## 1deuea2022005 ## Source details **Canonical URL:** [1deuea2022005](https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1deuea2022005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1deuea2022005.pdf.json) --- ### Executive summary — framework, recent actions, vulnerabilities, and priorities - Framework and capacity: - Germany’s macroprudential policy framework and toolkit are "well developed." - Institutional arrangements judged "mostly sound and operating well." - Capacity and expertise in risk monitoring are "good," supported by the central bank’s analytical power and data access and close coordination between macro- and microprudential arms of financial supervisory authorities. - Remaining principal outstanding task: add powers to set caps on debt-to-income and debt service-to-income ratios on residential real estate loans to existing powers over loan-to-value ratios and amortization rates. - Recent policy actions and timing: - Macroprudential action taken to counter rising cyclical vulnerabilities, with measures in January 2022 to raise buffers in response to risks around real estate and interest rates, and exuberance in some corporate funding markets. - The CCyB and a residential real estate-focused sectoral systemic risk buffer (SSyRB) were deployed; measures will apply in full starting February 2023. - Together, these measures preserved some €22bn worth of bank capital out of the approximately €30bn capital accumulated in buffers over the course of the pandemic. - Germany’s banking system reported an average Tier 1 ratio of 16.8 percent. - Between end-2019 and 2021-Q3, reciprocal reductions released capital worth 0.09 percent of RWAs. - Principal vulnerabilities identified: - Strengthened and broadened boom in German residential real estate prices; pandemic did little to curb housing demand. - Evidence of over-valuations coupled with accelerating growth in mortgage lending. - Legislated borrower-based instruments (e.g., LTV limits and other borrower-based measures) exist but have not been activated to date. - Household leverage and low real interest rate environment conducive to leverage buildup by some households and to risk-taking in parts of the financial system. - Some tilting in the composition of bank exposures towards riskier corporate borrowers; low bank profitability limits organic capital generation under stress. - Data and analytical capacity: - Progress welcomed towards closing data gaps. - Starting in mid-2023, comprehensive and consistent data on residential real estate lending standards collected by the Bundesbank will become available to support risk monitoring and tool calibration. - Work towards an integrated database of financial stability statistics (the “House of Microdata”) is ongoing. ### Institutional framework, mandates, and decision-making - Financial Stability Committee (FSC): - Established by the 2012 Financial Stability Act (FinStabG); operational since 2013. - Composition: three voting members from the BMF; three voting members from the Deutsche Bundesbank; three voting members and one observer from the BaFin. - Primary purpose: “to strengthen cooperation in the area of financial stability” through regular discussion and deciding on formal warnings and recommendations. - FSC has no “secondary” objectives. - Bundesbank role and legal tasks under FinStabG: - Furnish the Committee with analysis of the financial stability situation. - Prepare an annual report on the activities of the Committee. - Propose actions to be taken by the Committee. - Assess implementation of measures taken by the Committee. - BaFin responsibilities: - Counteract financial sector developments that may impair provision of financial services or lead to macroeconomic disruption (Banking Act (KWG), §4(2)). - Cooperate with the European Systemic Risk Board (FinDAG §4(2) point 1). - Act as a member of the FSC (FinStabG §2(3) point 3). - Decision-making and powers: - Bundesbank may propose draft resolutions and may veto resolutions relating to warnings, recommendations, and their publication. - BMF retains substantial influence: State Secretary chairs the FSC and the FSC secretariat is housed in the BMF. - BaFin may act independently as the National Designated Authority. - FSC resolutions adoptable by simple majority; Chair should seek unanimity for recommendations or warnings where possible (FinStabG, §2(5)). - Hard powers and constraints: - Hard powers rest with BaFin for CRD/CRR-specified tools (e.g., CCyB, G/O-SII buffer, LCR, NSFR, national flexibility measures CRR Art. 458). - BaFin may activate macroprudential limits relating to lending for residential real estate that exist in German law (KWG, Amended June 6, 2017). - Bundesbank advises on calibration of borrower-based measures under a statutory order (WoImmoDarIRV), effectively requiring its consent for certain calibrations. - FSC soft powers: - FSC may issue recommendations with a comply-or-explain mechanism (FinStabG, §3). - FSC may issue formal warnings and communicate via statements and an annual report; warnings have not been used to date. ### Macroprudential strategy, communication, and transparency - Role of strategy documents: - Strategy documents should elaborate objectives, explain decision-making, and set out expected transmission of tools. - Benefits: foster public awareness, counter inaction bias, improve accountability, guide expectations. - FSC strategy and transparency: - FSC strategy developed and published; most recently updated in 2020. - Strategy sets objectives, approach to risk assessment, communications, and use of recommendations and warnings. - FSC publishes decision-making procedure in Rules of Procedure (ROP); decisions typically published immediately after meetings. - FSC annual report prepared by the Bundesbank is submitted to the Bundestag; covers April of the year preceding publication through the following March and is released in June or July. - Observed weaknesses and recommended procedural reforms: - Information on Committee activities becomes available with considerable delay and with limited detail on debate. - Macroprudential strategy has gaps: “much less information has been shared in respect of the other macroprudential tools.” - Recommendations: - Embed links between macroprudential risks and corresponding mitigation measures within the FSC macroprudential strategy (adopt joint-use approach; operational guidance should emanate from the FSC). - Publish post-meeting records to provide more timely and relevant information while respecting confidentiality (based on meeting minutes as per ROP §9). ### Countercyclical Capital Buffer (CCyB), leverage, and buffer usability - CCyB framework and practice: - Germany follows “guided discretion” for the CCyB; rule-based component computed each quarter based on domestic credit-to-GDP deviation from trend (credit gap). - German buffer guide: credit aggregate more narrowly defined (loans to and debt securities of the private non-financial sector held by domestic banks and money market funds). - Historical uses: - Increase to 0.25 percent announced in 2019 when guide ~0 percent. - Buffer set at zero during the pandemic when guide stood at 1 percent. - Increase to 0.75 percent announced in January, 2022 when guide stood closer to 1.25 percent. - Authorities reviewed CCyB framework (not seen by FSAP team); changes focused on principles for buffer use and streamlining indicators; no change to rule-based component. - Leverage Ratio (LR) context: - Minimum LR requirement of 3 percent applied to all banks since June, 2021. - Under CRD V, supervisors can top up LR requirement; G-SIIs to hold an additional LR buffer amounting to 50 percent of their risk-weighted G-SII buffer rate as of January 2023. - LR and LR buffer calculated as ratio of Tier 1 capital to total exposure value (CRR, Art. 429). - Concerns and recommendations on buffer useability: - Overlapping capital claims (LR, MREL) can limit CCyB releasability and useability. - Recommended to continue using CCyB discretionary component flexibly and consider a “positive neutral” CCyB to create pre-positioned space to act—subject to considerations about CRR amendments on releasability and useability. - Maintain information flow between FSC and authorities overseeing MREL (SRB and BaFin) on headroom and potential distribution restrictions. ### Residential real estate (RRE): prices, lending, data gaps, and borrower-based measures (BBMs) - Price and housing market dynamics: - RRE prices rose by more than 90 percent in nominal terms (and 60 percent in real terms) between 2010 and 2021. - Nationwide, RRE prices grew by 10.3 percent in 2021 (versus 6.5 percent in 2019). - In the largest seven cities, RRE prices grew by 8.2 percent in 2021 (versus 4.2 percent in 2019). - Bundesbank estimates of overvaluation at end-2021: between 20 and 35 percent for Germany overall; 15 to 40 percent in cities. Price-to-rent and price-to-income deviations from long-run averages of 37 and 21 percent respectively at end-2021. - Housing cost overburden: 16 percent in 2019 for cities and rural areas; about 26 percent of household disposable income dedicated to housing costs in 2019 (EU average 20 percent). - Banks’ exposures and lending growth: - Bank loans for house purchase constituted about 45 percent of GDP as of 2021Q4. - Outstanding loans by banks for house purchase totaled over €1.6 trillion, equivalent to 53 percent of total loans to domestic enterprises and households. - Of the €1.6 trillion, 28 percent were granted to corporates, and 72 percent to households and non-profits. - Housing loan growth reached 7.3 percent year-on-year in August 2021—the highest growth in about 2 decades. - Data limitations and planned improvements: - No single comprehensive data source for RRE prices; Destatis inputs incomplete and delayed; private sources (vdpResearch, bulwiengesa