Basel III: “Capital increase will prove to be considerably higher than the European Commission forecasts”

Berlin, 27 October 2021

vdp criticizes Basel III legislative proposal and warns it will adversely affect the financing of the real estate sector and the real economy

The Association of German Pfandbrief Banks (vdp) takes a critical view of the legislative proposal published today by the European Commission on the implementation of the Basel III regulations:

“The legislative proposal results in a gold-plating of the Basel standards, particularly with regard to the output floor,”

Jens Tolckmitt, the vdp’s Chief Executive, commented. Tolckmitt explained that this will in turn lead to a substantial increase in capital requirements for banks that is considerably higher than the European Commission recently predicted. It is fundamentally wrong, he added, to compare only the minimum capital requirements with the capital that is actually available, because the capital ratios banking supervisors expect to see are always higher than the minimum capital requirements.

“Far more banks are going to need additional capital than the European Commission forecasts,” Tolckmitt remarked. “The original goal of 'not significantly' increasing the capital burden on the banking industry with the Basel III reform is thus clearly missed."

The solution currently proposed for real estate is completely inadequate

First of all, the vdp takes a positive view of the fact that the EU Commission has apparently recognized the need for action in the real estate financing business:

“We welcome the fact that the legislative proposal now explicitly recognizes that real estate financing needs to be treated differently, after such treatment had previously been denied for years. However, the solution that has now been found is still completely inadequate. It is incomprehensible, on the one hand, why the special treatment to be given to residential properties should only apply for a limited time and, on the other hand, why commercial properties are disregarded,” stressed Tolckmitt “This is because – and in this point we vehemently contradict the supervisors – the financing of commercial properties is also secure.  This is proven by the hard test already required by the Capital Requirements Regulation (CRR) and monitored in Germany by BaFin."

The vdp warns of the consequences the current legislative proposal for Basel III would have. For example, the capital requirements determined using the output floor would prevent risk-sensitive capital backing.

“It sounds absurd, yet it seems to be what regulators want: incurring higher risks is no longer to lead automatically to higher capital requirements. And a particularly sharp increase in capital requirements is to apply, above all, to low-risk business areas such as real estate financing. This will create completely wrong incentives at the expense of financial stability,” Tolckmitt explained.

Right now, there is a need for banks that are able to provide sufficient funding

Ultimately, it is to be feared that gold-plating the Basel III framework will give rise to a shortage in the credit supplied by banks as well as to a significant increase in financing costs for borrowers. At the same time, it is likely that parts of the financing business will be moved to less stringently regulated areas of the financial sector. In view of the upcoming legislative process, the vdp therefore appeals to the EU Commission, EU Parliament and the Council of the EU that the burdens associated with the implementation of Basel III be noticeably reduced for real estate finance providers in particular. Tolckmitt emphasized:

“Given the importance of tasks such as financing the post-pandemic economic recovery and the sustainable transformation of the economy, what we need right now are banks that are able to provide sufficient financing.”

The Pfandbrief banks still favour the so-called parallel stacks approach as a means of implementing the output floor, as it would ensure that banks continue to back their assets with capital in a risk-sensitive manner. Nevertheless, the vdp is also open to alternative implementation approaches – always provided that these take into account the low-risk real estate financing business and ensure adequate relief for the institutions compared with the EBA's implementation proposals in this area.