Germany asks banks to build buffers as housing market heats up

The logo of the German Federal Financial Supervisory Authority BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) is pictured outside the former Ministry of Finance building in Bonn, Germany on April 5, 2016. REUTERS / Wolfgang Rattay

FRANKFURT, Jan. 12 (Reuters) – Germany on Wednesday asked its banks to set aside around 22 billion euros ($ 25 billion) in additional capital by next year as the economy shrinks. is largely recovering from the pandemic and that a growing real estate bubble threatens the stability of the financial sector.

Regulators reduced additional cushion requirements to zero at the onset of the crisis, but house prices have skyrocketed on the backs of record rates and the market is now 10-30% overvalued, leaving lenders particularly vulnerable to a price correction, the Bundesbank said earlier.

In response to these warnings, the Federal Financial Supervisory Authority, or BaFin, raised the countercyclical cushion to 0.75% on February 1, 2023 from 0%, while an additional 2% cushion will be introduced for mortgages. residential.

“Banks will be able to meet this requirement almost entirely from existing excess capital,” BaFin said in a statement. “Only a few institutions have a small requirement for additional capital.”

The decision will require banks to build around 17 billion euros in the countercyclical cushion and an additional 5 billion in the sector cushion for systemic risk, BaFin added.

In addition to the new measures, BaFin called on banks to be more cautious in granting new loans, especially in light of the development of house prices.

The supervisor calls for careful property valuations, prudence in making large loans relative to the property’s value, and a solid analysis of the ability of borrowers to make payments even when interest rates rise.

Supervisors have long warned that banks could overestimate the value of their loan guarantees and are not sufficiently prepared for possible interest rate hikes, as much of their long-term loans are at fixed rates. .

($ 1 = 0.8798 euros)

Reporting by Balazs Koranyi and Frank Siebelt; Editing by Toby Chopra

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