The rise in prices on the residential property market worries the Bundesbank and the financial supervisory authority Bafin. You want to prevent excessive lending.
(Photo: dpa)
Frankfurt For home buyers, the acquisition of a property could become more expensive and more difficult in the foreseeable future: the German Financial Stability Council, the representatives of the Federal Ministry of Finance, the Bundesbank and the financial supervisory authority Bafin, the price surge on the German residential property market is scary. That is why he wants to oblige the banks to reserve more equity for residential property loans in the future.
This is likely to have consequences for credit terms: the more capital banks have to set aside for their lending business, the higher their interest rates have to be for customers so that the institutes can still earn money on the loan.
Specifically, the Financial Stability Board wants to activate the so-called countercyclical capital buffer for banks. This means that banks have to set aside additional capital for their business in addition to the normal requirements. For their activities as a whole, the institutes should reserve an additional 0.75 percent for their risk-weighted assets.
In the case of residential property loans, another two percentage points should be added. Overall, there is an extra buffer of 2.75 percent for private construction financing.
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The Financial Stability Board is reacting to overvaluations on the residential property market. According to Bundesbank board member Claudia Buch, the current price level is ten to 30 percent above the values that can be justified by fundamental data.
The portfolio of residential real estate loans has now grown to more than 1.6 trillion euros. “This underlines the absolutely elementary importance of the residential property market for financial stability,” emphasized Bafin boss Mark Branson. That is why it was decided to use a targeted instrument for the residential real estate sector in addition to the countercyclical capital buffer for all loans.
In addition, he announced that Bafin intends to closely monitor banks’ lending standards. The standards are still appropriate, but there are indications that this is gradually changing. This could lead to risks, especially in real estate markets where real estate is becoming less and less affordable.
In talks with banks and other institutions that grant mortgage loans, Bafin will ensure that they are not “lax” and that their lending standards are softened. “It’s not in the best interests of the lender or the customer,” said Branson.
Bafin wants to monitor lending practice
A “conservative assessment and lending practice” is extremely important to the supervisory authority. Should the Bafin discover signs that the standards continue to erode, the Bafin would also consider binding requirements. The authority could then, for example, introduce upper limits that cap the loan amount in relation to the property value.
Financial stability does not react to acute problems with its package of measures: Thanks to the state support measures, the corona pandemic has so far only had a very limited impact on the financial markets, said Bafin boss Branson.
“Lending is expanding, and prices and credit volumes are rising particularly quickly in the case of residential property.” It is therefore time to make the financial system more resilient by building up additional capital buffers.
The Bundesbank sees it similarly. Although the financial system did well in the pandemic, this is also due to the extensive government aid for the economy. “The resilience of the banks has not really been tested,” said the Bundesbank board member responsible for financial stability, Buch.
More: Bundesbank Vice President Claudia Buch: “We are seeing increasing vulnerabilities in the financial system”