Examining Banks’ Lending Standards: FMA’s Focus on Customer Advice and Eroding Standards

The financial market supervisory authority wants to take a very close look at the banks’ lending in the next few months, “that will be a focus of our work,” said FMA board member Helmut Ettl on Monday in the business journalists’ club. They also want to check how the banks have advised their customers. Lending standards have eroded significantly in recent years, and the current standards are “barely justifiable” in the long term.

Ettl recalled the financial crisis triggered by the Lehman bankruptcy 15 years ago. Back then, housing loans were also given to people who actually couldn’t afford it. Many of today’s borrowers were not there at the time and would consider the low interest rate phase of the last ten years to be a normal development, but that is not correct: this phase is rather extraordinary and was brought about by extraordinary stabilization measures by the European Central Bank.

Until 2010, there was a parallel development in income and residential property prices in Austria, explained Ettl. Since then, residential property prices have more than doubled, while incomes have only increased by just over 50 percent. Residential real estate has been massively overvalued in recent years. “The driving forces behind this were of course the low interest rates,” said the FMA board. In addition, the eroding lending standards of the banks also meant that people who could not afford them received loans.

Variable-interest housing loans are unique to Austria. “There is no other country where the proportion of variable-interest loans is so high.” At times, the proportion of variable-interest loans when new loans were granted was 80 percent. The FMA had already warned of this at the time and calculated that interest rates would only have been 30 to 40 basis points higher for fixed-interest loans. “Today, of course, we are dealing with generations who have never felt interest rates develop normally.” This also applies to inflation.

It is surprising that loans with variable interest rates have increased again since the ECB’s interest rate change. A possible explanation: “People don’t believe that interest rates have risen sustainably.” But it’s possible that many people simply couldn’t afford fixed interest rates.

In the next few months, the supervisory authority wants to take a closer look at the banks’ lending and also how the banks have advised their customers. The currently applicable standards are “barely justifiable” and still “generous” compared to Europe, said Ettl. “These are minimum standards that should not be fallen short of.” The current plan is, among other things, that the loan installments must not exceed 40 percent of the household income and the equity share must only be 10 percent or 20 percent if the additional costs of the loan are taken into account .

There are currently “no arguments on the table” for weakening the standards. Finance Minister Magnus Brunner (ÖVP) had repeatedly pushed for easing of restrictions so that “all citizens who can afford it can realize their desire to own their own home,” as he put it in a published letter to the FMA board.

Ettl is not reassured by the fact that loan defaults are still very low. Even before 2008, the failures were small. However, it is true that the banks are currently earning very well and have good capital ratios.