 km in larger cities. A total of 77% of the population resides within a 2 km travel distance to the nearest bank. Although our results suggest that, on average, Austrians have reasonable access to bank branches, a more disaggregated analysis allows us to identify municipalities where travel distances are longer. For example, about 433,000 residents (4.9% of the population) have to travel more than 5 km. Municipalities with a high share of residents who have to travel farther than 5 km have 1,000 inhabitants on average and are located in all provinces except Vienna.
In an environment of a quick unfolding crisis with high uncertainty, the European Insurance and Occupational Pensions Authority issued on 2nd April 2020 a statement requesting (re)insurers to suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders. Although, this should have a positive impact on the overall financial stability of the sector, it could have a negative impact on insurers’ equity prices as a response to the published statement. Hence, this article empirically investigates this potential effect using an event study methodology. Although, negative drops were observed in some cases, the obtained empirical results suggest that they were not statistically significant for the overall European insurers’ equity market when considering the event windows covering a few days after the publication.
A crisis of the real economy – like the current crisis caused by the coronavirus pandemic – and the countermeasures taken by countries worldwide can lead to a severe financial crisis if debtors turn out to be unable to pay back their debt. The support debtors need and the costs involved in providing it directly depends on the financial buffer households have and their general risk-bearing capacity. It is crucial to understand both aspects to be able to anticipate potential problems and prepare for mitigating their impact. Policies designed to mitigate the effects of income losses could benefit greatly from better knowledge of the exact nature of the nonlinearities involved. We analyze newly available microdata on households’ balance sheets to examine financial vulnerability in Central, Eastern and Southeastern European (CESEE) countries and Austria. As Austrian banks have a high and increasing exposure in the region, households’ risk-bearing capacities in CESEE are an important factor in determining credit risks of the banking sector in Austria. The Household Finance and Consumption Survey (HFCS) allows us to study the general indebtedness of households as well as borrower-level vulnerability in eight CESEE countries and compare them to Austria. While the share of households owning their homes is comparably large in these countries, the share of households holding mortgage debt is not particularly large. Uncollateralized debt levels, by contrast, vary greatly across the region, and some of the countries show rather high levels of loan-to-value ratios, which point to more generous credit standards in mortgage lending. The debt service-to-income ratio >40% vulnerability measure points toward households in Croatia, Lithuania, Slovenia and Hungary being particularly vulnerable. Subtracting the assets of vulnerable households from their debt reveals that the levels of potential losses for banks are generally low. The highest loss given default estimates are obtained for Slovenia, Hungary and Lithuania. Furthermore, we use a machine learning approach to reweight the data, thereby decomposing the observed differences between CESEE and Austria into one part that can be explained by observable household characteristics and a remainder, which might be linked to banks’ different treatment of similar clients in different countries. The different directions of the effects of the reweighting approach across countries indicate that there is no typical household structure that suggests a high level of vulnerability as different types of households are vulnerable across countries. One important lesson from this crisis is to make sure that better data are available to policymakers (e.g. registers covering the loans of households to the necessary degree) so that research does not have to rely on survey data alone to analyze households’ risk-bearing capacities and, hence, we are better prepared for the next crisis.
With Austrian banks having significantly expanded their lending to domestic nonfinancial corporations in 2017 and 2018, we are witnessing the fifth period of significant loan growth since 1982. While the recent rise in loan growth rates was broadly in line with past increases in magnitude, the year-to-year variation was generally much higher. This paper provides stylized facts on the latest increase in loan growth and a first assessment of potential systemic risks for the Austrian banking system. Developments in the real economy in 2017–2018 broadly followed those during past periods of loan growth – only investment grew at a stronger pace. Bank loans were losing importance in the financing mix of nonfinancial corporations and in banks’ balance sheets throughout the review period. The most recent upturn started from historically low levels and has been more pronounced in some banking sectors as banks have been adjusting their business models following the financial crisis. A potential deterioration in loan quality would especially hit banks with currently high lending rates that have structurally low margins and weaker risk bearing capacity. From an industry-level perspective, the main borrowers were industries with high value-added growth, high profitability and low insolvency rates, yet with a concentration on real estate activities. Such a concentration on real estate business may pose risks given the ongoing buoyancy of the Austrian real estate market.
This study aims to enhance transparency on the Austrian fintech industry by collecting firsthand industry data provided by Fintech Austria – the country’s largest fintech interest group – and subjecting the data to statistical analysis conducted by the Oesterreichische Nationalbank (OeNB). The analysis of key features of Austrian fintechs across various dimensions reveals that the domestic fintech industry is a small but rapidly growing industry. While being based on a diverse – and increasingly specialized – range of business models, most fintechs still operate in the payments sector. Typically, fintechs are established in larger cities by men who have already pursued a previous career. As a rule, their ownership structures are divided between a broad domestic shareholder base and a more concentrated investor base abroad. The dynamics in the fintech industry need to be closely monitored. If not identified in a timely manner, strong growth and the tendency of online industries to form oligopolies ormonopolies may lead to systemic implications and financial stability risks. Moreover, increasing cooperation between incumbent banks and fintechs as third-party providers may impose outsourcing risks. Should the latter fail, this may have negative spillover effects on the financial sector as a whole. Therefore, it is all the more important that policymakers and market participants alike keep track of the fintech industry’s structure and trends. With this in mind, the analysis presented in this study was largely automated to allow for periodic updates and thus continuous monitoring of the Austrian fintech industry in the future.
