Bundesbank and BaFin Publish Regulatory Updates for Banks
The Federal Financial Supervisory Authority of Germany (BaFin) published “loss rates” for exposures secured by domestic residential real estate and commercial real estate for 2020 in accordance with the Capital Requirements Regulation (CRR). BaFin notes that the compliance determination made for 2020 for risk positions secured with residential real estate and commercial real estate continues to apply until the necessary information has been evaluated for the current and the following year. Additionally, Deutsche Bundesbank published the results of its financial stability review as well as Version 2.03 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
The report on financial stability review considers developments up to November 19, 2021 and highlights that the financial system has functioned well during the pandemic. However, vulnerabilities have continued to intensify as the pandemic progressed with the credit-to-GDP gap continuing to grow dynamically during the pandemic. Thus, the activation of the countercyclical capital buffer is warranted from a value of 2 percentage points and up. Macro-prudential supervisors in other European countries have already responded to the increased cyclical systemic risks in the financial system by activating the countercyclical capital buffer or announcing its activation, notes the report. For Germany, the available data currently provide no indication of an excessive loosening of lending standards for new residential real estate loans. Moreover, household leverage is still relatively moderate despite strong lending growth. In addition to strengthening resilience by building up capital buffers, the use of borrower-based macro-prudential instruments could then be called for. To counter a threat to financial stability, BaFin can impose restrictions on credit institutions concerning the granting of residential real estate loans. Against the backdrop of increased vulnerabilities, greater preventive action must be taken now to equip the financial system to deal with future risks.
The report also studies the impact of climate risk, establishing that the German financial system appears to be only moderately vulnerable to valuation adjustments resulting from rising carbon prices. Risk assessment can be improved further through disclosure requirements for climate risks. Scenarios could arise in which policymakers take measures to combat climate change unexpectedly late in the day and these measures are much stronger than assumed in this analysis. In this case, the transition to a low-carbon economy would have to occur within an even shorter space of time. More extreme increase scenarios could then materialize, meaning that the shock to the financial system would be greater. This could ultimately lead to higher losses. This makes it all the more important, then, for intermediaries and financial market agents to consider transition risks in their risk management and to be sufficiently resilient. The central banks of the G7 member states will also discuss options for implementing the TCFD recommendations in their own disclosures. As the holder of the G7 presidency in 2022, Germany will be able to make a positive impact on the implementation of disclosure measures, the report highlights.
Related Links (in German and English)
- BaFin Press Release
- Bundesbank Derivation Rules (XLSX)
- Bundesbank Financial Stability Review
- Financial Stability Report (PDF)
Keywords: Europe, Germany, Banking, Reporting, Derivation Rules, Financial Stability Review, CRR, Residential Real Estate, Commercial Real Estate, Credit Risk, Basel, ESG, Climate Change Risk, Stress Testing, Disclosures, Low-Carbon Economy, Transition Risk, Lending, Bundesbank, BaFin
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Nihil Patel
Data scientist; SaaS product designer; credit portfolio analyst and product strategist; portfolio modeler; correlation researcher
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
