Basel III: Need to act on adjustments in real estate financing recognized
Berlin, August 23, 2022
vdp welcomes amendment proposals by Members of the European Parliament
The Association of German Pfandbrief Banks (vdp) takes a generally positive view of the proposed amendments to the banking package that have been tabled by Members of the European Parliament and were published recently.
“It is gratifying that among the ranks of the parliamentarians, notably from the EPP Group and the Renew Europe Group, the need to act on adjustments in the real estate financing business within the scope of implementing Basel III is seen, and that purposeful changes to the European Commission's draft law are being advocated. This gives support to our long-standing positions,” said Jens Tolckmitt, the vdp’s Chief Executive. “Above all, we warn against gold-plating the Basel requirements, which would lead to a disproportionate increase in capital requirements for banks, and call for an appropriate shaping of the Basel III capital adequacy regulations.”
For example, Dr Othmar Karas, the shadow rapporteur from the EPP Group for Basel III implementation and 1st Vice-President of the European Parliament, recommends taking specific European market structures into consideration in the implementation, amongst other things in real estate financing. He is particularly in favour of appropriate capital treatment for residential real estate financing if the bank can prove it is low-risk. In this context he believes the special treatment for real estate financing as envisaged so far by the European Commission should apply permanently rather than temporarily until 2032. Additionally, he brings into play the extension of this special treatment to include low-risk commercial real estate loans by suggesting that the European Banking Authority (EBA) be mandated to assess this issue.
Call for privileged treatment also for low-risk commercial real estate loans
A further amendment proposal aims at banks that use the Credit Risk Standardized Approach (CRSA) being generally allowed to apply a reduced risk weight of 50% in the case of commercial real estate loans if their repayment is not materially dependent on the cash flows generated by the secured property (non-IPRE). The precondition here would be that the so-called hard test is adhered to. Both Karas and Markus Ferber (also from the EPP Group) back the privileged 100% risk weighting of loans (as envisaged by the European Commission) that finance the acquisition, development and construction (ADC) of residential real estate, provided certain risk-mitigating conditions are met. Independently of each other, they propose extending this privileged treatment to include commercial real estate ADC loans under the same risk-mitigating conditions.
And finally, including green factors in capital backing, as called for by the European Parliament's rapporteur, Jonás Fernández (S&D Group), is rejected as not conducive because it is not sensitive to risk. Any discussions on this should not be held until the EBA has submitted a study on this question and relevant experience has been gained from the climate stress tests.
“Of the utmost importance that improvements are made”
“It is of the utmost importance for the supply of credit to the real economy and the competitiveness of European banks that improvements are made to the European Commission’s proposal for Basel III,” Tolckmitt emphasized. “Particularly the burdens on real estate financing that result from the output floor must be reduced in the upcoming talks of the European institutions. Otherwise, this low-risk business would, absurdly, fall foul of the Basel III regulation."
Moreover, on a positive note, Tolckmitt pointed out that other MEPs such as Linea Søgaard-Linell, Engin Eroglu and Gilles Boyer (all of the Renew Group) as well as Sirpa Pietikäinen (EPP Group) also hold positions that merit support.
The vdp has for years been committed to shaping the Basel III capital adequacy rules in a way that does not further hamper the performance of the banking system or place additional strain on the real economy. Especially against the backdrop of the great need for financing, the banking sector must not be burdened further by inappropriate regulations.
“Unfortunately, we find that political visions and regulatory reality do not always make a good fit. Yet they need to be aligned if political goals such as the sustainable transformation of the economy or the creation of affordable housing are to be financeable,” Tolckmitt remarked. "However, the regulation of banks, which by necessity have to provide most of the financing for these goals, is unfortunately having a counterproductive effect.”