in real estate funds with the respec-tive regional focus. Residential real estate price indices are often not sophisticated enough to provide the basis for efficient hedging instruments for regional and local residential real estate price uncertainty. If the mar-ket fails to provide adequate indices, public authorities might be called on to help filling the gap.
6.5 The Importance of Cross-Border Branching Will Grow
Banks adopt branch network strate-gies to ensure geographic proximity to customers, also in response to in-creasing (temporary) migration of pensioners to traditional holiday des-tinations. As a consequence, the role of cross-border branching might in-crease, especially in the EU. The cur-rent home-host supervisory regime addresses the issue of cross-border branching in principle. Thus poten-tial new developments in this area do not merit immediate supervisory action beyond the call for (further) increased coordination and coope-ration.
6.6 Risks Will Stem from the Search for Yields and Increased Risk Tolerance
Banks will try to maintain their stra-tegic relevance for their customers, inter alia by providing higher yields for their customers. This search for yields, in combination with increas-ing competitive pressure, could en-courage banks to increase their risk ap-petite. This might require higher loan loss provisions. However, given the capital adequacy regime in place and the additional incentives for banks to improve their risk management, their corporate governance, and their com-pliance, given the need for banks to protect their brand, no immediate
consequences emerge for supervisors or regulators. However, increased awareness of the potentially higher volatility of capital adequacy ratios would be warranted.
can increasingly expose banks (but also households) to operational, repu-tation, legal and traditional insurance risks (relative to traditional products).
International diversification might expose banks to increased country and political risk as well as exchange rate risk.
The immediate implications for supervisors are modest in most cases:
The statutory minimum capital ade-quacy ratio might be reviewed in the light of the increasing reliance on the shock absorption capacity of bank
capital. Supervisors might want to promote adequate regulatory frame-works for new products to reduce legal risk for banks. Given the in-creasing complexity of financial prod-ucts and the ongoing shift of risks to households, provisions that increase market and price transparency for consumers and ensure adequate con-sumer protection will be required.
Certainly, banks and supervisors should continuously monitor the im-pact of demographic change on banks and financial stability.
References
1 Workshop Presentations
A. Workshop “Ageing and its implications for banks and bank strategy I” (in consecutive order)
Wood, G. E. 2006. The Implications of an Ageing Population for the Banking Sector.
Lebhart, G. 2006. Demographic Change, Aging and Migration: Austrian Developments in a European Perspective.
Tichy, G. 2006. The Economic Consequences of Demographic Change: Its Impact on Growth, Investment, and the Stock of Capital.
Winter, J. 2006. Demographic Change, Savings, and Financial Markets: Supply and Demand for Capital.
Robischon, T. 2006. The Impact of Demographic Change on Real Estate Demand.
Raab, T. 2006. Demographic Change and the Future of Financial Services.
Tourdjman, A. 2006. Demographic Change and the Future of Banking.
B. Workshop “Ageing and its implications for banks and bank strategy II” (in consecutive order)
Vooght, N. 2006. Demographic Change and Its Impact on Bank Strategy: Ageing and Private Wealth Accumulation – Achieving Customer Focus.
Weiss, H. 2006. Ageing: A Challenge for Bank Revenues.
Thompson, M. 2006. Capturing the Needs of Future Generations and the Search for Asset Returns.
Hedrich, C. 2006. Towards an Aging Society – Strategic Challenges for Banks.
Bosek, P. 2006. The Response to Demographic Change – The Perspective of Erste Bank.
Kraft-Kinz, G. 2006. The Response to Demographic Change – the Perspective of a Net-work of Local Banks.
2 Other References
Clark, G. L. 2004. Pension Fund Governance: Expertise and Organisational Form. Journal of Pension Economics and Finance 3. 233–253.
ECB. 2006. The Impact of Ageing on EU Banks. Report on EU Banking Structures. Frank-furt/Main. 21–37.
Economic Policy Committee and the European Commission (EPC/EC). 2006. The Impact of Ageing on Public Expenditure: Projections for the EU25 Member States on Pensions, Health Care, Long-term Care, Education and Unemployment Transfers (2004–
2050). Special Report No. 1/2006. Brussels.
European Commission. 2006. Financial Integration Monitor 2006. SEC(2006) 1057.
Brussels.
Gomez-Salvador, R., A. Musso, M. Stocker and J. Turunen. 2006. Labour Pro-ductivity Developments in the Euro Area. ECB Occasional Paper No. 53. Frankfurt/
Main.
McCarthy, D. and A. Neuberger. 2003. Pensions Policy: Evidence on Aspects of Savings Behaviour and Capital Markets. Centre for Economic Policy Research (CEPR). London.
OECD. 2005. The Impact of Ageing on Demand, Factor Markets and Growth. Economics Working Paper No. 240. Paris.
Schmitz, S. W. 2005. Demographic Developments, Funded Pension Provision and Finan-cial Stability. OeNB FinanFinan-cial Stability Report No. 9. 93–109.
Schmitz, S. W. 2006. The Governance of Occupational Pension Funds and the Politico-Economic Implications: The Case of Austria. In: P. Mooslechner, H. Schuberth, B. Weber (eds.). The Political Economy of Financial Market Regulation – The Dynamics of Inclusion and Exclusion. Cheltenham: Edward Elgar. 214–246.
