Austrian banks’ lending risk appetite in times of expansive monetary policy and tightening capital regulation

In the past decade, the Austrian credit market was shaped by expansive monetary policy, favorable economic conditions and tightening regulatory capital requirements. Analyzing the impact of these three factors on Austrian banks’ credit risk, we focus on credit risk of new nonfinancial corporate borrowers and banks’ willingness to fund customers with a high risk of default. To this end, we examine borrower-by-borrower data available in the Austrian credit register. Using data from 2008 to 2019, we find evidence for a strong improvement in credit quality as estimated by banks. We relate this overall credit quality improvement to the favorable economic environment as corporate financial statements did not improve in tandem. Applying fixed effects panel regressions, we find that expansive monetary policy induces risk taking. Banks subject to tightening capital requirements reduced the probability of default and expected loss of their customers more strongly. Smaller, regional deposit-financed banks, which are to a greater extent affected by decreasing interest rates due to margin pressure, show stronger signs of risk taking. COVID-19 update: Austrian banks’ credit quality will severely worsen as a result of the ongoing coronavirus pandemic and the related economic shutdown. Past crises showed that economies and financial stability are hit the more, the higher the levels of private sector debt and the worse the credit quality are. In our analysis, we find that the credit quality of banks’ loan portfolios was good according to their own estimates when banks entered the coronavirus crisis. Low estimates of credit risk, however, also imply lower risk-weighted assets and thus lower capital requirements for a given loan portfolio. In annex 2, we depict the development of credit quality until year-end 2019 in selected service industries which were immediately hit by the policy measures taken in Austria to contain the pandemic. The overall trend, evident in recent years, toward improved credit quality according to banks’ estimates holds for all those – albeit heterogenous – industries, even though credit risk parameters are worse than for the cross-industry average, especially for accommodation, food and beverage service activities.