AG) used with differing methodologies. - For regional indices, about 45 percent of recent data cannot be used for index calculation due to missing price-determining attributes required for quality adjustment. - FinStabDEV (February 2021) authorizes Bundesbank to request lender data on loans to natural persons to build or purchase residential real estate; reporting entities ordered in September 2021. - Regular data collection expected to deliver semi-aggregated institution-level information; first usable information for 2023Q1 expected in the latter part of 2023Q2 (i.e., mid-2023). - Borrower-based macroprudential measures (BBMs) in law and practice: - Legal powers: - KWG amended to permit caps on LTV ratios and to set repayment requirements (Federal Law Gazette, 2017). - Cap on LTV applies to sum of all debt relating to a residential property financing transaction. - Statutory order WolmmoDarIRV issued in February, 2021, defining “loan” and “value” and activation/review processes. - Legislators chose not to implement DSTI and DTI ratios in 2017; present federal government committed to introduce these tools and process underway. - Current legally-binding measure readily available: LTV cap. Income-based tools (DTI, DSTI) not yet introduced. - Data constraints impede activation: - Activation requires ancillary parameters (e.g., “free quota” or “speed limit”) and granular data to avoid mis-calibration. - Two LTV definitions used by institutions (loan-to-market value and loan-to-collateral value) with some 10-15 percent difference between them. - Authorities await more comprehensive data from new data collection starting in 2023; reporting for former years requested on a best-effort (non-obligatory) basis. - FSAP policy guidance and interim measures: - Recommend activating BBMs as precautionary measures to avoid unsustainable household leverage and to create market benchmarks. - Until legal/technical impediments resolved, strengthen BaFin guidance on lending standards, including: - Explicitly discouraging the practice of including transaction costs (fees, commissions, taxes) in loans. - FSC should develop and coordinate a communication strategy to support activation and calibration of BBMs and improve acceptability. ### Legal framework, SyRB, and calibration for residential real estate - ESRB and FSAP interaction: - ESRB recommended legally-binding LTV limit (ESRB/2021/10, Recommendation A) and DTI or DSTI once introduced (Recommendations C and D(2)); non-binding measures allowed if legally-binding not possible. - Authorities will “comply or explain” to the ESRB; ESRB to issue an assessment subsequently. - Sectoral Systemic Risk Buffer (SyRB / SSyRB): - SyRB is an EU-targeted capital tool; before 2022 Germany had not used SyRB. - CRD V and German Risk Reduction Act (2019) allow buffers on domestic sectoral exposures, including residential real estate. - SyRB advantages: can be targeted to banks/groups, applied quickly with no mandatory notification period, and BaFin has discretion in application. - Constraint: EU Commission authorization required where combination of SyRB with other buffers exceeds 5 percent threshold. - Germany applied a residential SSyRB; calibration used a mortgage market stress test with an SSyRB rate of 2 percent taking CCyB at 0.75 percent into account. - FSAP solvency stress tests: pick-up in loss rates on household lending portfolios would be small in the adverse scenario and likely within or very close to range the SSyRB was set. ### Fiscal interactions and other structural drivers - Macroprudential policies stabilize credit availability and reduce short-run downside price risks, but structural drivers (housing policy, supply constraints) matter over longer periods. - Transaction taxes vary across Länder and can be as high as 6.5 percent; past changes in transfer tax rates have large effects on housing transaction volumes. - Current property tax reform: - Reformed system of property taxation to apply starting in January 2025; properties revalued for the first time in decades; intended to be revenue neutral at the municipality level. - Taxes based on property appraisal value; infrequent appraisals can make rates lumpy and unpredictable, while regular updates could produce countercyclical effects. - FSC should monitor government housing policy closely and consider publicly flagging policies with adverse financial stability implications; this could be a use case for a formal warning. ### Corporate sector, commercial real estate (CRE), non-financial corporations (NFCs), and NBFIs - NFCs and banks’ corporate exposures: - German NFCs have reduced debt and reliance on bank lending over the past decade; equity to total asset ratios above 25 percent for both SMEs and large corporates at end-2020. - Bank debt made up a little under one third of SME debt and one seventh of larger firms’ debt. - Pandemic support and strong pre-pandemic balance sheets limited immediate banking-sector corporate losses. - Bundesbank monitoring uses AnaCredit, JANIS, Ustan, Bundesbank Online Panel Firms, and an In-house Credit Assessment System (ICAS). - Allocation risk and stress-test findings: - Allocation risk: loan portfolios tilting towards riskier borrowers; stress tests foresee modest increases of at most 0.07 percent in loan loss rates on banks’ NFC portfolios in an adverse scenario. - Distribution of losses could be concentrated in banks with relatively riskier borrower portfolios. - CRE exposures and dynamics: - CRE prices declined on average by 0.8 percent in 2021 (versus +6.4 percent in 2019). - As of 2021Q3, German banks held 28 percent of total €1.7 trillion in EU exposures to NFCs for real estate activities. - Exposures to construction and real estate activities constituted about 6 percent of assets, 19 percent of total loans to enterprises and households, or 17 percent of GDP. - Growth in lending to CRE sectors was 6.4 percent year-on-year in 2021Q3. - Non-performance rates for CRE loans remained low during the pandemic. - NBFIs, insurers, and funds: - Insurers (life business) have exposures to bonds amounting to 20 percent of total assets (Solvency II basis as of end-2020) and exposures to investment funds amounting to 30 percent of total assets. - Material interconnections exist between investment funds and savings banks/credit cooperatives, implying potential indirect effects on banks. - Development of macroprudential tools for NBFIs remains a work in progress. - Macroprudential toolkit limits for corporate risks: - Few targeted macroprudential tools exist to mitigate corporate sector risks; large exposure limits and CRR Art. 458 activation require complex thresholds and reciprocation is not assured. - SSyRB activation remains an option but targeting and systemic relevance constraints apply. ### Systemically-important institutions (SIIs), Institutional Protection Schemes (IPS), and related recommendations - SIIs and buffers: - Fourteen institutions designated as O-SIIs in Germany; O-SII buffer requirements ranged from 0.25 percent to 2 percent of RWAs at time of writing; BaFin modified buckets so buffer will range from 0 percent to 3 percent of RWAs. - Deutsche Bank is Germany’s only G-SII; placed in second-to-lowest subcategory implying G-SII buffer 1.5 percent of RWAs. - Institutional Protection Schemes (IPS): - Two large IPSs: Sparkassen-Finanzgruppe and the cooperative banking group (covers ~800 credit unions and DZ Bank group). - IPS mutual support reduces failure likelihood of individual members but correlated risks can make IPS systemically important; IPS treatment affects O-SII scoring and buffer calibration. - Recommendations on IPS: - BaFin could compute a ‘shadow’ O-SII score treating IPS members as consolidated groups and compare to current O-SII scores. - Consider stress-test style analysis of IPS resilience (as done in Austria) to inform future IPS framework work. ### Key policy recommendations (selected and timed) - Enhance legislated powers over borrower-based instruments and promptly introduce powers to set debt-to-income and debt service limits. - Timing: NT (Near Term: within 1 to 3 years) - Agency: BMF - Strengthen current guidance on standards expected for lending in residential real estate markets. - Timing: I (Immediate: within one year) - Agency: BaFin - FSC should initiate development of a comprehensive communication approach to support activation of borrower-based measures. - Timing: I - Agency: FSC - FSC macroprudential strategy should embed links between macroprudential risks and corresponding mitigation measures within its overall approach to setting policy. - Timing: MT (Medium Term: within 3 to 5 years) - Agency: FSC - FSC should undertake to publish post-meeting records. - Timing: NT - Agency: FSC - Additional recommended priorities: - Close remaining real estate data gaps promptly (data on stream in 2023 per FinStabDEV). - Develop macroprudential tools for NBFIs and monitor indirect linkages between investment funds, insurers, and banks. - Assess systemic importance and resilience of IPSs via shadow O-SII scoring and stress testing. - Continue to monitor allocation risk across banks’ NFC portfolios and consider targeted measures if concentration of higher-risk borrowers increases materially. *Source: EXECUTIVE SUMMARY and selected excerpts from the Germany FSAP chapter — IMF.