Financial Stability Report 32

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• Financial Stability Report 32 (PDF, 4.7 MB) December 2016

Studies and Analyses

• Management summary (PDF, 72 kB) en Dec 5, 2016, 12:00:00 AM

• International macroeconomic environment: growth outlook in advanced economies remains subdued (PDF, 431 kB) en Dec 5, 2016, 12:00:00 AM

• Corporate and household sectors in Austria: financing conditions remain favorable (PDF, 1022 kB) en Dec 5, 2016, 12:00:00 AM

• Austrian financial intermediaries: structural reforms gain momentum in a challenging environment (PDF, 986 kB) en Dec 5, 2016, 12:00:00 AM

• The profitability of Austrian banking subsidiaries in CESEE: driving forces, current challenges and opportunities (PDF, 1006 kB) Ebner, Endlich, Greiner, Gruber, Hobl, Kavan, Ohms, Redak, Schober-Rhomberg, Stockert, Widhalm, Wittenberger. This study analyzes the driving forces behind the profitability of Austrian banking subsidiaries in Central, Eastern and Southeastern Europe (CESEE) from 2003 to 2015, with a particular focus on the aftermath of the global financial crisis, which marked a turning point for their risk-return characteristics. We start off with an analysis of operating income and expense trends and delve into an analysis of credit risk costs. Then we look at large extraordinary one-off cost items before summing up with a long-term revenue bridge and an analysis of the most recent risk-return metrics. Overall, we find that the subsidiaries generated substantial profits, which have to be seen in the light of significant writedowns of their book values at the parent level. Regarding current challenges, operating profits are under pressure from falling net interest margins and fading organic growth, while remaining foreign currency loans might lead to further one-off costs, which in the past offset efficiency improvements. Credit risk also remains high in some countries, but a positive trend has emerged over the past years and provisioning levels have improved. One lesson learned in this respect is that rapid credit growth before the crisis typically led to high nonperforming loan (NPL) ratios, which now weigh on some subsidiaries’ ability to lend. Looking forward, banks continue to face a challenging environment in the CESEE region with little low-hanging fruit, as the speed of macroeconomic catching-up has slowed and low interest rates have taken hold. Therefore, Austrian banks’ subsidiaries should diversify their income base, maintain their operating cost discipline and continue to strive for risk-adequately priced products in order to keep their profitability on a sustainable footing. banking, financial crisis, Austrian banks, bank profitability, net interest income, net interest margin, operating expenses, credit risk, NPL, writedowns, foreign currency loans, Texas ratio, CESEE G01, G21 Dec 5, 2016, 12:00:00 AM

• Banking employment in Austria (PDF, 808 kB) Ritzberger-Grünwald, Stiglbauer, Waschiczek. The ongoing restructuring and consolidation process in the Austrian banking sector has drawn attention to banking employment developments. This article takes stock of the data on employment, labor costs and related indicators to provide a basis for discussion. Since 2008, the number of employees in banking has been on a slow, but permanent decline. Working hours have decreased even more strongly, reflecting a shift toward part-time work. Wage costs per employee are relatively high and have grown faster than those in most other sectors. However, until 2008, labor productivity growth outpaced labor cost growth. Since the crisis, labor cost growth has exceeded productivity increases, but less strongly than in the rest of the economy. Banks’ intensity of IT use has increased over the past 15 years. Not all IT investments were intended to substitute labor with capital. Instead, increasing IT usage in banks went hand in hand with a significant shift toward higher-skilled labor. Moreover, organizational changes related to the ongoing consolidation processes within the Austrian banking sector have contributed to the reduction in labor demand. Until recently, banks appear to have avoided layoffs, relying on attrition instead. en banking, employment, labor costs, value added, Austria E24, G21, J21 Dec 5, 2016, 12:00:00 AM

• Bail-in: who invests in noncovered debt securities issued by euro area banks? (PDF, 616 kB) Pigrum, Reininger, Stern. During the financial crisis numerous banks experienced financial difficulties and were subsequently bailed out by governments using taxpayers’ money. Policymakers around the globe responded by overhauling resolution mechanisms for banks, including the introduction of bail-in rules to prevent future taxpayer-funded bail-outs. Despite the initial optimism that bail-in would mitigate the too-big-to-fail dilemma, criticism highlighting the shortcomings of this approach has recently been voiced both in academia and in wider circles. Several researchers have noted the urgent need for a more detailed analysis of the structure of holdings of bail-in-able debt securities. The aim of this paper is twofold: First, we provide an overview of the main arguments for and against the bail-in tool, and second, we shed light on the question of who invests in senior unsecured debt securities issued by banks, drawing on the Securities Holdings Statistics of the ECB for evidence. Our empirical evaluation on the basis of unconsolidated national banking sectors in the euro area provides information on the structure of the demand and supply side of bail-in-able bank debt securities in each euro area country. We are able to show which portions of the outstanding bail-in-able bank debt securities issued by euro area banks on aggregate and in individual countries are held in which region (home country, non-home euro area and outside the euro area) and by which sector (i.e. banks, other financial institutions and nonfinancial sector) within the euro area. In particular, we find that nearly 40% of all bail-in-able debt securities issued by euro area banks are held outside the euro area; intra-euro area cross-border holdings account for one-third of all euro area holdings of such debt, euro area banks’ holdings for one-third and the euro area’s nonfinancial sector (mainly households) for one-fourth. As regards bail-in-able debt issued by Austrian banks, about 20% are held outside the euro area, while euro area banks hold about 36% and the euro area’s nonfinancial sector about 38% of all euro area holdings of this debt. en banking regulation, systemic risk, bail-in, contagion E44, G21, G28 Dec 5, 2016, 12:00:00 AM

• From low to negative rates: an asymmetric dilemma (PDF, 555 kB) Kerbl, Sigmund. With the expansionary monetary policy in several European countries continuing, the low interest rate environment is being increasingly replaced by a negative interest rate environment. We estimate a panel model to study the effects of prolonged low interest rates on banks in Austria. It shows that the profitability of banks declines in times of low interest rate environments. However, we are skeptical of extrapolating these findings to the negative environment. In a negative environment banks face an asymmetric dilemma: While the returns on many assets follow the decreasing reference rate (e.g. EURIBOR), costs of deposits are floored at zero and cannot follow this rate. In order to include this crucial nonlinearity and to estimate which banks are expected to suffer most, we amend our approach and employ an ARIMA model on a bank-by-bank basis. First, we find that small regional banks are hit hardest. These banks have a high share of deposits and are more sensitive to changes in the reference rates. Second, by only looking at data covering low interest rates (e.g. our panel approach) one would indeed underestimate the impact of negative rates on banks’ pro?tability. Third, we ?nd that a reference rate close to –2% would pose a substantial burden on banks’ profitability. The approach assumes little adaptation of banks to these extreme environments and therefore highlights the importance of banks’ adequate and timely reaction should interest rates continue to be negative. en bank profitability, low interest rate environment, negative interest rate environment, net interest margin, panel econometrics, ARIMA models G21, C22, C23 Dec 5, 2016, 12:00:00 AM

• Annex of tables (PDF, 203 kB) en Dec 5, 2016, 12:00:00 AM

• Notes (PDF, 134 kB) en Dec 5, 2016, 12:00:00 AM