Regulatory complexity is becoming a concern and top priority for policymakers and the financial industry, both at the global and European level. The speed of the debate has gained pace very recently as the political pressure to deregulate has increased. In light of this, the Oesterreichische Nationalbank (OeNB) hosted a Macroprudential Policy Conference on May 9, 2019, where policymakers discussed the tradeoff between reducing the complexity of financial regulation and maintaining financial stability. At this one-day conference, high-level representatives from finance, politics and academia shed light on the drivers of complexity and explored ways to address them. In three panel discussions, the speakers drew on national and international experience with macroprudential policy to investigate what the future regulatory framework, one that also includes nonbank financial intermediaries, could and should look like. The main conclusion of the conference was a call for a high-level expert group at the EU level to explore the main sources of regulatory complexity and measures to reduce it. With less distortionary incentives for banks as well as effective macroprudential supervision and reliable resolution frameworks in place, supervisors should be able to put more emphasis on reducing the systemic costs of banks’ market exit. Less emphasis could be put on keeping all banks in business and regulatory complexity could be reduced without jeopardizing financial stability.
Nonbank finance is an alternative to bank finance that fosters competition in the supply of financing and supports economic activity. However, nonbank finance may also become a source of systemic risk, both directly and through its interconnectedness with the banking system, if it involves activities that are typically performed by banks, such as maturity or liquidity transformation and the creation of leverage. While in the EU, the relative importance of nonbank finance vis-a-vis traditional banking has increased noticeably in the past decade, the Austrian financial system is still dominated by the bank finance model. Overall, the fractional growth of nonbank finance assets is not seen as a concern in itself, as the risks from nonbank financial intermediation seem contained. Neither the structure nor the size of nonbank financial intermediation in Austria are currently considered to pose a threat to financial stability.
Insures use derivatives to hedge risks from investments portfolios and underwriting, but this exposes them to liquidity risk. This study uses Solvency II reporting data to assess to what extent European (re-)insurers would be able to meet potential variation margin calls on interest rate swaps portfolios. Interest rate swaps pose the largest share of (re-)insurers derivatives’ portfolios. We consider several shifts to the yield curve, calculate the corresponding variation margin calls, compare them to liquid assets available to insurers and derive the potential liquidity shortfalls. Our results reveal that there may be a liquidity risk for (re-)insurers stemming from the use of derivatives, in particular interest rate swaps (IRS). This reflects both high IRS exposure and insufficient holdings of cash and liquid assets. Based on the analysis presented in this article we conclude that some insurers have not yet adapted their asset allocation and liquidity management practices to the (new) requirements on margining practices which have been introduced as part of the OTC derivatives reform.
In this study, we give an overview of risks to financial stability that result from climate change. We classify them according to their sources and show how they affect traditional categories of financial risk. Most financial institutions have yet to acknowledge these types of risk, with only a few having to date recognized climate change as a market opportunity. Over the past few years, both private and public institutions have, however, started to find better ways to identify, assess and manage climate-related risks, especially since the Paris Climate Agreement. Which data and indicators are needed to implement effective risk management in this area? While metrics and methods are available to financial intermediaries for this purpose, they are not yet widely used in practice. In the latter part of our study, we explore the awareness of Austrian financial intermediaries of climate-related financial risks empirically. Based on survey data, we find that some institutions have already integrated climate change into their business strategy and risk management systems, while a large share of institutions has not yet identified climate change as a financial risk at all. The fact that a majority of financial intermediaries had cited regulations and norms as effective motives for better adapting to the risks of climate change calls for future action by policymakers and regulatory authorities.
In the first collaboration between climate economists, climate financial risk modellers and financial regulators, we apply the CLIMAFIN framework described in Battiston at al. (2019) to provide a forward-looking climate transition risk assessment of the sovereign bonds’ portfolios of solo insurance companies in Europe. We consider a scenario of a disorderly introduction of climate policies that cannot be fully anticipated and priced in by investors. First, we analyse the shock on the market share and profitability of carbon-intensive and low-carbon activities under climate transition risk scenarios. Second, we define the climate risk management strategy under uncertainty for a risk averse investor that aims to minimise her largest losses. Third, we price the climate policies scenarios in the probability of default of the individual sovereign bonds and in the bonds’ climate spread. Finally, we estimate the largest gains/losses on the insurance companies’ portfolios conditioned to the climate scenarios. We find that the potential impact of a disorderly transition to low-carbon economy on insurers portfolios of sovereign bonds is moderate in terms of its magnitude. However, it is non-negligible in several scenarios. Thus, it should be regularly monitored and assessed given the importance of sovereign bonds in insurers’ investment portfolios.
