Financial Stability Report 42

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• Financial Stability Report 42 (PDF, 3.2 MB) November 2021

Studies and Analyses

• Call for applications: Klaus Liebscher Economic Research Scholarship (PDF, 180 kB) en Nov 24, 2021, 12:00:00 AM

• Recent developments (PDF, 1 MB) en Nov 24, 2021, 12:00:00 AM

• Nontechnical summaries in English (PDF, 293 kB) en Nov 24, 2021, 12:00:00 AM

• Nontechnical summaries in German (PDF, 297 kB) de Nov 24, 2021, 12:00:00 AM

• OeNB climate risk stress test – modeling a carbon price shock for the Austrian banking sector (PDF, 1.2 MB) Guth, Hesse, Königswieser, Krenn, Lipp, Neudorfer, Schneider, Weiss. The climate crisis is one of the most pressing global issues of our time. Policymakers across the field are challenged with the trade-offs of either taking insufficient action to tackle climate change and keeping the current economy humming or decisively addressing global warming and sending the economy into a tailspin. The introduction of a carbon pricing mechanism, one of the main policy instruments in the transition to a more climate-friendly economy, has been intensively discussed. In Austria, the government presented a tax reform package in September 2021, which also includes a carbon pricing scheme. In this article, we assess the impact of carbon pricing on the Austrian banking system in a forward-looking framework. We evaluate three scenarios over a horizon of five years: The baseline scenario is consistent with the current OeNB top-down solvency stress test and serves as a reference point. One transition scenario assumes an orderly increase of carbon emission
  costs for the economy, the other one envisages a disorderly increase. These two scenarios provide
  the empirical basis for our policy conclusions. Our stress test focuses on the transmission channels
  and the potential impact of transition risks on the banking system and should not be interpreted
  as a forecast of the development of the Austrian economy. We expand the OeNB’s top-down stress testing infrastructure with two additional models. First, we develop an enhanced multiregional input-output model to calculate cost and turnover changes for different economic sectors following the introduction of carbon pricing schemes. Second, we expand the OeNB’s corporate insolvency model introduced in 2020 to assess the impact of the COVID-19 pandemic to include shocks such as a carbon emissions-based shock. This allows us to assess the impact of the aforementioned policy measures on sectoral insolvency rates, which is then used as an approximation for stressed credit risk default probabilities. In addition, we use these stressed default rates to derive valuation losses in Austrian banks’ bond portfolios. Both inputs feed into the OeNB’s top-down stress testing framework ARNIE, making it possible to assess the impact on the Austrian banking system. Our results imply that especially the disorderly transition scenario can have a sizable impact on certain economic sectors, most importantly agriculture and transport, where default rates would rise sharply, affecting banks exposed to these sectors. The aggregate CET1 ratio for the Austrian banking system would decrease by 2.7 percentage points in the disorderly scenario and by 0.7 percentage points in the orderly scenario. Given initial capitalization levels, this seems manageable. Hence, while the introduction of a carbon pricing mechanism will certainly create additional costs for the Austrian banking system, our results indicate that the banks are well placed to withstand the indirect effects of measures to counter the climate crisis. en climate change, stress tests, banks, credit risk, risk management G18, G32, Q54 Nov 24, 2021, 12:00:00 AM

• Supplement to “OeNB climate risk stress test – modeling a carbon price shock for the Austrian banking sector” (PDF, 273 kB) Königswieser, Neudorfer, Schneider. 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. en Nov 24, 2021, 12:00:00 AM

• Identifying banks with significant negative effects on financial stability in systemic shock scenarios (PDF, 784 kB) Eidenberger, Steiner. We present a method that allows us to assess the effects on financial stability caused by banks exiting the market in a system-wide stress event based on a consistent and conclusive systemic stress scenario. The method fills a gap in the OeNB’s toolkit for assessing the financial stability effects of idiosyncratic and systemic bank failures (a method for an idiosyncratic scenario was developed in 2019). The outlined method follows a multistep approach. It is based on the idea that banks that are vulnerable and exposed to a shock get into trouble simultaneously and might even need to exit the market at the same time. In the first step, we define economic and financial shock scenarios. In the second step, we identify banks that are highly exposed to these shocks and are likely to default. The third step considers any potential mitigating (or amplifying) effects on banks’ solvency stemming from their membership in an institutional protection scheme (IPS). In the fourth and last step, we identify those banks whose exit causes marginal negative effects on the financial system in the system-wide event. Knowledge about the consequences of banks’ simultaneous failure for the financial system provides fundamental input for financial stability analysis, which, in turn, feeds into macroprudential supervision, crisis prevention, crisis management as well as deposit guarantee schemes. For this reason, Austria pursues an integrated approach in order to ensure overall consistency. en financial stability, macroprudential supervision, resolution, systemically important banks, systemic scenario G18, G21, H81 Nov 24, 2021, 12:00:00 AM

• Nonbank financial intermediation in Austria – an update (PDF, 927 kB) Schober-Rhomberg, Trachta, Wicho. Nonbank finance, which complements bank finance, increases competition in the supply of financing and supports economic activity. It may, however, also give rise to systemic risk, both directly and indirectly through interconnections with the banking system. The latter may be the case when nonbank finance involves activities that are typically performed by banks, such as maturity or liquidity transformation and the creation of leverage. Worldwide, and also in the EU, the relative importance of nonbank finance has increased noticeably since the great financial crisis. In Austria, the financial system is still dominated by the bank finance model, however. Since 2018, the relative composition of the nonbank finance sector has remained unchanged in Austria. Neither the structure nor the size of nonbank financial intermediation in Austria is currently considered to pose a threat to the stability of the Austrian financial market. en nonbank finance, nonbank financial intermediation, nonbank financial institutions, investment funds, insurance corporations, pension funds, other financial institutions, finance leasing, systemic risk, financial stability G23 Nov 24, 2021, 12:00:00 AM

• Annex: Key financial indicators (PDF, 548 kB) en Nov 24, 2021, 12:00:00 AM

• Annex: Key financial indicators (XLSX, 93 kB) de