Featured Product

    IMF Publishes Report on the 2018 Article IV Consultation with Germany

    July 05, 2018

    IMF published its staff report under the 2018 Article IV consultation with Germany. Directors noted that profitability in the bank and life insurance sectors remains low and that restructuring efforts must be accelerated to durably strengthen resilience and reduce risks. They stressed the importance of continued supervisory attention to progress in implementing restructuring plans and reducing interest rate risk in banking and insurance.

    The staff report highlights that completion of Basel III, as well as other recent regulatory changes, may have important implications for large German banks. After a long period of favorable economic conditions, banks’ internal risk models may underestimate risk-weights. The introduction of the 72.5% output floor is aimed to limit the effects of sharp re-assessments of risks on bank capital. As the use of internal models is more pervasive in large banks, this measure will affect mostly this group. In addition, the report highlighted that the Markets in Financial Instruments Directive (MiFiD II), which came into force in January 2018, aims to increase transparency and efficiency in financial trading, but may also add regulatory compliance costs in the larger banks. Furthermore, the 2017 minimum requirement for own funds and eligible liabilities (MREL) policy of EU sets targets that are binding only for larger/more complex banks in the Single Resolution Board remit, while smaller and medium-size institutions are not yet affected. Few banks are expected to face funding shortfalls to meet MREL target and subordination requirements are facilitated by recent changes to the German Banking Act.

    In the banking sector, the regulatory capital ratio has increased, but the cost-to-income ratio and leverage remain high. Risk-weighted capital stood at comfortable levels, supported by favorable macroeconomic conditions and declining risk-weighted asset density, and is improving for all categories, except large banks. Non-performing loans (NPLs) continue to decline and provisioning for impaired shipping loans is leveling off. As noted in the 2016 Financial Sector Assessment Program (FSAP), international experience suggests that macro-prudential tools should be deployed early to be most effective. It is therefore important that the macro-prudential framework is sufficiently nimble such that instruments can be utilized preventively to avoid the build-up of vulnerabilities. The macro-prudential toolkit should be strengthened. New tools—loan to value (LTV) caps and amortization requirements—were legally created in 2017, a welcome development. However, income-based instruments, such as the debt-to-income ratio and the debt-service-to income ratio, are not included in the legislation. These tools, which can help prevent an excessive build-up of debt by households when house prices are rising rapidly, should be added.

    Large German banks continue to underperform relative to the European peers. To keep up with cost-reduction targets, the German global systemically important bank (G-SIB) presented an updated restructuring strategy to refocus activities in Europe and reduce personnel costs by shrinking its investment banking business. Overall, the financial market stress is assessed to be low, capital buffers in the banking and life insurance sectors are deemed comfortable. Nevertheless, accelerating restructuring, restoring profitability, and reducing interest rate risk remain the key priorities in the banking and life insurance sectors. Continued supervisory attention to interest rate risk and implementation of restructuring plans, including through Pillar 2 measures, remains essential. The report also reveals that low interest rates and the introduction of Solvency II are forcing some restructuring in the life insurance sector. Solvency ratios, according to Solvency II, have improved overall, alongside the increase in long-term yields, since late 2016. However, a majority (nearly 70%) of life insurers rely on transitional measures to calculate their solvency capital requirement. As was noted in the Bundesbank’s 2017 Financial Stability Report, 14 life insurers would not meet the Solvency II minimum requirement as of end of 2016 without transition measures.

     

    Related Link: Staff Report

    Keywords: Europe, Germany, Banking, Insurance, Securities, Solvency II, Basel III, MiFID II, NPLs, Restructuring, IMF

    Featured Experts
    Related Articles
    News

    APRA Reviews Repayment Deferral Plans, Identifies Best Practices

    APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.

    September 22, 2020 WebPage Regulatory News
    News

    ESAs Assess Risks to Financial Sector After COVID-19 Outbreak

    ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.

    September 22, 2020 WebPage Regulatory News
    News

    BoE Confirms Withdrawal of COVID Corporate Financing Facility

    BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.

    September 22, 2020 WebPage Regulatory News
    News

    ECB Allows Temporary Relief in Leverage Ratio Amid COVID-19 Pandemic

    ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.

    September 21, 2020 WebPage Regulatory News
    News

    ESAs Launch Survey on Templates for Product Disclosures Under SFDR

    ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).

    September 21, 2020 WebPage Regulatory News
    News

    ECB Proposes Integrated Reporting Framework to Reduce Burden for Banks

    ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.

    September 21, 2020 WebPage Regulatory News
    News

    EC Deems UK Framework for CCPs Temporarily Equivalent to EMIR Rules

    EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).

    September 21, 2020 WebPage Regulatory News
    News

    EBA to Phase Out Guidelines on Loan Repayment Moratoria

    EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.

    September 21, 2020 WebPage Regulatory News
    News

    EBA Provides Opinion on Definition of Credit Institution in CRR

    EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).

    September 18, 2020 WebPage Regulatory News
    News

    ECB Finalizes Methodology to Assess CCR and A-CVA Risk of Banks

    ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.

    September 18, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5820