First challenges to Austria’s financial stability caused by COVID-19 successfully overcome

Presentation of the 39th Financial Stability Report of the OeNB

The spread of the COVID-19 pandemic temporarily led to serious restrictions on economic and social life, causing not only dramatic price slumps on international financial markets, but also the most severe economic downturn seen in Austria since the end of World War II. “Although measures to contain the spread of the virus and to keep trade and businesses afloat have shown good results, the economy will need several years to recover,” OeNB Governor Robert Holzmann explained. Vice Governor Gottfried Haber added “This time, the banking sector, which was at the core of the financial crisis of 2008–2009, is playing an important part in overcoming the crisis. Banks have significantly strengthened their resilience in recent years – not least thanks to prudent and forward-looking supervision and improved supervisory instruments.”

In its current Financial Stability Report, the OeNB dedicates a special report to the impact of the COVID-19 crisis on Austria’s financial sector.

In March 2020, the global outbreak of the COVID-19 pandemic caused prices on international financial markets to slump. The wide-ranging restrictions on economic and social life enforced to contain the spread of the virus have been a challenge for financial stability worldwide. Thanks to subsequent comprehensive monetary, fiscal and economic policy measures taken by central banks and governments, financial market prices have visibly rallied. This, however, does not reflect the serious macroeconomic situation. As a matter of fact, the Austrian economy is currently facing its sharpest downturn in the post-war period. Though public support measures are promoting lending, ensuring that businesses and households are provided with liquidity, indebtedness will increase, which, for the corporate sector, was already higher prior to the onset of the COVID-19 crisis than before the great financial crisis of 2008–2009 hit. That said, in a European comparison, debt levels in Austria are still low.

In the household sector, loans – in particular mortgage loans – tend to be taken out by households with higher income and thus greater debt-bearing capacity. Still, income losses caused by unemployment and short-time work are particular causes for concern. For now, these challenges are still being mitigated by fiscal measures.

The COVID-19 pandemic is also affecting the Austrian real estate market. Mortgage lending to households has lost some of its momentum in recent months. In general terms, however, the residential real estate market has been less affected than commercial real estate, which strongly depends on economic developments.

The banking sector is playing an important part in supporting the flow of credit to the Austrian real economy during the present crisis – in tandem with government measures such as guarantees and moratoria. This is possible as Austrian banks entered the present crisis with visibly strengthened resilience, not least because of numerous regulatory and supervisory measures implemented over the last decade in response to the great financial crisis. Profits have been high over the last years, allowing banks to build up capital. The share of nonperforming loans in credit portfolios has been reduced, and banks have a solid funding base. Already at the beginning of the COVID-19 crisis, supervisory authorities implemented temporary relief measures making it easier for banks to lend to the real economy, which has contributed to strengthening financial stability. Recent scenario analyses conducted by the OeNB show that the Austrian banking sector is currently well capitalized despite the negative effects of the crisis.

Still, the uncertainty surrounding the economic and financial outlook remains exceptionally high. Changes in credit risk and the associated nonperforming loans will become more visible only from the second half of 2020 on. Rising credit risk provisioning in Austria and Central, Eastern and Southeastern Europe – an important market for Austrian banks – may put a strain on Austrian banks’ profitability in the future (after it had improved in recent years).

In these challenging times, the OeNB recommends that banks take the following measures to strengthen financial stability:

• Refrain from and/or postpone share buybacks and consider the distribution of dividends, profits as well as bonuses with particular care in line with national and international recommendations and regulation in order to preserve capital.
• Prepare for the time when public support measures expire and ensure transparency regarding the credit quality of loan portfolios.
• Apply sustainable lending standards in real estate lending, both in Austria and in CESEE, and comply with the quantitative guidance issued by the Financial Market Stability Board.
• Continue efforts to improve cost efficiency and operational profitability, even under the currently difficult circumstances.
• Develop and implement adequate strategies to deal with the challenges of digitalization, new technologies and cybersecurity.

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering in-depth insights into specific topics related to financial stability.