BaFin will issue a general administrative act for each measure. The hearings begin today and end on 26 January 2022. Both buffers are to be activated in the near future. However, institutions will have enough time to adapt to the measures; they will not have to meet the additional capital requirements in full until 1 February 2023. The two capital buffers will conserve a total of around EUR 22 billion of Common Equity Tier 1 capital in the banking system – EUR 17 billion via the countercyclical capital buffer and EUR 5 billion via the sectoral systemic risk buffer. The banks will be able to meet the requirements almost entirely from their existing surplus capital. Only a small number of institutions will have an additional capital requirement.

The financial system has proven to be robust in the face of the coronavirus pandemic. However, vulnerabilities to negative economic developments have been building up, especially in the residential property market. Recent developments in prices and lending for residential property have been particularly dynamic. BaFin and the FSC intend to take preventive action to counteract the resulting increasing risks. “These capital buffers not only take into account the cyclical risks, but are also targeted at the specific financial stability risks in the residential property market, where price and credit growth are currently very strong,” explained BaFin President Mark Branson. The main goal is to strengthen the resilience of the banking sector. In more difficult times, the buffers will serve to absorb losses so that any procyclical curbs on lending that could have negative impacts on the real economy can be limited.

In addition to the capital-related measures, BaFin is urging banks, insurance companies and other lenders to be particularly cautious when extending new loans in light of current developments on the residential property market. BaFin expects conservative valuation and lending practices with a restrictive approach towards financing with a high LTV (loan-to-value ratio) that ensure a solid level of debt sustainability on the part of borrowers over the long term, including in periods of stress. Borrowers should be able to make the monthly payments for interest and principal at all times, even if interest rates rise.

In close cooperation with the FSC, BaFin will continuously analyse the development of credit standards. If BaFin determines that credit standards are becoming too lax, it can adopt binding measures regarding lending. For example, under section 48u of the German Banking Act (Kreditwesengesetz) and section 308b of the Insurance Supervision Act (Versicherungsaufsichtsgesetz), BaFin could impose a cap on the ratio of leverage used in residential property financing.