European legislation

The EU Capital Requirements Directive (CRD) and the EU Capital Requirements Regulation (CRR) contain regulatory requirements dealing with the authorisation of institutions, as well as minimum requirements concerning own funds, liquidity, leverage ratio and risk management. These requirements also apply to Pfandbrief banks without exception.

For institutions that are active in Germany, the German Banking Act (Kreditwesengesetz, KWG) and subsidiary regulations contain supplemental regulatory requirements. In addition, Pfandbrief banks are subject to the German Pfandbrief Act (Pfandbriefgesetz) and the associated regulations.

For real estate financing and covered bonds like Pfandbriefe in particular, the CRR provides various privileges in terms of capital and liquidity requirements on account of the security and quality of these assets.

The CRD and CRR were revised fundamentally in June 2019 and are now commonly referred to as CRD V / CRR II. They concern such regulatory areas as the definition of eligible liabilities in connection with loss-absorbing and recapitalisation capacity, reporting requirements for market risk, the large exposures regime, and requirements pertaining to a net stable funding ratio (NSFR) and the leverage ratio. The new requirements are applicable from 27 June 2019 or 28 June 2021 for the most part (see also CRD/CRR, Current developments).

Transposition of European legislation

Because it is a directive, the Capital Requirements Directive has to be transposed into German law (see also CRD/CRR, German legislation).

By contrast, as a regulation, the Capital Requirements Regulation is directly applicable law and does not require national transposition, other than with respect to the options and discretions contained in it.

Among other things, the CRD and CRR translate into European law the requirements agreed upon by the Basel Committee on Banking Supervision, namely those concerning capital requirements (Pillar 1), risk management (Pillar 2), and liquidity requirements (see also Basel regulatory framework).

The CRD and CRR are supplemented by numerous delegated acts (DA), regulatory technical standards (RTS), and implementing technical standards (ITS), as well as by various guidelines and publications of the European Banking Authority (EBA), the national supervisory authorities (BaFin, Deutsche Bundesbank), and the banking supervision arm of the European Central Bank (ECB) (see also Supervisory practice).

The key elements of the capital requirements set forth in the CRR are:

  • the definition of own funds,
  • the own funds requirements, such as for credit and market risk,
  • the limitation of concentration risk through upper limits on large exposures, and
  • the leverage ratio (LR).

Liquidity requirements are addressed, for instance, by the liquidity coverage ratio (LCR) and the requirements regarding a net stable funding ratio (NSFR). In addition to the minimum requirements, the supervisory authorities request for supplementary capital and liquidity requirements that are geared to the risk position of each credit institution (see also Supervisory practice).

The CRD contains, among other things, requirements concerning the authorisation of institutions, interest rate risk, risk management generally, internal bank procedures for determining adequate capital and liquidity levels, and requirements for supervisory review procedures (internal capital adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP)) (see also Basel regulatory framework), as well as provisions concerning capital buffers (see also Supervisory practice).

Pfandbrief business: specific CRR legislation

Legislation concerning covered bonds
  • Preferential risk weighting when calculating own funds requirements using the Standardised Approach for credit risk pursuant to Article 129 CRR
  • Preferential loss given default (LGD) when calculating own funds requirements using the Internal Ratings-Based Approach (IRB Approach) pursuant to Article 161 CRR
  • For covered bonds with particularly good credit quality (like Pfandbriefe) that are contained in the trading book of trading book institutions, preferential own funds requirements using the Standardised Approach for market risk pursuant to Article 336 CRR and using the Alternative Standardised Approach pursuant to Article 325w and 325ah CRR
  • Privileged consideration as liquid assets with regard to the LCR pursuant to Article 416. CRR in conjunction with the Delegated Regulation on the LCR
  • Privileged factors for the required stable funding for the purpose of the net stable funding ratio (NSFR) pursuant to Article 428t and 428aa CRR (from 28 June 2021)
  • Discretionary exemption from the limit on large exposures pursuant to Article 493 CRR.
Concerning cover assets and the business model of Pfandbrief banks
  • Preferential minimum loss coverage requirements for non-performing real estate loans (NPL) pursuant to Article 47c CRR
  • Specific reporting obligations concerning losses stemming from real estate financing pursuant to Article 101 CRR (from 28 June 2021: Article 430a CRR) in conjunction with ITS EU/2014/680, Annexes VI and VII
  • Preferential risk weighting when calculating own funds requirements using the Standardised Approach for credit risk for sovereign exposures, such as central governments and central banks, regional governments and local authorities, public sector entities, multilateral development banks, and international organisations pursuant to Article 114 et seq. CRR
  • Preferential risk weighting when calculating own funds requirements using the Standardised Approach for credit risk for real estate financing pursuant to Article 124 et seq. CRR
  • No requirement to apply a minimum value for the probability of default (PD) for sovereign exposures and inter-bank receivables when using the IRB Approach pursuant to Article 160 CRR
  • Consideration of real estate, ship, and aircraft collateral when using the basic IRB Approach pursuant to Article 199 CRR
  • Preferential LGD when calculating own funds requirements using the IRB Approach for real estate, ship, and aircraft financing, as well as alternative risk weight for real estate financing pursuant to Article 230 CRR
  • For sovereign exposures that would be assigned a risk weight of 0% using the Standardised Approach for credit risk, exemption from the limit on large exposures pursuant to Article 400 CRR
  • For real estate financing that would be assigned the maximum possible preferential risk weight using the Standardised Approach for credit risk, exemption from the limit on large exposures pursuant to Article 402 CRR
  • For regional governments and local authorities that would be assigned a risk weight of 20% using the Standardised Approach for credit risk, discretionary exemption from the limit on large exposures pursuant to Article 493 CRR