Because house prices in Germany and elsewhere in Europe have been increasing more quickly than household income for years, authorities have been concerned about medium-term risks to financial stability.

In a 21 December report (A new normal emerging for European banks?), we noted that the direction of travel to gradually returning buffer rates to pre-Covid levels is clear. Denmark, Norway and the UK in December, and Sweden in September 2021, have all announced increases to the CCyB for their banks, following a 12-month phase-in. France’s Haut Conseil de stabilité financière intends to normalise its CCyB to pre-crisis levels at its next meeting, depending on the data.

Germany’s CCyB and systemic risk buffers will take effect from February 2023. BaFin noted that Germany’s Financial Stability Committee (AFS), the agency responsible for macroprudential surveillance, supports the move, as does the European Systemic Risk Board. The Bundesbank has explicitly called for the countercyclical capital buffer to be built up again “gradually and in good time”.

The impact of higher countercyclical capital buffers will be muted. Large Eurozone banks have excess capital and gradual increases in CCyB levels have been incorporated into capital planning. Danish, Norwegian and Swedish authorities all noted that banks under their jurisdictions could meet the increased buffers from existing capital resources.

BaFin said German banks will be able to meet the higher requirements almost entirely from existing excess capital, adding that a few institutions will have a small additional capital requirement. The German CCyB requirement covers EUR 17bn of capital; the systemic risk requirement, EUR 5bn.

Most German banks have strengthened their capital bases in recent years. We expect there will be a limited need for capital strengthening measures, especially for the specialised medium-sized real-estate lenders, which maintain lower capital buffers. In the coming years, though, most banks will need to further strengthen their capital bases to keep the buffer to regulatory capital requirements stable.

Scope has consistently called for macroprudential measures in Germany to calm over-exuberant house prices and allay rising residential housing market risk. In a report published on 25 November (Bundesbank takes wait-and-see approach while house prices increase at record pace), Scope’s covered bonds team called for action beyond advocating for sustainable lending standards and close monitoring.

An earlier Scope report on 12 November (Hesitation by policy makers introduces financial stability risk in Germany) in response to the record 11.4% growth in German residential house prices in Q3 2021 noted: “to avoid financial stability risk, macroprudential tools need to be activated now and further enhanced. Only then can not only lenders but also homeowners too be shielded against a turning tide”.

BaFin also issued a call to lenders, reiterating a call from the Bundesbank, to maintain sustainable lending standards, including restricting high LTV loans and acting conservatively on borrowers’ debt sustainability in an environment of rising interest rates. The supervisor stopped short of introducing formal caps on residential mortgage lending, however.

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