“Systemic risk buffer is not appropriate”

Berlin, 30 March 2022

vdp criticises capital buffer activation for residential real estate financing

The Association of German Pfandbrief Banks (vdp) is critical of the decision of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to set a systemic risk buffer of 2% for residential real estate financing on top of the countercyclical capital buffer of 0.75%.

“The activation of the systemic risk buffer is not expedient in terms of amount or timing. The current state of the residential property market does not justify a measure on this scale,” warned Jens Tolckmitt, Chief Executive of vdp.

A buffer, particularly in the amount set, makes it harder for banks to fulfil their core task of ensuring an adequate supply of credit to the economy. Not least, politically popular projects such as transitioning to more sustainability in the economy and housing stock or the new Federal government’s housing strategy will require massive investment over the next few years, for which the banking industry will need to provide a significant portion of the funds.

“It is also questionable whether BaFin’s measure will have the intended effect,” continued Tolckmitt, “as it only affects the banking industry.”

The rest of the finance industry will not be burdened with the measure, he pointed out. Which is why, he believes, that the anticipated dampening of the residential property market’s development will not be achieved.

“Instead financing business will shift to areas of the finance sector that are subject to different or less regulation,” emphasised Tolckmitt.

The vdp does not believe that it serves to strengthen financial stability.

The vdp cannot confirm such increased risks for the residential property market and real estate financing to which the supervisory authority attests. The price of residential property has indeed increased once again over the four quarters of 2021, rising 10.7% as indicated by the vdp Property Price Index. However, these price increases can be explained by fundamentals: demand for housing is outstripping supply, building capacity is limited, construction material prices are shooting up. For exactly those reasons, the new Federal government has launched its housing construction programme. Unlike in the US and some European countries before the financial crisis, housing is not built speculatively, added Tolckmitt.

Stable parameters for residential property financing in Germany

As highlighted by the latest year-end 2021 edition of the vdp’s regular survey, which is now in its 30th year, financing conditions do not give cause for concern. Banks’ lending standards are just as risk-oriented as their borrowers: the share of borrowed funds has decreased recently to an average of 80%. Accordingly, the amount of own funds contributed stands at 20% and, in absolute terms, has risen considerably of late, as has borrowing households’ income. The percentage of loan-servicing costs to the acquiring household’s disposable income, the debt service ratio, decreased over the past two years from 26% to 25% – a level that is remarkably low compared to the long-term figure, and considerably lower than many households’ rent burden. Furthermore, the high average initial repayments of 3%, which considerably shorten the term of the loan, serve to reduce risk, as does the fact that in Germany loan conditions are locked in for long periods of time – 14 to 15 years have become the standard. The traditional German “fixed-interest-rate culture” has a stabilising effect.

With the activated instruments, BaFin is clearly also responding in large to pressure from international institutions such as the European Systemic Risk Board (ESRB) and the European Central Bank (ECB), which have been pushing Germany to take action for years with reference to corresponding measures in other countries. The situation in Germany, however, is not necessarily comparable with that of other countries, according to Tolckmitt, which is why he believes a different approach is warranted.