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Key findings on framework and capacity - Germany’s macroprudential policy framework and toolkit are "well developed." - Institutional arrangements judged "mostly sound and operating well." - Capacity and expertise in risk monitoring are "good," supported by the central bank’s analytical power and data access and close coordination between macro- and microprudential arms of financial supervisory authorities. - Remaining principal outstanding task: add powers to set caps on debt-to-income and debt service-to-income ratios on residential real estate loans to existing powers over loan-to-value ratios and amortization rates. ### Recent policy actions and timing - Macroprudential action taken to counter rising cyclical vulnerabilities, with measures in January 2022 to raise buffers in response to risks around real estate and interest rates, and exuberance in some corporate funding markets. - The policy package preserved material bank capital and was "well timed and well coordinated." - The CCyB and a residential real estate-focused sectoral systemic risk buffer (SSyRB) were deployed; measures will apply in full starting February 2023. - Together, these measures preserved some €22bn worth of bank capital out of the approximately €30bn capital accumulated in buffers over the course of the pandemic. - Germany’s banking system reported an average Tier 1 ratio of 16.8 percent. - Between end-2019 and 2021-Q3, reciprocal reductions released capital worth 0.09 percent of RWAs. ### Vulnerabilities identified - Residential real estate: - A strengthened and broadened boom in German residential real estate prices in recent years; the pandemic did little to curb housing demand. - Evidence of over-valuations coupled with accelerating growth in mortgage lending. - Legislated borrower-based instruments (e.g., LTV limits and other borrower-based measures) exist but have not been activated to date. - Household leverage and low real interest rate environment remain conducive to leverage buildup by some households and to risk-taking in parts of the financial system. - Some tilting in the composition of bank exposures towards riskier corporate borrowers observed. - Low bank profitability, which would limit the ability to generate capital organically under macroeconomic stress. ### Data and analytical capacity - Progress welcomed towards closing data gaps. - Starting in mid-2023, comprehensive and consistent data on residential real estate lending standards collected by the Bundesbank will become available to support risk monitoring and tool calibration. - Work towards an integrated database of financial stability statistics (the “House of Microdata”) is ongoing and helping close analytical gaps. ### Policy recommendations (selected, from Table 1) - Enhance the legislated powers over yet-to-be activated borrower-based instruments to facilitate their effective use, and rapidly introduce powers to set debt-to-income and debt service limits. - Timing: NT (Near Term: within 1 to 3 years) - Agency: BMF - Strengthen current guidance on the standards expected for lending in residential real estate markets. - Timing: I (Immediate: within one year) - Agency: BaFin - The FSC should initiate the development of a comprehensive approach to communication in support of the activation of borrower-based measures. - Timing: I - Agency: FSC - The FSC macroprudential strategy should embed links between macroprudential risks and corresponding mitigation measures within its overall approach to setting policy. - Timing: MT (Medium Term: within 3 to 5 years) - Agency: FSC - The FSC should undertake to publish post-meeting records. - Timing: NT - Agency: FSC ### Specific policy guidance and interim measures - The FSAP recommends activating borrower-based macroprudential tools as precautionary measures to avoid unsustainable household leverage and to create market benchmarks for a level playing field. - Until technical and legal impediments to legally-binding borrower-based measures are resolved, the FSAP advocates strengthening BaFin guidance on lending standards, including: - Explicitly discouraging the practice of including transaction costs (fees, commissions, taxes) in loans. - The FSAP recommends the FSC develop and coordinate a communication strategy to support activation and calibration of borrower-based measures and to improve their acceptability. ### Institutional observations and recommendations - Four principal macroprudential players: Financial Stability Committee (FSC), Federal Ministry of Finance (BMF), Federal Financial Supervisory Authority (BaFin), and Deutsche Bundesbank. - The FSAP identified scope for improvements to the FSC’s macroprudential strategy and communications to: - Improve predictability of decision making. - Promote transparency and accountability (recommendation to publish regular post-meeting records). - Articulate links between macroprudential risks and corresponding mitigation measures in the next strategy review. ### Scope and limits of assessment - Coverage: institutional framework, macroprudential strategy and communications, broad-based vulnerabilities, residential and commercial real estate, non-financial corporations, and systemically important institutions. - Not covered in this report: monitoring of non-bank financial institutions and corresponding macroprudential tools (treated in FSB peer review); macroprudential risks for insurance companies (separate FSAP workstream); macroprudential dimensions of climate risk (not yet sufficiently developed for treatment here). - The assessment focuses on matters specific to Germany and omits a discussion of euro area-related policy. *Source: EXECUTIVE SUMMARY (Germany FSAP), IMF.* ### 16. The institutional arrangements that underpin macroprudential policy in Germany are ### 16. The institutional arrangements that underpin macroprudential policy in Germany are ### Institutional framework - The Financial Stability Committee (FSC) is the body assigned a macroprudential mandate in Germany, established by the 2012 Financial Stability Act (FinStabG) and came into operation in 2013. - The FSC is a collegiate, high-level body comprised of: - three voting members from the BMF; - three voting members from the Deutsche Bundesbank; - three voting members and one observer from the BaFin. - The FSC’s primary purpose is “to strengthen cooperation in the area of financial stability” through regular discussion and deciding on formal warnings and recommendations. - The FSC has no “secondary” objectives. - The Bundesbank is singled out by the FinStabG to undertake particular macroprudential functions and its views carry special status at the FSC. ### Legal mandates and assigned tasks - The Bundesbank’s responsibilities under FinStabG include four essential FSC functions: - (i) to furnish the Committee with analysis of the financial stability situation; - (ii) to prepare an annual report on the activities of the Committee; - (iii) to propose actions to be taken by the Committee (FinStabG, §1(1) point 3); - (iv) to assess implementation of measures taken by the Committee. - The BaFin is assigned macroprudential tasks in law, including: - to counteract financial sector developments that may impair the provision of financial services or lead to macroeconomic disruption (Banking Act (KWG), §4(2)); - to cooperate with the European Systemic Risk Board (FinDAG §4(2) point 1); - to act as a member of the FSC (FinStabG §2(3) point 3). ### Decision-making, voting, and roles within the FSC - The Bundesbank has a powerful position within the FSC despite being in a minority because: - the Bundesbank alone may propose draft resolutions for policy measures—recommendations and warnings—to be taken by the FSC; - Bundesbank representatives may exercise a veto on resolutions relating to warnings, recommendations, and their publication. - The BMF retains substantial influence because: - the State Secretary chairs the FSC; - the FSC secretariat is housed in the BMF. - The BaFin may act on macroprudential policy independently from the FSC in its role as the National Designated Authority. - Any Committee member may propose a topic be discussed (FinStabG, §2(2) point 1). - As a general rule, FSC resolutions may be adopted with the assent of a simple majority of voting members; however, the law states that the Chair should seek unanimity, if possible, when use of recommendations or warnings is at issue (FinStabG, §2(5)). ### Ability to act — powers, instruments, and constraints - Hard powers related to setting macroprudential tools rest with BaFin, the National Competent and Designated Authority (NCA/NDA) for tools specified by European legislation (CRD/CRR), including: - capital-related tools such as the countercyclical capital buffer (CCyB), the global/other systemically-important institutions (G/O-SII) buffer, risk weight and loss given default parameters (CRR Art. 124 and Art. 164 respectively); - liquidity-related tools such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR); - the ‘national flexibility measures’ allowing for stricter macroprudential limits (CRR Art. 458). - BaFin may activate macroprudential limits relating to lending for residential real estate that exist in German law (KWG, Amended June 6, 2017). - The Bundesbank advises on calibration of borrower-based measures under a statutory order (WoImmoDarIRV), meaning BaFin cannot set such instruments to a chosen level without the Bundesbank’s consent in effect. - The FSC has the power to make recommendations with a comply-or-explain mechanism: - FSC may address formal recommendations to public bodies in Germany, including the Federal Government and BaFin (FinStabG, §3). - Recipients must respond by acting to implement the recommendation or explaining why they do not act (comply-or-explain). - To date, the FSC has issued two public recommendations: - one to the Federal Government relating to borrower-based measures for real estate loans; - one to BaFin relating to the activation of the CCyB. - The FSC also has broad scope to communicate through statements, an annual report, and formal ‘warnings’ (soft powers). ### Coordination and operational arrangements - The FSC is principally a forum for senior-level discussion and decision making and promotes cooperation between domestic bodies involved in macroprudential policy. - A