European legislation

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

For institutions that are active in Germany, the German Banking Act (Kreditwesengesetz, KWG) and subordinate 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 (see also Pfandbrief business: specific CRR legislation).

The CRD and CRR were revised fundamentally in June 2019. These changes are commonly referred to as CRD V and CRR II. Among other things, the following regulatory areas are affected:

  • Definition of eligible liabilities in connection with loss-absorbing and recapitalisation capacity
  • New approaches to determine the capital requirements for market risk, which initially only trigger additional reporting requirements
  • Large exposures regime
  • New requirements pertaining to the net stable funding ratio (NSFR) and the simplified calculation of the net stable funding ratio (sNSFR)
  • New requirements pertaining to the leverage ratio

For the most part, the new requirements of the CRR II have been applicable since mid-2021 and the new requirements of the CRD V were to be transposed into national law by the end of 2020. Currently, the CRD and CRR are being fundamentally revised once again (see also CRD/CRR, Current developments)

Transposition of European legislation

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

By contrast, as a regulation, the Capital Requirements Regulation (CRR) 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 following:

  • Definition of own funds and capital deductions
  • Calculation of own funds requirements, such as for credit, counterparty, market and other risks
  • Limitation of concentration risk through upper limits on large exposures
  • Leverage ratio

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 in the banking book, 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).