We employ household-level microdata to assess the effectiveness of macroprudential policy tools in identifying vulnerable households. We evaluate loan-to-value (LTV), debt-to-income (DTI) and debt service-to-income (DSTI) limits with regard to their impact on the following two potential errors: denying nonvulnerable households access to credit (type I) and not preventing vulnerable households from obtaining credit (type II). Therefore our analysis also takes into account the potential costs of falsely restricting credit access to financially sound households. Our data allow us to measure vulnerability based on current values the macroprudential tools refer to, as well as classical vulnerability measures not related to these tools. We find that policymakers’ awareness of their own goals and preferences in terms of weights of type I and II errors are crucial to effectively use the macroprudential tools at hand. Our analysis delivers qualitative results to better understand the mechanics of macroprudential policy measures as well as a tool for their evaluation in terms of costs and benefits. However, to employ our tool for actually steering policy limits, a far larger sample or register data would be necessary, as an estimation based on our relatively small survey sample is not precise enough.
In Austria, like in most European countries, small and medium-sized enterprises (SMEs) rely on bank funding as their primary source of external finance. Using ECB survey data, we analyze the availability of bank credit for SMEs in Austria in comparison to SMEs in the euro area. Overall, we find that bank lending has been rather stable over the past few years, and the lending conditions did not discourage many potential borrowers. Creditors and investors treat small, young firms that engage in innovation differently due to their elevated risk profile and the high share of intangible capital in their assets. We discuss the financial life cycle of these start-ups and the appropriate funding in each stage, including policy actions that have been taken to encourage a favorable ecosystem for start-ups in Austria. Whereas public support for these firms is well established, the private market for venture capital is rather small in Austria, especially in comparison with European innovation leaders.
As a consequence of the ongoing low-yield environment, insurers are changing their business models and looking for new investment opportunities to deliver the required return. This paper focuses on investments in equities and main drivers of their changes in insurers’ portfolios. In this respect, an empirical analysis for a period before and after the Solvency II introduction using both panel and pool regression was conducted. The obtained results suggest that macroeconomic as well as company specific indicators could explain changes in shares of equities in insurers’ portfolios.
Russian banks seem to be slowly emerging from the country’s 2014–15 economic and financial crisis, which had been triggered by the oil price plunge and Western sanctions. While the economy has recovered from the recession and macroeconomic stability has been re-established (including record-low inflation), GDP growth is still modest. Lending has gone from a crisis-driven credit crunch to a retail-driven recovery, while deposits, buoyed by sustained confidence, have expanded. However, some medium-sized private banks, burdened by legacies of mishandled crisis-triggered takeovers of smaller outfits, collapsed in the second half of 2017, delaying the overall improvement of credit quality, profitability and capital adequacy. In reaction, the central bank nationalized and bailed out these systemically relevant players and established a “bad bank” to more effectively control restructuring procedures. While credit risk and related-party lending risk remain serious, shock-absorbing factors are ample and have further accumulated (including high foreign currency reserves, sizable net external assets and a solid fiscal position).
The segment of retail payments has been among the most affected by technology-enabled innovations in financial markets (fintech). This study looks at the digitalization of retail payments markets in Europe. We develop a framework and collect supportive indicators to discuss the connection between fintech and retail payments market developments. We apply our framework to four small European economies – Sweden, Austria, Estonia and Bulgaria – and discuss what conclusions, if any, can be drawn for the integration of European retail payments markets and fintech from the developments observed in the case study countries. While there are many channels through which digitalization may facilitate the creation of a single market for retail payments, this study discusses whether fintech might also contribute to stronger retail payments market fragmentation.
This study analyzes how Austrian banks generated profits in their domestic business over the last two decades, i.e. from 1995 to 2016, while paying close attention to the heterogeneity in business models. We focus on the period after the global financial crisis (GFC) and the challenges it entails, in order to highlight the most important trends and their potential repercussions on the medium-term sustainability of banks’ profits and consequently Austria’s financial stability. We find that banks and their income grew strongly before the GFC at the expense of their margins, whereas this trend went into reverse after the crisis hit. Operating expenses increased steadily until recently, when cuts in staff-related expenses started to show effects. Higher credit risk costs were another consequence of the GFC, but the sector-wide ratio of nonperforming loans never surpassed 5%. All of these developments resulted in strong volatility in the return on (average) assets (ROA) after the onset of the GFC and – supported by historically low loan loss provisioning – a recent return to pre-crisis levels. Overall, smaller local banks generated above-average ROAs. Large banks underperformed, while large regional banks performed in line with the banking sector average. In the near future, improvements in operating profitability in a highly competitive market are likely to depend on banks’ pricing power and their ability to use the currently calmer environment to address structural cost issues, to tap new sources of income whose pricing adequately reflects risks and to ready themselves for the digitalization of their business.