sub-structure of formal and informal cooperation supports collaborative monitoring and leverages expertise across the BMF, the Bundesbank, and the BaFin. - The FSC secretariat is housed in the BMF’s Financial Market Stability Division (VIIC1) and coordinates inputs from BaFin and the Bundesbank to the Committee’s quarterly meetings; it also facilitates coordination within the BMF for legal instruments when necessary. - The Bundesbank reorganized in the early 2010s, creating a directorate-general for financial stability (DG-FS) in 2012. - The Coordination Committee for Financial Stability (KAF), chaired by the head of DG-FS, prepares materials for FSC meetings; materials are approved by the Executive Board prior to FSC meetings. - The BaFin has fewer resources dedicated to macroprudential policy than the Bundesbank; within BaFin: - two divisions within the Directorate for International Policy, Financial Stability, and Regulation deal with domestic and international policy respectively; - the Strategic Risk Committee brings together micro- and macroprudential policy areas. - Both institutions have frameworks that integrate macroprudential perspectives into staff-level discussions and to decision-makers. ### Macroprudential communication and strategy - Communication is crucial across the macroprudential policy process to build acceptance, avoid circumvention, and reduce legal and reputational risks. - Soft powers complement binding actions: - The FSC may issue formal warnings (soft powers) distinct from recommendations; warnings usually imply no obligations. - The FSC has not used the warning power to date. - Central banks commonly produce financial stability reports (FSRs); the Bundesbank produces an annual FSR with extensive discussion of risks and policy options, but its communication is mostly targeted to a narrow technical audience. - The FSC’s strategy recognizes the role of ad hoc communications (press releases, post-meeting statements) and the FSC launched a website for dissemination. - Recent coordinated communication examples: - The December 2021 FSC statement provided the Committee’s risk assessment and set out a clear policy direction. - Statements in January 2022 were well coordinated with BaFin announcements concerning new policy measures, delivering a consistent message. - The FSC’s 2020 strategy emphasizes communications to build awareness of the body’s purpose and powers and to support action when systemic vulnerabilities are building. *Source: 16. The institutional arrangements that underpin macroprudential policy in Germany are — IMF PDF chapter.* ### 30. Strategy documents are an important element of overall macroprudential ### 30. Strategy documents are an important element of overall macroprudential ### Role and purpose of macroprudential strategy documents - Tasks: “elaborate the objectives of macroprudential policy, explain the decision-making process leading up to macroprudential action, and set out the expected transmission of macroprudential tools” (IMF, 2014a, §51). - Identified benefits: - Foster public awareness of macroprudential objectives and expected benefits from deploying macroprudential tools. - Counter inaction bias and improve accountability. - Guide expectations, particularly when policy is relaxed. - Adoption: Most EU countries and some non-EU countries (e.g., Georgia, New Zealand, United Kingdom) have put a macroprudential strategy in place. ### Financial Stability Committee (FSC) strategy, scope, and transparency - FSC strategy: - Developed and published; most recently updated in 2020. - Sets out: FSC’s overall objectives for macroprudential policy; the Committee’s approach to risk assessment; objectives for and approaches to communications; use of powers of recommendation and warning. - Focus is on tools at FSC disposal: chiefly power to recommend actions to other public bodies, and soft powers relating to warnings and other communications (reflecting Germany’s architecture with BaFin holding hard powers). - Transparency practices: - Many OECD jurisdictions publish records of macroprudential policy discussions, with variation in timing and level of detail (examples: Czech Republic, Belgium, Denmark, Finland, France, Ireland, Poland, United Kingdom). Minutes published in only one OECD instance (United States example cited for government-body practice). - FSC disclosures: - Published decision-making procedure in internal Rules of Procedure (ROP). - Publishes macroprudential policy decisions typically immediately following meetings. - When issuing a macroprudential recommendation, provides a detailed explanation of identified vulnerabilities, suitability compared to other actions, and likely benefits and costs. - Bundesbank and FSC publish certain financial stability indicators and data sets, including inputs to the CCyB guide. - Accountability: - FSC is formally accountable to the Bundestag via the FSC Annual Report. - Report covers April of the year preceding publication through the following March, released in June or July; prepared by the Bundesbank. - The report summarizes topics considered, risks and vulnerabilities, and Committee views; example: 2021 report indicated consideration of more flexible use of the CCyB and the possibility of a ‘positive neutral’ buffer level. - Accountability for BaFin actions is to the BMF. The Bundesbank largely stands outside political oversight. ### Overall assessment of the German macroprudential framework - General view: “well developed and mostly effective.” - Developments since last FSAP: refinements to FSC strategy, use of FSC recommendations, increased emphasis on communication. - Strengths: - Clear assignment of macroprudential tasks to FSC, Bundesbank, and BaFin. - Well-designed decision-making procedures. - Legal provisions support FSC comply-or-explain recommendations and BaFin’s ability to enact binding measures. - Increased openness and well-documented Committee decisions. - Limitations: - Information on the Committee’s ongoing activities becomes available only with a considerable delay and with relatively little flavor of the policy debate. - FSC’s power to issue warnings has limited use cases due to narrow set of potential addressees; warnings have yet to be used. - Macroprudential strategy has gaps: while CCyB and O-SII methodologies/guides are published, “much less information has been shared in respect of the other macroprudential tools.” ### Recommendations (high level and procedural) - Embed links between macroprudential risks and corresponding mitigation measures within the FSC macroprudential strategy: - Adopt an approach to the joint use of macroprudential instruments to guide recommendations, warnings, and other communications. - Operational policy guidance should emanate from the FSC (not carry the brand of a single member institution). - Strategy is periodically revised (most recently 2020); introduction of new tools might occasion an update. - Strike balance between providing market guidance and retaining flexibility to react to new circumstances. - Recommendation does not call for a quantitative buffer guide for every instrument. - Publish post-meeting records to provide more timely and relevant information and to promote transparency and predictability: - FSC annual report is useful but published with delay; timely disclosures soon after meetings would foster better understanding even when no action is taken. - Published records should respect confidentiality and sensitivity (comments need not be attributed; subjects of discussion can be withheld if sensitive). - Records could be based on meeting minutes (ROP §9) and reflect consensus views; providing a flavor of discussions could be beneficial. - Detailed or attributed meeting transcripts are another option but have debated costs and benefits. ### Systemic risks and macroprudential tools — key points - Countercyclical Capital Buffer (CCyB): - Principle: Germany follows “guided discretion” for the CCyB; a rules-based component is computed each quarter based on the deviation of the domestic credit-to-GDP ratio from its long-run trend (the ‘credit gap’). - Legal/interpretive context: - SolvV, §33 et seq. and KWG, §10(d) referenced for legal basis. - German buffer guide is a slight modification of the Basel formulation; credit aggregate used is more narrowly defined (loans to and debt securities of the private non-financial sector held by domestic banks and money market funds). - CRD IV, Art. 136, para. 3(c) permits BaFin to take into account other variables relevant for addressing cyclical systemic risk. - BaFin must consider formal recommendations of the FSC and the ESRB (example: Recommendation ESRB/2021/10). - Historical applications and discretion: - Of 15 jurisdictions activating CCyB between 2014 and 2021, the majority did so when the credit-to-GDP gap was negative; some activated when gap was deeply negative (examples: Bulgaria, Ireland). - Germany examples: - Increase to 0.25 percent announced in 2019 when the guide stood around 0 percent. - Buffer set at zero during the pandemic when the guide stood at 1 percent. - Increase to 0.75 percent announced in January, 2022 when the guide stood closer to 1.25 percent. - Discretion has been used but deviations from the rule-based component have been small. - Review of CCyB setting: - Authorities completed a review reportedly setting changes in two principal areas: - Delineation of general principles for buffer use (including speed of build-up and principles for release), aligning with FSC emphasis on preemptive action. - Streamlining indicators informing the discretionary component (previously around two dozen series, not all publicly available). - No changes to the rule-based component; authorities are newly using forecasts for the rules-based indicator. - Note: “The FSAP team has not seen the review. At the time of writing, the review has not been published or approved by the FSC.” - Minimum Leverage Ratio (LR): - Purpose: LR is a backstop to risk-weighted capital requirements to guard against errors in risk-weighting. - EU status: - A minimum LR requirement of 3 percent has applied to all banks since June, 2021. - Under CRD V, supervisors can top up the LR requirement where they see fit. - G-SIIs will have to hold an additional LR buffer amounting to 50 percent of their risk-weighted G-SII buffer rate as of January 2023 (introduction of the G-SII LR buffer was postponed as part of the CRR “quick fix” enacted in response to the pandemic). - Calculation: LR and LR buffer are calculated as the ratio of regulatory Tier 1 capital to the total exposure value of all assets and off-balance sheet items (CRR, Art. 429). *Source: Germany — INTERNATIONAL MONETARY FUND (FSAP excerpt).