As announced in its communication of December 2021, the German Financial Stability Committee (FSC) has analysed which macroprudential instruments currently most effectively address the risks identified in the financial system.
In view of the risk situation in the German financial system, the FSC welcomes the package of macroprudential measures announced by the Federal Financial Supervisory Authority (BaFin).
In recent months, cyclical risks that already existed prior to the pandemic have continued to build up. This increases the danger of banks underestimating their credit risks and potentially making insufficient risk provisions. Furthermore, the financial system is vulnerable to negative developments in the residential real estate market and to interest rate risk. Due to the existing vulnerabilities, abrupt market corrections may negatively impact financial stability in Germany. Such corrections could occur if risk premia in the markets were to rise, for example, or if the currently high levels of inflation were to prove unexpectedly persistent.
In light of the risk situation, it is intended to increase the countercyclical capital buffer to 0.75% of domestic risk positions as of 1 February 2022.
It is also intended to address the specific risks from residential real estate loans. Due to the protracted upturn in the residential real estate market, structural risks have also formed alongside cyclical risks. House prices rose by roughly 12% on average in the third quarter of 2021 compared to the previous year. Residential real estate loans again grew sharply, up just over 7% compared to the previous year. Bundesbank calculations show that residential real estate prices are 10-30% higher than justified by fundamentals. If credit and price dynamics in the residential real estate market continue in this form, this harbours the risk of greater vulnerability for new borrowers to interest rate rises and market corrections.
BaFin is therefore intending to impose a sectoral systemic risk buffer as a complementary instrument. The sectoral systemic risk buffer will additionally counteract the specific risks in the real estate market that cannot be fully addressed by the countercyclical capital buffer. The rate of the sectoral systemic risk buffer on loans secured by residential real estate is intended to be set at 2.0%.
Through these measures, capital buffers of roughly €22 billion will be preserved within the banking system for times of need. This strengthens the banks’ resilience to adverse developments. The buffer requirements can be satisfied almost in full using existing surplus capital. Banks have until 1 February 2023 to satisfy the buffer requirements in full. Should the macroeconomic or sectoral setting require it, the capital buffers can be adjusted flexibly, including in the build-up phase.
Given the current risk situation, the FSC welcomes that BaFin and Bundesbank, are using their prudential communication to call on lenders, such as banks and insurers, not to take excessive risks, especially in the area of residential real estate financing. The intention here is to foster prudent lending practices.
Bundesbank and BaFin also continually review whether it is necessary to limit the loan-to-value ratio (LTV).
The FSC will continue to intensively monitor the risk situation and will, if necessary, propose adjusting the buffer level of the instruments deployed in line with changes in the risk situation.