Bundesbank and BaFin Publish Regulatory Updates for Banks

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