* ### 44. Leverage rules were amended to support the implementation of monetary policy. To ### Leverage rules were amended to support the implementation of monetary policy. ### Leverage rules, reserve expansion, and temporary LR relief - To provide monetary easing in response to the COVID-19 pandemic, the ECB implemented a program of asset purchases financed by central bank reserves. As a result, the balance of excess reserves in the euro area banking system rose by a factor of 2.4 between December 2019 and January 2022. - Reserves are liabilities of the central bank and carry zero risk weight; expanding unweighted bank balance sheets through reserve expansion makes the leverage ratio (LR) more binding than the risk-weighted capital ratio. - The CRR (Art. 429a) allows the competent authority (CA) to permit the exclusion of a portion of a bank’s exposures to central banks from the LR requirement so long as “exceptional macroeconomic circumstances” prevail. - The CRR “quick fix” brought forward this discretionary relief measure, originally scheduled to become applicable with CRR II (i.e., from June 2021). The quick fix made the measure available earlier (until the end of June 2021). Subsequently, the relief measure was based on CRR II. - The ECB allowed institutions under its direct supervision to use the temporary relief; BaFin adopted the same provisions for Less Significant Institutions (LSIs) in Germany. - These temporary relief measures were finally removed as of April, 2022. ### Assessment on broad-based vulnerabilities and macroprudential policy stance - Authorities have undertaken a “lessons learnt” process and concluded the CCyB framework required modifications to avoid activation “too little, too late.” The FSAP shares that assessment. - The package of measures enacted in January 2022 offers encouragement; the FSAP welcomes a more nimble approach to activating the CCyB. - External observers perceived the authorities’ approach as cautious; many viewed past actions as slow and were surprised when the buffer was raised by 0.75 percent in January, 2022. - Industry participants note that banks did not actually use buffers in the past policy cycle and tend not to support raising the CCyB to counter vulnerability accumulation in an up-turn. - Recommendations and considerations: - Continue to use the flexibility afforded by the discretionary component of the CCyB framework. - Use flexibility to ensure the CCyB is set at a level from which it could be materially reduced if needed. - Consider adopting a “positive neutral” CCyB (as used in the Czech Republic, Lithuania, and the United Kingdom) so the buffer is non-zero in a normal risk environment and creates space to act in case of shocks—assuming other buffer requirements are not reduced. - Decisions on a “positive neutral” buffer in Germany should consider future amendments to the CRR addressing buffer “releasability” and buffer “useability.” - Maintain good information flow between the FSC and authorities overseeing MREL (the SRB for large banks, and BaFin otherwise) on headroom, actual and potential breaches, and potential restrictions on distributions (M-MDA). ### Concerns about buffer useability and overlapping capital claims - The effectiveness of CCyB release to support credit supply in stress depends on banks being willing and able to use released space. - In Germany, evidence on buffer release effectiveness is limited because the CCyB had not been fully phased in at the time of its release and had been set at a comparatively low level. - A key challenge is overlapping regulatory uses of capital, notably to fulfil the LR requirement and, in Europe, the minimum requirement for own funds and eligible liabilities (MREL). The CCyB may not be the binding constraint among multiple constraints in stress situations. - The CRR “quick fix” to the LR requirement recognized this interaction. - The European legislative review will inform future debate on releasability and useability. It is important to maintain information exchange between macroprudential and resolution authorities on banks’ headroom and constraints. ### Household sector vulnerabilities — Residential real estate (RRE) - Price dynamics and drivers: - RRE prices rose by more than 90 percent in nominal terms (and 60 percent in real terms) between 2010 and 2021. - Nationwide, RRE prices grew by 10.3 percent in 2021 (versus 6.5 percent in 2019). - In the largest seven cities, RRE prices grew by 8.2 percent in 2021 (versus 4.2 percent in 2019). - Fundamental forces: supply shortages (construction labor shortages, capacity constraints, limited land availability in larger cities, shortages of construction materials) and strong demand (immigration, urbanization, household savings directed into real estate). - Homeownership and housing costs: - Germany has the second lowest homeownership rate in the OECD (only Switzerland higher rentership rate). - Housing cost overburden in German cities and rural areas was 16 percent in 2019 (share of population living in a household where total housing costs represent more than 40 percent disposable income). - For Germany overall, around 26 percent of household disposable income was dedicated to housing costs in 2019, above the EU average of 20 percent. - Indicators of possible overvaluation: - At end-2021, overall price-to-rent and price-to-income ratios showed deviations from long-run averages of 37 and 21 percent, respectively. - City-level price-to-rent deviations from the long-run (2000-20) average ranged between 15 and 45 percent in the largest 7 cities. - Bundesbank estimates suggest overvaluation of between 20 and 35 percent for Germany overall, and in the range of 15 to 40 percent in the cities at end-2021. - FSAP team estimates are broadly comparable to the Bundesbank’s estimates. - Data limitations: - No single data source for RRE prices; Destatis inputs are incomplete and delayed, supplemented by private sources (vdpResearch, bulwiengesa AG) with differing methodologies and coverage. - Regional estimates (and for 127 cities) are available at annual frequency; no municipality-level data. - For regional indices, Destatis relies on transaction data from committees of surveyors, but about 45 percent of the data for the most recent period cannot be used for index calculation due to missing price-determining attributes required for quality adjustment. This limits reliability, increases susceptibility to revisions, and reduces analytical usefulness, particularly for rural areas. ### Banks’ exposures to real estate and lending growth - Banks hold the largest share of exposures to real estate in Germany: - Bank loans for house purchase constituted about 45 percent of GDP as of 2021Q4. - Outstanding loans by banks for house purchase totaled over €1.6 trillion, equivalent to 53 percent of total loans to domestic enterprises and households. - Of the €1.6 trillion, 28 percent were granted to corporates, and 72 percent to households and non-profits. - Housing loan growth reached 7.3 percent year-on-year in August 2021—the highest growth in about 2 decades—and lending has been accelerating for most of the last decade. ### Lending standards, observed trends, and data gaps - Mixed evidence on lending standards due to inconsistent statistics and differing data sources: - Bundesbank and BaFin and ECB surveys (2019) covering the whole German banking system found average LTV ratios increased from 82 percent in 2016 to 84 percent in 2018. - Interhyp and vdpResearch indicated similar trends. - ECB credit underwriting data collection in 2019 (covering German Significant Institutions, SIs, about one third of the German RRE market) found new lending with LTV above 80 percent and LTI above 5 times had grown by 2 and 7 percentage points, respectively, between 2016 and 2018. - Interhyp data show the average LTV rose by 4 percentage points between 2016 and 2019, peaking at a little over 82 percent, but fell back in 2020-21. - Concerns about high-LTV lending: - Some sources indicate a notable proportion of new mortgage loans granted at LTVs in excess of 100 percent. Sources disagree on the extent and recent trends. - Possible reasons for LTVs above 100 percent include inclusion of property transaction taxes and fees in loan amounts or additional loans for repairs tagged onto the loan. - Definitions of “loan” and “value” differ across lenders (market value versus “sustainable” value or Beleihungswert). In rising-price environments, average discounts in assessed collateral values may be of the order of 10 percent. - Actions to close data gaps: - In 2015, the FSC recommended a legal foundation for collecting data for macroprudential risk assessment in RRE and CRE. - The ESRB recommended collecting a prescribed set of standard indicators and breakdowns for RRE. - To meet recommendations, the BMF issued the Financial Stability Data Collection Ordinance (FinStabDEV) in February 2021 authorizing the Bundesbank to request data from commercial lenders on terms of loans