Schmitz, S. W. 2007. The Impact of Projected Demographic Developments on Funded Pension Provision in Austria. In: M. Balling, F. Lierman (eds.). Money, Finance and Demog-raphy – the Consequences of Ageing, SUERF – Société Universitaire Européenne de Recherches Financières. Lisbon (forthcoming).
Timmer, M., G. Ypma and B. van Ark. 2003. IT in the European Union: Driving Pro-ductivity Divergence? Groningen: Groningen Growth and Development Centre Research Memorandum GD-67.
1 Introduction1
Over the course of the last decade, Austrian banks2 have successfully seized the opportunity to expand their presence in the CEE banking markets. Taking into account that al-most 40% of the Austrian banking system’s total profits are earned by CEE operations today,3 the evolution of the CEE banking markets has had a substantial influence on the Austrian banking system. With a market share of almost 24% in CEE,4 these opera-tions have at the same time consider-able influence on the stability of the
CEE banking markets. As much as CEE subsidiaries can profit from the stability of their parent banks, they could also be affected by their poten-tial instability. If, for example, some exogenous shock in one particular market puts an Austrian parent bank into trouble, its presence in the re-gion could transfer this shock into other CEE markets as well. Thefore, the issues of Austrian and re-gional financial stability are closely interlinked.
Based on a stress testing exercise this paper is intended to assess both
Refereed by:
Thomas Reininger and Walter Waschiczek, OeNB.
Refereed by:
Thomas Reininger and Walter Waschiczek, OeNB.
Austrian banks are heavily engaged in Central and Eastern European (CEE) markets primarily by running local subsidiaries but also by extending cross-border loans. We give an account of the historical development and the status quo of these exposures and con-duct a stress test for the Austrian banking system with respect to its credit exposure vis-à-vis the CEE region. Our test is based on an analysis of the current state of the local banking systems from a risk perspective, inter alia drawing on stress testing experiences gained by the national central banks and the International Monetary Fund. We use a stress scenario that (i) takes account of the differences in host country risks and (ii) repre-sents a worst case that deliberately exceeds historical shocks. It turns out that, despite the dramatic worsening of the economic environment implied by the scenario, the Austrian banking system is not put at risk by the hypothesized crisis. The possible repercussions of a crisis in a single country via solvency problems of the Austrian parent institution turn out to be well limited.
JEL classification: G15, G21, F23.
Keywords: financial stability, Central and Eastern Europe, stress testing, credit risk.
Keywords: financial stability, Central and Eastern Europe, stress testing, credit risk.
Michael Boss, Gerald Krenn, Claus Puhr,
Markus S. Schwaiger 1 Michael Boss, Gerald Krenn, Claus Puhr,
Markus S. Schwaiger 1
1 Financial Markets Analysis and Surveillance Division, Oesterreichische Nationalbank (OeNB). Opinions expressed by the authors do not necessarily reflect the official viewpoint of the OeNB. The authors would like to thank Ion Dra˘gulin, Tomislav Galac, Adam Glogowski, Michal Hlaváa˘gulin, Tomislav Galac, Adam Glogowski, Michal Hlaváa cˇek, Denis Krivorotov, Marek Licˇek, Denis Krivorotov, Marek Lic cˇák, ˇák, ˇ Stoyan Manolov, Elena Romanova, Eris Sharxhi, Tatjana Šuler and Marianna Valentinyiné Endrész. ˘gulin, Tomislav Galac, Adam Glogowski, Michal Hlavá Stoyan Manolov, Elena Romanova, Eris Sharxhi, Tatjana Šuler and Marianna Valentinyiné Endrész. ˘gulin, Tomislav Galac, Adam Glogowski, Michal Hlavá
2 Throughout this paper, the term “Austrian banks” refers to banks or banking groups operating in Austria, irrespective of domestic or foreign ownership. Therefore e.g. Bank Austria Creditanstalt AG (BA-CA) is included in the analysis.
3 The sample of countries for this paper has been chosen according to the exposure of Austrian banks and their fully consolidated subsidiaries in the region as reported to the OeNB as of December 2006. It includes Albania (AL), Belarus (BY), Bosnia and Herzegovina (BA), Bulgaria (BG), Croatia (HR), the Czech Republic (CZ), Hungary (HU), Poland (PL), Romania (RO), the Russian Federation (RU), Serbia (RS), Slovakia (SK), Slovenia (SI) and Ukraine (UA). The ongoing organizational changes of BA-CA are only included in case they are reflected in the year-end data reported to the OeNB.
4 Excluding the Russian Federation and Turkey, but including the expected market shares after the reorganization of BA-CA; including the Russian and Turkish markets would lead to a market share of 14.5%.
the impact of CEE banking opera-tions on Austrian banks and the im-pact of Austrian financial stability on financial stability in CEE countries.
The scenario used in the stress test (i) takes account of the differences in host country risks and (ii) represents a worst case that deliberately exceeds historical shocks.
Section 2 provides a review of the development as well as the status quo of Austrian banks’ exposure in the region. Section 3 gives a succinct sum-mary of recent trends in the region’s banking systems, while section 4 briefly reviews the rationale behind stress testing in general as well as the stress testing experiences of the CEE central banks and the International Monetary Fund (IMF) in the region in particular. All three sections aim at establishing a proper understand-ing of economic circumstances as well as the reasons why national and international authorities stress test credit exposures in the CEE region.
Section 5 presents the refined
meth-odology and results of stress tests conducted at the Oesterreichische Nationalbank (OeNB) for the Aus-trian banking system with respect to its credit exposure vis-à-vis the CEE region. Section 6 concludes.