The Austrian Federal Financing Agency should adapt its stress tests
The Austrian Federal Financing Agency is responsible for the debt management of the Republic of Austria on behalf of the Federal Ministry of Finance. In the course of the COVID-19 pandemic, the financing needs of the Federation skyrocketed from EUR 26.297 billion in 2019 to EUR 57.820 billion in 2020. The Austrian Federal Financing Agency therefore had to become increasingly active on the money and capital markets.
In its report "Austrian Federal Financing Agency: Risk Management and Financing of Legal Entities and Provinces“ published today, the Austrian Court of Audit (ACA) recommends to review the amount defined for limiting the interest payment risk as well as the design of the stress tests and, if necessary, to update them. The ACA notes positively that the Austrian Federal Financing Agency hedged against a long-term increase in interest rates for the financial debt portfolio. The audited period essentially spanned the years from 2016 through 2020.
The Austrian Federal Financing Agency is mandated by the Minister of Finance to carry out the debt management of the Republic of Austria on behalf and for the account of the federal government. This includes the raising of financial debt, debt portfolio management, central cash management and activities for legal entities and the provinces. It has to secure financing and the resulting repayment obligations at the lowest possible financing costs and without high risk. The financial transactions of the Austrian Federal Financing Agency include the issuance of bonds of the Republic of Austria as well as federal treasury notes, purchases and sales of securities of the Republic of Austria, the taking out of loans, interest rate or currency swaps as well as investments.
Financing needs skyrocketed
As a result of the COVID-19 pandemic, the federal government’s adjusted financial debt increased to almost EUR 238 billion by the end of 2020. In the period of 2016 to 2019, financing for the Federation, whose repayment was not effected in the year of incurrence, ranged from EUR 23.212 billion (2018) to EUR 29.891 billion (2017) per year. In 2020, the COVID-19 pandemic led to a sharp increase of the financing needs to EUR 57.820 billion. The Austrian Federal Financing Agency covered the financing needs of the Federation mainly with bonds. These were almost twice as high in 2020 (EUR 37.047 billion) as in 2019 (EUR 19.090 billion). The amount of federal treasury notes also increased by more than 200 per cent in 2020 compared to 2019, namely from EUR 5.717 billion to EUR 18.912 billion.
Stress tests should be adapted to current experience
Within the framework of stress tests, the Austrian Federal Financing Agency analyses, on a quarterly basis, the risks under stress and crisis conditions and their impact on the interest burden. Since their introduction in 2012, the design of the stress tests has not been reviewed. According to the ACA’s recommendation, the Austrian Federal Financing Agency should review the design of its stress tests at regular intervals to see if there is a need for change and also incorporate its experience from current events – such as the COVID-19 pandemic. The ACA also critically notes that the results of the stress tests were not explained in the control reports provided to the supervisory board as regards a possible need for action.
Hedging against an increase in interest rates
The effective interest rate of the federal government’s financial debt portfolio fell continuously from 2.7 per cent to 1.5 per cent from 2016 to 2020 due to the economic framework conditions. Compared to other euro area Member States, the financial debt portfolio managed by the Austrian Federal Financing Agency has the longest average remaining maturities and interest rate fixing periods. With the high fixed interest rate share, the agency hedged, amongst others and in the longer term, against a rise in interest rates.
Limits set too high
Numerous risks are associated with the financial transactions carried out as part of public debt management. The limits defined in the market risk regulation to curb the interest payment risk have not been exceeded since their introduction in 2013. Only three times were they exhausted by more than 80 per cent. Consequently, possible control measures to reduce the interest payment risk were not triggered. The ACA sees this as an indication that the limits are set too high. Limits that are too high can lead to a late identification of risks. The ACA critically notes that the Austrian Federal Financing Agency had not updated the market risk guideline in the audited period. It should therefore complete the update of the market risk regulation as soon as possible. In doing so, the existing limits and the corresponding amount for limiting the interest payment risk should be reviewed for appropriateness and adjusted accordingly.
Credit risk was limited
The ACA positively acknowledges that, against the backdrop of the COVID-19 implications, the Austrian Federal Financing Agency limited the credit risk with regard to the effects of the COVID-19 pandemic by no longer taking on unsecured credit risks from investments. However, further delayed effects of the pandemic on the credit risk of the Federation could not be ruled out.
Financing advantage for legal entities and the provinces
The ACA notes that according to the calculations of the Austrian Federal Financing Agency, the financing costs of the loans concluded between the federal government and the legal entities and provinces in the period of 2016 to 2020 were lower by more than two billion euros compared to loans granted by the federal government itself. This financing advantage for the legal entities and the provinces results from the onward settlement of the conditions of the refinancing transactions of the federal government, which are advantageous due to the high financing volume of the federal government and the rating of the Republic of Austria.
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Report: Austrian Federal Financing Agency: Risk Management and Financing of Legal Entities and Provinces (in German)
From March to June 2021, the ACA audited the Austrian Federal Financing Agency. The audit aimed at assessing its risk management, especially the management of the market risk, the liquidity risk, the credit risk, the operational risk, the legal risk and the reputational risk. The ACA also assessed the financing of legal entities and the provinces by the Austrian Federal Financing Agency. The audited period spanned the years from 2016 through 2020, whereas the ACA also took into account relevant development of the first half of 2021.