granted to natural persons to build or purchase residential real estate in Germany. - Based on FinStabDEV, the Bundesbank issued a general administrative act in September 2021 ordering reporting entities to participate in the data collection. - The regular data collection will deliver semi-aggregated institution-level information on lending standards using pre-defined distribution buckets to aid risk assessment and macroprudential calibration, and to assess lender compliance with BBMs and individual exemption clauses (via annual auditors). - Authorities expect the first usable information, for 2023Q1, to be available in the latter part of 2023Q2. ### Borrower-based macroprudential measures (BBMs) - Role and types: - BBMs strengthen household balance sheets and can interrupt feedback loops between credit and house prices. - Examples include limits on loan-to-value (LTV) ratios, debt service-to-income (DSTI) ratios, debt-to-income (DTI) ratios, amortization requirements, and maturity limits (for interest-only loans). - International practice and EU context: - BBMs have been adopted in a number of OECD jurisdictions including Israel, New Zealand, and the United Kingdom; the Republic of Korea has two decades of experience. - Implementation varies materially across jurisdictions reflecting differences in housing markets and housing finance systems. - In the EU, BBMs are not (yet) part of the standard macroprudential toolkit, though they have been implemented as national measures in several EU countries (Austria, Czech Republic, Estonia, France, Ireland, Malta, Romania). *Source: Excerpt from IMF FSAP chapter on Germany.* ### 57. Germany has introduced the legal basis for a small set of borrower-based measures, ### 1deuea2022005 - 57. Germany has introduced the legal basis for a small set of borrower-based measures, ### Borrower-based measures and legal framework - Legislator amended the KWG and related acts to permit caps on LTV ratios and to set repayment requirements (Federal Law Gazette, 2017). - The cap on the LTV ratio applies to the sum of all debt relating to a residential property financing transaction (Deutsche Bundesbank, 2017, p. 54). - A statutory order (WolmmoDarIRV) was issued in February, 2021, defining legal meanings of terms such as “loan” and “value”, and processes for activation and review of the tools. - Legislators chose not to implement the FSC’s 2015 recommendation on DSTI and DTI ratios (‘income-based’ instruments) in 2017; the present federal government has committed to introduce these tools and the process is underway. - Until income-based tools are introduced, the only readily-available and legally-binding measure remains the LTV cap. - The authorities signaled they may use an LTV cap in the event of a slippage in lending standards (FSC, 2021). - An internal assessment of lending standards is part of the quarterly risk assessment conducted prior to meetings of the FSC. ### Data constraints and implications for activation of BBMs - Extant data gaps on real estate lending standards will take time to close; this blunts the authorities’ appetite for activating an LTV cap. - Reasons data gaps impede activation: - Improvements (declines) in average LTV ratios seen since 2019 are viewed as a contra-indicator by responsible authorities. - Activation requires ancillary variables to be set, including the “free quota” or “speed limit”, and various thresholds (KWG, §48(u), para. 3); insufficiently granular data risks mis-calibration and reputational consequences. - Absence of a standardized definition of LTV applied consistently across credit institutions makes practical effects difficult to judge. - German institutions use two definitions of LTV ratios: loan-to-market value and loan-to-collateral value, with some 10-15 percent difference between the ratios with these definitions. - Authorities await more comprehensive data from the new data collection starting in 2023 to make better-informed decisions; at the start of the obligatory data collection in 2023, lenders have been requested to report data for former years on a best-effort basis (non-obligatory). ### ESRB recommendation and FSAP interaction - The ESRB recommended application of a legally-binding limit to the LTV ratio (ESRB/2021/10, Recommendation A), and to either the DTI or DSTI ratio following their introduction (Recommendations C and D(2)). - The recommendation allows non-binding measures if a ‘hard’ legally-binding limit is not possible. - The timescale for responding to ESRB recommendations stretches beyond the likely date for FinStabDEV data availability. - The authorities will “comply or explain” to the ESRB; the ESRB will issue an assessment subsequently. - The FSAP’s recommendations (Part III.E) complement those of the ESRB; certain short-term actions are recommended and legal constraints are addressed directly. ### Sectoral Systemic Risk Buffer (SyRB) - The SyRB is a flexible and targeted capital tool unique to the EU regulatory framework; before 2022 Germany had not used the SyRB. - Changes introduced in CRD V and transposed to German law in the Risk Reduction Act (2019) allow buffers to apply to domestic sectoral exposures, households and firms, and in particular on residential and commercial real estate if not already covered by other buffers. - Advantages of SyRB: - Can be targeted to particular banks and groups of banks, avoiding some costs associated with the CCyB. - Can be applied quickly with no mandatory notification period as with the CCyB. - BaFin has considerable discretion in applying the buffer. - Constraint: need to seek authorization from the EU Commission where the combination of SyRB buffer level with other buffers exceeds a 5 percent threshold. - The Solvency Regulation (SolvV) does not anticipate in detail how the buffer is to be set. - Germany has applied a sectoral buffer to mortgages secured by residential real estate, set on the broadest category under EBA guidelines—mortgages secured by residential real estate located in Germany—because differentiation by risk profile is challenging given data gaps. ### SyRB calibration and stress testing - SyRB calibration used a mortgage market stress test following a published methodology (Barasinska, Haenle, Koban, & Schmidt, 2019). - Taking into account the CCyB set at 0.75 percent, the authorities deemed a SSyRB buffer rate of 2 percent to be sufficient. - FSAP solvency stress tests report that the pick-up in loss rates on banks’ household lending portfolios (mainly mortgage loans) would be small in the adverse scenario, and likely within or very close to the range at which the SSyRB has been set. ### Other real estate-related policy measures and fiscal interactions - Macroprudential policies have limits in containing residential real estate market risks; they stabilize credit availability and may reduce downside price risks in the short run, but structural and institutional drivers (including housing policy) matter over longer periods. - Fiscal measures affect housing market stability and can reduce systemic risk; property (or land) taxation affects equilibrium property values via user cost. - Germany has not used fiscal measures as a macroprudential tool. - Transaction taxes vary across Länder and can be as high as 6.5 percent. - Past changes in transfer tax rates have large effects on housing transaction volumes in Germany. - Decentralized setting of transaction taxes and effects on state revenue make temporary changes to transaction taxes hard to envisage as countercyclical tools. - Current property tax reform: - A reformed system of property taxation will apply in Germany starting in January 2025. - Properties are being revalued for tax purposes for the first time in decades; the reform is intended to be revenue neutral at the level of individual municipalities. - Effects on aggregate prices and on regional prices are likely to be limited. - Taxes will be based on a property appraisal value; infrequent appraisals can make effective tax rates lumpy and unpredictable over time; regular updates could produce countercyclical effects. ### Assessment on Residential Real Estate (RRE) - Delaying action poses clear risks; legislative processes to implement borrower-based tools and close data gaps have proceeded exceptionally slowly. - The Fund advocated preemptive activation to damp housing market risks in 2018 (IMF, 2018c, §41). - Developments since 2018: - Over-valuations became broad-based. - Real estate loan growth accelerated from 4 percent in 2016-17 to 7 percent in 2021. - New data indicated the share of mortgages carrying an LTV ratio above 100 percent had increased. - Early activation of the LTV cap (if feasible) could have mitigated some risks. - Measures to curb pockets of vulnerable households are needed because: - German household indebtedness is low compared to OECD peers, but lower home ownership rates must be considered. - Relatively long fixation periods on new mortgages mitigate immediate impact of rising interest rates, but as rates rise some exiting mortgagors will face rising interest burdens as fixation periods roll off. - Demand from new borrowers and investors is likely to be crimped with knock-on effects to the housing market. - Households that own property hold more wealth than non-owners, but mortgagors with substantial illiquid housing wealth and limited liquid reserves react more procyclically to income changes. - Given price and lending trends and some evidence on high LTV and LTI lending, there is a higher-than-usual likelihood some households are stretching balance sheets; higher rates may result in upward pressure on DSTI ratios for new loans. - Recommendation: place limits on lending practices that allow risks to build on household balance sheets sooner rather than later. - The Financial Stability Committee should monitor government housing policy closely and consider publicly flagging policies with adverse financial stability implications; this could be a use case for a formal warning. ### Corporate sector and commercial real estate vulnerabilities (non-financial corporations) - German non-financial corporations have reduced debt and reliance on bank lending in the past decade, trends particularly marked in the SME sector. - At the end of 2020, equity to total asset ratios stood above 25 percent for both SMEs and large corporates. - Bank debt made up a little under one third of SME debt, and just a seventh of the debt of larger firms. - The pandemic led to revenue contractions in sectors such as air transport, amusement and recreation, and hotels and restaurants, but corporate balance sheets entering the pandemic were strong and federal pandemic support prevented a sharp rise in losses on banks’ loans to corporates. - Easy financial conditions allowed NFCs to bolster cash positions and lengthen debt maturity on favorable terms; available data indicate corporate sector balance sheets remained strong through 2020. - The Russia-Ukraine war may have implications for some German corporates, but at the time of writing little information was available. *International Monetary Fund — Germany FSAP chapter content (excerpts).