Financial Stability Report 17

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• Financial Stability Report 17 (PDF, 1.3 MB) June 2009.

Studies and Analyses

• Foreword (PDF, 34 kB) en Jun 15, 2009, 12:00:00 AM

• From Financial Crisis to Global Economic Crisis (PDF, 35 kB) en Jun 15, 2009, 12:00:00 AM

• Global Financial and Economic Crisis Hits Eastern Europe (PDF, 336 kB) en Jun 15, 2009, 12:00:00 AM

• Financial Crisis Hits the Real Economy (PDF, 177 kB) en Jun 15, 2009, 12:00:00 AM

• The Financial Crisis Takes Its Toll on the Austrian Financial System (PDF, 291 kB) en Jun 15, 2009, 12:00:00 AM

• A Review of the Impact of the Crisis on Austria’s Financial Sector (PDF, 153 kB) Schürz, Schwaiger, Übeleis. Schürz, Schwaiger, Übeleis – Financial Stability Report 17 en Jun 15, 2009, 12:00:00 AM

• EU Bank Packages: Objectives and Potential Conflicts of Objectives (PDF, 235 kB) Posch, Schmitz, Weber. Posch, Schmitz, Weber – Financial Stability Report 17 Any attempt to resolve a systemic financial crisis inherently involves conflicts of objectives. In the following article, we identify and elaborate on the conflicts of objectives embodied in the EU bank packages. Building on this, we then analyze how the EU Member States and the EU institutions are dealing with these conflicts of objectives. The empirical basis of our analysis comprises the explicit objectives of the EU bank packages and the details of the bank packages of the individual Member States. Our main findings are: (1) Although much effort has been extended to ensure a harmonized EU approach, the Member States in fact enjoy great leeway in designing national bank packages, which leads to competitive distortion. (2) In the conflict between fiscal objectives and micro- and macroeconomic objectives, the latter have been afforded priority. The bank packages entail passing on the costs of overcoming the crisis to the taxpayers, while the banks’ creditors are not required to make a contribution. (3) As a result, short-term financial stability is favored over long-term stability in the conflict between these two objectives. (4) Some attempts have been made to resolve these conflicts of objectives by attaching conditions to state aid. Our analysis indicates first of all, that under certain circumstances conditions such as dividend restrictions, state influence on company management and salary caps may be consistent with all of the objectives specified, and second, that requirements to maintain lending and solve borrowers’ debt problems are themselves subject to unavoidable conflicts of objectives. en Financial crisis, bank packages D53, E44, F36, G18, G28 Jun 15, 2009, 12:00:00 AM

• Modeling Credit Risk through the Austrian Business Cycle: An Update of the OeNB Model (PDF, 378 kB) Boss, Fenz, Pann, Puhr, Schneider, Ubl. Boss, Fenz, Pann, Puhr, Schneider, Ubl – Financial Stability Report 17 In quantitative financial stability analysis, the link between the macroeconomic environment and credit risk is of particular importance when assessing the risk hidden in loan portfolios. Macroeconomic stress testing, in particular, which aims at measuring the impact of an economic crisis on individual banks or on the entire financial system, depends on means to quantitatively assess this link. Hence, the objective of this paper is to provide a methodological update of the OeNB’s previous credit risk model that improves the capture of the relation between macroeconomic variables and probabilities of default for the main Austrian corporate sectors. In addition to the standard model based on individual macroeconomic variables, the paper explores solutions to two important challenges: first, the challenge related to the exploitation of potential information inherent in a larger macroeconomic data set and second, the problem that accounts for potential nonlinearity in the relation between credit and business cycles. The first issue is addressed via a regression model based on a principal components analysis that takes in a wider range of macroeconomic variables than commonly practiced. The second issue is addressed via a threshold approach. This paper presents the estimation results for the three different models and discusses them on the basis of an illustrative example. en Credit risk, credit cycle, financial stability, stress testing C22, E32, G21 Jun 15, 2009, 12:00:00 AM

• Direct Cross-Border Lending by Austrian Banks to Eastern Europe (PDF, 304 kB) Puhr, Schwaiger, Sigmund. Puhr, Schwaiger, Sigmund – Financial Stability Report 17 Direct cross-border lending is an important component in the ongoing process of financial deepening in Central, Eastern and Southeastern Europe (CESEE) and the Commonwealth of Independent States (CIS). We use a loan-level dataset of Austrian banks to study the characteristics as well as the major driving forces of direct cross-border lending in CESEE and the CIS. Direct cross-border lending to nonbanks by Austrian banks expanded rapidly over the last few years; the bulk of loans is extended to corporate customers and is denominated in a foreign currency, with the euro taking a prominent position. By means of a series of univariate analyses, we provide support for the relevance of geographic proximity – small and medium-sized banks mainly lend to neighboring countries. Banks’ direct lending also seems to follow nonfinancial FDI by Austrian corporates to CESEE and the CIS. We furthermore analyze the interdependencies between direct (i.e. by Austrian headquarters) and indirect (i.e. by local subsidiaries) cross-border lending and find support for a complementary effect between the two. In addition, host country factors such as GDP growth, private sector credit growth, financial intermediation growth and wage growth are also associated with direct lending growth. en direct lending, cross-border lending, credit growth, Central, Eastern and Southeastern Europe G21, F37 Jun 15, 2009, 12:00:00 AM

• Banking and Financial Stability in Russia and the Euro Area amid International Financial Market Turbulences (PDF, 305 kB) Barisitz, Ebner, Lahnsteiner, Pann. Barisitz, Ebner, Lahnsteiner, Pann – Financial Stability Report 17 This study was drafted during the preparation of the Fifth Joint High-Level Eurosystem – Bank of Russia Seminar hosted by the OeNB in Vienna on March 11–12, 2009. The first part of the study illustrates developments in the euro area, where the financial sector suffered to some extent from spillover effects from the first waves of the subprime crisis and later more substantially from the demise of Lehman Brothers. While rescue actions taken by national authorities and the ECB mitigated crisis effects, current challenges arise from a cyclical deterioration of credit quality and further adverse developments in global financial markets. The study highlights the considerable exposure of euro area banks to emerging Europe in general and their more modest exposure to Russia in particular. It then discusses developments in Russia: Embarking from a quite favorable macroeconomic environment, Russia was caught up in the global financial turbulences only in recent months, but the impact was heavy and exacerbated by structural weaknesses of the Russian economy. The Russian authorities’ crisis response measures have been substantial and contributed to staving off a systemic banking crisis, but the sector remains fragile. The paper concludes with comments on lessons learnt: Confidence – which is the foundation of the financial system – needs to be restored. Structural and institutional problems have to be addressed adequately. Interbank markets should be made more resilient to shocks. en Banking system, contagion, crisis response measures, euro area, financial crisis, financial rescue package, financial stability, Russia E52, G18, G21, G28 Jun 15, 2009, 12:00:00 AM

• Annex of Tables (PDF, 143 kB) en Jun 15, 2009, 12:00:00 AM