Financial Stability Report 33

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• Financial Stability Report 33 (PDF, 5 MB) Juli 2017

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• Management summary (PDF, 50 kB) en 14.07.2017, 00:00:00

• International macroeconomic environment: global growth outlook more favorable (PDF, 407 kB) en 14.07.2017, 00:00:00

• Corporate and household sectors in Austria: debt levels remain low while interest rate risk persists (PDF, 809 kB) en 14.07.2017, 00:00:00

• Austrian financial intermediaries: banks post strong profits but weaker operating results in 2016 (PDF, 840 kB) en 14.07.2017, 00:00:00

• Simulating the impact of borrower-based macroprudential policies on mortgages and the real estate sector in Austria – evidence from the Household Finance and Consumption Survey 2014 (PDF, 372 kB) Albacete, Lindner. In this paper we simulate the impact on house prices and credit available of different macroprudential restrictions on household mortgages in Austria. We apply the methodology developed in the literature for credit register-based information and extend it to the use of survey data. This allows us to make use of the data gleaned from the most recent wave of the Household Finance and Consumption Survey (HFCS) in Austria to investigate the linkages between macroprudential policy and credit supply. We find that of the three standard credit ratio-based criteria – loan to value (LTV), debt to income (DTI) and debt service to income (DSTI) – for most households, the income-based criteria (DTI followed by DSTI) are the binding ones, while the role of LTV is limited. The relationship between credit supply and house prices is found to be positive, but weak. We simulate various macroprudential scenarios and find that macroprudential measures may potentially have sizeable effects on the credit available to households for financing real estate. Furthermore, it can be seen that – as expected – macroprudential policy tends to affect less affluent mortgage holders (although at the median, mortgage holders are more affluent than the general household population). The results also show that the simulated macroprudential policy measures trigger smaller changes of house prices. en macroprudential policy, house price development, mortgage market, HFCS D12, D14, G21, G28, R21, R31 14.07.2017, 00:00:00

• Ukraine’s banking sector: still very weak, but some signs of improvement (PDF, 169 kB) Barisitz, Lahnsteiner. Ukraine has been undergoing a reform process, and the banking sector is certainly among the areas that have seen remarkable progress. The authorities started to tackle related-party lending (a long-standing structural impediment), resolved many undercapitalized banks and managed to restore a degree of confidence in the sector, as witnessed by the stabilization of deposits. As part of the banking sector clean-up, the country’s largest credit institution was nationalized. This step contributed to considerable changes in the ownership structure, with the share of the state in total assets rising to about 50%. After the severe recession of 2014–2015, macroeconomic stabilization achieved with international support in 2016, if sustained, could pave the way for a resumption of lending. Yet, nonperforming loans (NPLs) have skyrocketed, credit risk is still very high, related-party lending is still a problem, resistance to reform remains stubborn, and economic recovery fragile, subject to political uncertainty. Further sound economic policies, progress with structural reforms (in particular with regard to the rule of law and corruption) and efforts to reduce NPLs appear essential to make a sustained banking recovery possible. en banking sector, geopolitical risk, credit risk, related-party lending, pocket banks, nonperforming loans, recapitalization, IMF, Ukraine G21, G28, P34 14.07.2017, 00:00:00

• What drives Austrian banking subsidiaries’ return on equity in CESEE and how does it compare to their cost of equity? (PDF, 531 kB) Gruber, Kavan, Stockert. This short study analyzes the relative profitability of Austrian banking subsidiaries in Central, Eastern and Southeastern Europe (CESEE) using two separate approaches. First, we address the subject from an accounting point of view based on a DuPont analysis. We dissect the return on (the book value of average) equity (ROE) to highlight how profit and loss drivers as well as financial leverage affected this profitability metric from 2004 to 2016. This prepares the ground for our second part, where we switch to a market perspective for the period from 2006 to 2016 to deduce the cost of (average) equity (COE) of these subsidiaries from the Capital Asset Pricing Model (CAPM) in order to compare the model-based profits that would be expected (i.e. demanded) by investors to those that have actually been realized. The analysis is complemented by a similar exercise for a peer group consisting of listed CESEE banks.
  We find that the ROE dropped substantially during the global financial crisis and only started to recover in 2016. An accounting-based DuPont analysis reveals that – over the entire analyzed time span – this was primarily caused by a rise in risk costs at the onset of the global financial crisis and their strong improvement in 2016, as well as a continuous reduction of financial leverage. The negative contribution of a lower operating income margin and positive effects of an improved cost-income ratio roughly canceled each other out. We also provide a (cautious) medium-term outlook for the future development of the ROE of Austrian banking subsidiaries in CESEE, which is likely to depend on the balance between the weakened net interest income and reduced credit risk costs (that still have to prove their sustainability). When switching to a market perspective and the question of the subsidiaries’ COE, we find that the latter is substantially lower than often assumed, but still too high to be fully compensated by realized profits (except in 2016). In aggregate, other CESEE peer banks fared better, which was mostly due to their higher profitability. These results call for continued and persistent efforts to further improve Austrian banking subsidiaries’ risk-return profile in CESEE. en banking, profitability, financial crisis, low interest rate environment, Austrian banks, CESEE, DuPont analysis, CAPM, return on equity, cost of equity, net interest margin, operating income margin, cost-income ratio, risk costs, financial leverage G01, G11, G21 14.07.2017, 00:00:00

• The resilience of households in bank bail-ins (PDF, 317 kB) Lindner, Redak. Potential losses incurred by households holding bail-in-able assets may be an issue in bank resolution matters and restructuring procedures – and are thus a financial stability issue. Yet, the range of households that may be affected by bank defaults is not sufficiently evident from aggregate statistics. Therefore, this paper uses the Eurosystem Household Finance and Consumption Survey (HFCS) to investigate the investment portfolio items of households from selected European countries that could potentially be eligible for bail-in. Doing so allows us to discuss the resilience of possibly affected households to shocks to their portfolio in terms of other household characteristics. Overall, the results show that, in addition to the relatively high resilience of households in terms of shock-absorbing capacity, the relatively few investors that exist are on average more inclined to take risks than the general population. en bail-in-able assets, household portfolio, risks, bank default, HFCS D14, D31, E44, G11 14.07.2017, 00:00:00

• Annex of tables (PDF, 167 kB) en 14.07.2017, 00:00:00

• Annex of tables (XLSX, 79 kB) de