* ### 71. The Bundesbank undertakes extensive risk monitoring for non-financial corporations. ### 1deuea2022005 - 71. The Bundesbank undertakes extensive risk monitoring for non-financial corporations. ### Bundesbank risk monitoring of non-financial corporations - Staff involvement: banking supervision, economics, and financial stability units collaborate. - Data sources used: - Bundesbank Online Panel Firms — provides extensive qualitative insights into firms’ expectations, funding conditions, impact of public health measures, and state of customer demand. - AnaCredit (ECB credit register) — provides timely quantitative insights into banks’ exposures to NFCs, including sectoral distribution of loans; monthly data reliably available from September 2019 onwards. - JANIS and Ustan panels used for SME financials (financials for SMEs available only once a year, with a lag); JANIS panel covers NFC financial statements from 1997 and Ustan from 1987. - Examples and outputs: - Bundesbank estimates based on AnaCredit data suggest that less than 5 percent of bank loans were to sectors most impacted by the pandemic. - Bundesbank produces forecasts for corporate insolvencies; these forecasts were influential at the onset of the pandemic. - The Bundesbank runs an In-house Credit Assessment System (ICAS) providing independent credit ratings for around 26,000 NFCs a year for collateral in monetary policy operations; ICAS is also useful for macroprudential policy. - Overall: oversight of the NFC sector is described as strong with considerable resources devoted to monitoring. ### Allocation risk in bank NFC portfolios - Definition and measurement: - Allocation risk arises from composition of banks’ NFC loan portfolios when portfolios tilt towards borrowers that are riskier than average. - For this work, ‘risk’ measured by factors including the debt overhang ratio, the interest coverage ratio, and the cash ratio. - Stress-testing results and implications: - FSAP solvency stress tests foresee modest increases of at most 0.07 percent in loan loss rates on banks’ NFC portfolios in an adverse scenario. - Losses of this order would be easily absorbed by existing capital buffers. - Bundesbank analysis suggests distribution of losses across banks is likely to be affected by allocation risk; firms that start out relatively riskier show much greater sensitivity to stressors such as a sharp rise in interest rates. - Drivers: - Trend toward greater allocation risk may reflect stronger firms paying down bank debt and tapping capital markets, leaving banks with a tail of ‘high agency cost’ borrowers. - Notable exception: default probabilities reported by IRB banks appear to buck the trend (possible underestimation of risk or additional expert information). ### Commercial Real Estate (CRE) dynamics and exposures - Price dynamics: - CRE prices declined on average by 0.8 percent in 2021 (versus an increase of 6.4 percent in 2019). - Office prices: after declining in 2021H1, average office prices grew by 0.2 percent in 2021 (versus 9.6 percent in 2019). - Retail (largely non-food) property prices fell by -3.1 percent in 2021, continuing a trend since late 2018; non-food retail affected by e-commerce acceleration during the pandemic. - Bank exposures and shares: - As of 2021Q3, German banks held 28 percent of the total €1.7 trillion in EU exposures to NFCs for real estate activities, leading France (24 percent) and Sweden (10 percent). - German banks held about 12 percent of total EU lending to NFCs for construction, fourth after France (23 percent), Italy (18 percent), and Spain (16 percent). - Among German IRB banks (2021Q3), 33 and 2.6 percent respectively of the total NFC loans were granted for real estate activities and construction. - Aggregate importance: - Exposures to sectors including construction, housing corporations, and other real estate activities constituted about 6 percent of assets, 19 percent of total loans to enterprises and households, or 17 percent of GDP. - Growth in lending to CRE sectors: 6.4 percent year-on-year in 2021Q3 (slowed from an 8 percent peak at end-2018). - As of end-2020, more than half of total CRE loans were granted for office buildings, followed by commercial buildings (about a third), and industrial buildings. - Non-performance rates for CRE loans have so far remained low despite the pandemic. - Data limitations and improvements: - Authorities previously relied on private data (vdpResearch) for CRE sub-sector exposures; those data are released with a lag and infrequently. - Banking supervision at BaFin monitors institutions with largest exposures. - Rollout of AnaCredit expected to provide more granular information on banks’ exposures to CRE sub-markets. ### Assessment on Non-financial Corporates (NFCs) - Direct banking sector risk: - Direct risks from the NFC sector appear manageable for banks; FSAP solvency stress test results and Bundesbank analysis indicate the banking system could absorb direct losses from corporate exposures even in severe stress. - Market funding and valuation concerns: - Bulk of funding for German NFCs is via capital markets. - High yield and leveraged loan issuance is low for Germany relative to the rest of the euro area, but there are signs of overvaluation compared to long-run averages. - Some high yield issuers placed bonds at negative rates in 2021. - Responsiveness of NFC bonds to shifts in government yield curve, and implications for market liquidity and fund behavior, require further attention given exposures of investment funds, insurers, and other NBFIs to corporate bonds. - Macroprudential toolkit limitations: - Few targeted macroprudential tools exist to mitigate corporate sector risks. - Large exposure limits (e.g., French measure of 2019) are unlikely relevant for Germany. - Activation of current provisions (e.g., CRR Art. 458) requires demonstration of complex requirements and reciprocation is not assured. - Borrower-based tools are not readily designed given diversity of financing arrangements, regulatory perimeter issues, and lack of prior experience. - SSyRB activation remains an option but requires balancing targeting against systemic relevance; may be difficult to meet except possibly for some CRE categories. - NBFI exposures: - Insurers, especially in life business, have exposures to bonds amounting to 20 percent of total assets (on a Solvency II basis as of end 2020) and face material risks from downgrades that affect own funds and capital requirements. - Insurers have exposures to investment funds amounting to 30 percent of total assets. - FSAP did not address risks within investment funds from exposures to German NFC capital market instruments. - Material interconnections exist between investment funds and savings banks/credit cooperatives, implying potential for indirect effects on banks. - Development of macroprudential tools for NBFIs remains a work in progress. ### Systemically-important institutions and Institutional Protection Schemes (IPS) - SIIs and buffers: - EU legislation (CRD Art. 131) provides tools: G-SII buffer (global systemic importance, BCBS framework) and O-SII buffer (other systemically relevant institutions, EBA guidelines). - As of 2022, fourteen institutions were designated as O-SIIs in Germany; all designated institutions are banks. - O-SII buffer requirements in Germany range from 0.25 percent to 2 percent of RWAs (at time of writing); BaFin modified buckets and thresholds so the buffer will range from 0 percent to 3 percent of RWAs. - Germany’s only G-SII is Deutsche Bank; BaFin placed Deutsche Bank in the second-to-lowest subcategory, making the required buffer 1.5 percent of RWAs. - Recent banking package removed previous 2 percent cap on the O-SII buffer rate and eliminated overlaps with SyRB. - Institutional Protection Schemes (IPS): - IPS definition (CRR, Art. 113(7)): contractual or statutory liability arrangement protecting members’ liquidity and solvency to avoid bankruptcy. - Two large German IPSs: - Sparkassen-Finanzgruppe (saving bank group) — includes local savings banks, Landesbanken, regional building societies, insurance companies, and other financial service providers. - Cooperative banking group — covers a little under 800 independent credit unions and the DZ Bank group. - Implications: - IPS mutual support reduces likelihood of individual failures but correlated risks across members mean IPS as a whole can be systemically important (akin to a bank as large as combination of all IPS members). - IPS membership brings regulatory advantages and economic benefits for