Position on Basel III
This document provides a concise summary of vdp’s current position on Basel III. The Basel guidelines have a significant impact on how vdp operates as an association.
- The Pfandbrief banks believe that a uniform supervisory approach is required worldwide and are therefore in favour of reforming Basel III in Europe.
- vdp’s position is that any attempt to implement the capital requirements laid out in Basel III should not go further than what has been agreed in the Basel Accords, while also taking care to avoid unduly weakening the banking system and putting additional pressure on the real economy.
- Even though the European Commission has clearly made every effort to take European specificities into account, its draft legislation for implementing the Basel III framework goes further than required by Basel III itself and would put the capital positions of European banks under significant pressure. Proposals to tighten rules even further – such as those put forward by rapporteur Jonás Fernández – would put an inappropriate amount of additional stress on lenders.
- We need to have an effective regulatory framework in order to finance projects that are championed in the political sphere, such as sustainable economic changes or the provision of affordable housing. However, continuously tightening the regulations governing credit institutions, which will inevitably be called on to provide the majority of this financing, will have a counter-productive effect.
- vdp would ask the European institutions that will be involved in negotiating these regulations to find ways to ease the anticipated burden on real estate financing – an area which is already extremely low-risk. The framework leaves a lot of room for manoeuvre.
- Implementing requirements which go beyond Basel III would increase capital requirements disproportionately. This would dry up the supply of credit to the real economy, make borrowing more expensive and put key political objectives at risk.
- Excessive capital requirements on banks would encourage real estate financing to move to other sectors that are less highly regulated or not regulated at all. These excessive capital requirements would drive business into segments of the capital market that are not as highly regulated or even completely unregulated. This would reduce financial stability, which regulators are so keen to improve.
vdp believes that there is an urgent need for the issues below to be addressed by the European institutions involved in setting banking regulations
- vdp is of the opinion that it is both unnecessary and unjustified for the output floor to impose additional capital requirements on low-risk, high-quality residential real estate financing with a loan to value ratio of 55% or less.
Institutions which use internal risk models would be confronted with increasingly stringent capital requirements going forward. The data gathered by the regulatory authorities has demonstrated the low-risk nature of this sector in Germany. In addition, these models have been the subject of intense scrutiny on the part of the ECB and the EBA in recent years, and have already been used to justify higher capital requirements. The output floor was originally designed to act as a backstop which would catch outliers. In actual fact, it has now become a key performance indicator for the majority of banks affected by it.
Residential real estate financing with a loan to value ratio of 55% or less should be given a risk weighting of 10% instead of 20% if additional requirements are met, including an institution-specific hard test allowing for a maximum loss rate of 0.25% across the relevant portfolio of a bank. vdp believes that this special treatment is both justified and urgently required, in view of the inherently low level of risk involved in real estate financing of this nature. Any institution whose loss rate exceeds 0.25% in future would lose the ability to apply this special treatment.
Residential real estate financing should receive special treatment on an ongoing basis due to its proven low-risk nature.
- vdp believes that special treatment should also be permitted for commercial real estate financing with a comparably low loan to value ratio, with institutions required to meet similarly strict conditions, for example in the form of hard test requirements. From vdp’s perspective, there is no reason why there should be any material difference in how comparable risks are handled.
- The 150% risk weighting for ADC (acquisition, development and construction) exposures is inappropriate as, in addition to being equivalent to the weighting applied to a defaulted loan, it also renders it practically impossible to improve the energy efficiency of our building stock, as we urgently need to do if we are to achieve our ambitious climate targets.
- Green factors should not be considered when determining a bank’s capital requirements. Introducing a green supporting factor through the back door – as proposed by rapporteur Jonás Fernández – would not have the desired effect. It is vdp’s position that capital adequacy rules should reflect the risk involved in a loan, not political wishful thinking.