smaller institutions (e.g., capital access), and shared central functions. - Treatment of IPSs affects O-SII scoring and buffer calibration; consolidated scoring of IPS members could materially change size/economic importance measures for central institutions (e.g., hypothetical DZ Bank consolidation example). - Recommendation on IPS assessment: - Work needed to better judge systemic importance of IPSs. - BaFin could consider computing a ‘shadow’ O-SII score treating IPS members as a consolidated group and compare to current O-SII scores. - Consider stress-test style analysis of IPS resilience (as done in Austria) to inform future IPS framework work. ### Overall assessment and key policy recommendations - Data and monitoring capacity: - Germany’s capacity for systemic risk monitoring is good; important data gaps should be closed by end 2023. - Increasing availability of large datasets (AnaCredit, EMIR, SFT) and the Bundesbank’s ‘House of Microdata’ platform will help close analytical capacity gaps. - Implementation of some past recommendations has been slow: recommendations to close real estate data gaps date from 2015, legislation from 2017, statutory instrument (FinStabDEV) issued in 2021, with data to be on stream in 2023. - Macroprudential toolkit: - The toolkit continues to develop; with additional borrower-based measures introduced, Germany’s toolkit will compare favorably with peers. - Authorities have used the CCyB and the SSyRB (reformed to be more easily activated); European banking package added LR, LRB for G-SIIs, and Basel liquidity requirements (LCR and NSFR). - Germany has created an LTV limit and a maturity or amortization limit for residential real estate borrowers; two additional instruments (DTI and DSTI limits) are set to be introduced by the present government and should be completed as soon as practical. - Specific recommendations highlighted: - Close remaining real estate data gaps promptly (data on stream in 2023 per FinStabDEV). - Develop further macroprudential tools for NBFIs and monitor indirect linkages between investment funds, insurers, and banking institutions. - Assess systemic importance and resilience of IPSs via shadow O-SII scoring and stress testing to inform regulatory and resolution frameworks. - Continue to monitor allocation risk across banks’ NFC portfolios and consider targeted measures if concentration of higher-risk borrowers increases materially. *Source: IMF Financial Sector Assessment Program — Germany (excerpts).* ### 86. Legislated powers over as-yet unused borrower-based instruments in the Banking Act ### 86. Legislated powers over as-yet unused borrower-based instruments in the Banking Act ### Enhancing legal powers and activation criteria - Recommendation: Enhance legislated powers in the Banking Act (Kreditwesengesetz) and related laws by: - (i) providing that such instruments can be activated prior to a material deterioration in lending standards, - (ii) limiting the scale of exemptions from their scope, and - (iii) ensuring that any specific provisions are proportionate to the law's macroprudential objective. - Authorities should ensure that the effectiveness of additional borrower-based macroprudential tools is similarly secured as they are introduced. - Rationale for preemptive limits: - Preemptive imposition of borrower-based limits helps to avoid build-ups of unsustainable leverage amongst households, and to short-circuit procyclical feedbacks between credit and asset prices, thereby acting to complement bank capital-based measures. - Binding limits create benchmarks that help to foster a level playing field amongst industry participants and help prevent a potential race to the bottom on standards. - Early action is vital for ‘flow’ measures (LTV limits, envisioned DTI and DSTI tools) which affect new lending business only. - Activation guidance and challenges: - Legally-binding borrower-based limits should be activated as soon as practical, unless a material change of direction in real estate and credit markets is observed, in line with past Fund and ESRB guidance. - While current conditions warrant precautionary measures, use of borrower-based measures as a structural tool may also be desirable. - Activation appears difficult even where envisioned limits are high and less likely to have immediate market impact. - Even as data becomes available in mid-2023, evidence of significant changes in standards sufficient to identify a threat to financial stability may take time to emerge and may remain a hurdle to activation. - Data and analytical priorities: - Micro data from the PHF (Private Haushalte und ihre Finanzen, part of the Eurosystem Household Finance and Consumption Survey) can assess granular impact of a BBM prior to activation, but is available only in widely-spaced waves. - Allocate resources to develop analytical methods for simulating the effect of borrower-based measures; this should remain a priority. - Compliance note: - The FSAP takes note of compliance criteria in ESRB/2021/10 stating that the German legal framework should ensure that authorities “are able to activate all legally-binding borrower-based measures in an effective and preemptive way and are provided with the necessary flexibility in order to design those measures based on the vulnerabilities identified” (Annex, Recommendation C, para. 1(a)). ### Strengthening guidance on lending standards in residential real estate - Assessment: Current guidance on standards expected for lending in residential real estate markets should be strengthened because it lacks specificity and few effective means exist to review lending practices. - Specific concerns and guidance: - Discourage practices that materially reduce borrowers’ own funds, such as lending to pay transaction taxes and other costs; such lending lowers effective down-payments at a time when consistent data on loan-to-value ratios remain unavailable and rapidly-rising prices are likely to stretch borrower balance sheets. - Provide less ambiguous guidance to help lenders better understand macroprudential objectives, including that macroprudential concerns relate not only to credit risk (which remains low) but also to borrower resilience—e.g., high-LTV or high DSTI loans may be secure from the bank’s perspective but still risk procyclicality. - The specific guidance recommended does not require knowledge of LTV ratios, which is advantageous, but its effect on lender behavior is unpredictable and not guaranteed to increase own-funds requirements on borrowers. - Guidance would be more effective if used in combination with an LTV limit. ### Developing a communication strategy for borrower-based measures - Recommendation: The FSC should develop a comprehensive communication approach to support activation of borrower-based measures to: - Identify all relevant stakeholders, - Broaden understanding of benefits and costs of macroprudential measures, - Promote acceptability of measures. - Communication design considerations: - Many stakeholders in the real estate ecosystem must be reached (investors, homeowner associations, brokers, builders, lenders, individuals); banks are the primary lenders in Germany and some regional savings banks have close associations with politicians. - Activation is relatively complex: beyond headline calibrations, a speed limit and ancillary thresholds must be determined, which may have differential impacts on households. - Germany has experience with LTV-type limits enacted in the Pfandbrief sector, but BaFin’s actual macroprudential tools differ in important respects from existing limits (e.g., the LTV cap takes into account overall RRE debt financing, a more encompassing approach used by the authorities than by lenders in risk management), requiring additional communication steps. - The FSC’s coordinating capacity across institutions is a strength and it should take the lead on communication. ### Pertinent factual indicators and recent policy actions (selected) - Data and market dynamics: - House prices increased by over 90 percent in nominal and over 60 percent in real terms between 2010-21. - RRE price growth reached 10.7 percent (5 percent) year-on-year in 2021Q4 in nominal (real) terms. - Domestic banks’ loans for house purchase constituted about 45.4 percent of GDP at end-2021. - Pandemic-era prudential actions (Table 1 highlights): - The CCyB rate was reduced to 0 percent as of April 1, 2020, cancelling an increase to 0.25 percent that would have come into force on July 1, 2020. - The Federal Financial Supervisory Authority issued a statement in February, 2021, that there were no plans to raise CCyB rate before the end of 2021. - Capital Conservation Buffer: Issued enhanced communication regarding operating temporarily below the level of capital defined by the CCB to banks under the supervision of the Federal Financial Supervisory Authority. - Forward-Looking Provisioning: Issued advice to make use of the transitional arrangements for institutions that prepare their accounts in accordance with IFRS 9. - Dividend Restrictions: Recommended that banks under the supervision of the Federal Financial Supervisory Authority refrain from making dividend distributions and performing share buy-backs aimed at remunerating shareholders from March 30 through October 1. Distributions permitted on a case-by-case basis thereafter. - Liquidity: Banks were encouraged to use liquidity buffers (temporarily operate below the LCR of 100 percent), if necessary. - Cross-country and comparative indicators (from Table 4 memo): - 5-year growth in household credit (%) shown as: 21 20 25 22 29 32 9 12 42 37 14 16 20. _International Monetary Fund — Selected excerpts from the Germany FSAP chapter on borrower-based macroprudential instruments and residential real estate lending standards_ --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022005.pdf_