ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

Erhvervsudvalget 2021-22
ERU Alm.del Bilag 356
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The EU needs

a balanced Basel III

implementation

June 2022

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

The EU needs a balanced

Basel III implementation

EU mortgage markets are a cornerstone of the European econ-

omy. They are a key source of funding for EU homeowners and

businesses, and they are paramount to post-covid-19 recovery.

And not least, they play an essential role in the climate transition.

Considering the war in Ukraine and the resulting energy crisis, this

is more important than ever.

Therefore, the Basel III output floor, which has a disproportionate-

ly negative effect on the secure Danish mortgage loans, should

be implemented in a balanced way to prevent any inadvertent

impact on families, businesses, and potential renewed economic

growth after the current crises.

Output-floor

The capital requirement determined using internal mod-

els to calculate risk exposures cannot fall below 72.5% of

the capital requirement determined using the standard-

ised approach

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

Mortgage markets are an important driver of

the EU economy and the green transition

The key significance of mortgage markets to the EU economy

can hardly be overestimated. At end-2019, outstanding mort-

gage loans in the EU amounted to almost EUR 8 trillion. This cor-

responds to almost 50% of the EU’s annual GDP.

In addition to their role as a main driver of the EU economy,

banks and mortgage lenders also provide finance to citizens

buying homes and to SMEs stimulating investment and job crea-

tion. Their continued ability to channel funds to businesses and

households is essential to the post-pandemic recovery of many

EU member states.

Also, the financial sector plays a key role in the transition to a car-

bon-neutral economy. The war in Ukraine has highlighted the EU’s

strong reliance on fossil energy sources. This emphasises the

need for an even faster and smoother climate transition. The out-

put floor should therefore be implemented with caution to avoid

any unreasonable and unjustified increases in capital require-

ments that would constrain banks and mortgage lenders’ lend-

ing capacity.

Facts

Outstanding mortgage loans in the EU: about EUR 8 trillion

– almost 50% of the EU’s annual GDP.

The need for housing renovation in the EU is substantial –

35% of the housing stock is more than 50 years old, and

about 75% is not energy efficient.

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

New EU capital requirements are bad

news to the EU’s mortgage markets

The European Commission is rolling out new capital requirements

for the financial sector. The requirements include the introduction

of a global standard specifying how banks and mortgage lend-

ers in the EU should calculate the amount of capital to hold for

potential loan losses - the so-called output floor.

This means that many European banks and mortgage lenders

will no longer be able to calculate the amount of capital required

on the basis of internal loss data like they do today. Instead, all

loans must be treated alike in the calculations. In other words,

low losses and low risk will no longer equal lower capital require-

ments. This will take its toll on particularly the secure European

mortgage loans – and customers. What makes European mort-

gage loans secure is the fact that they are secured by mortgage

on the relevant property and that borrowers are personally liable

for their loans – in other words as dual recourse. Consequently,

over the past more than 100 years, losses on Danish mortgage

Danish mortgage loan impairments

from a historical perspective

loan impairments, percentage

Source: Statistics Denmark, Kindleberger, Danish FSA, Association of Danish Mort-

gage Banks

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

loans have been very low. From a historical perspective, annual

loan impairments have averaged 0.10%.

The Commission’s impact assessment estimates an overall av-

erage rise of 6.5-8% in the capital requirements for European

banks. But increases will be much higher for mortgage loans/

mortgage portfolios.

Calculations1 made for Danish mortgage loans show that the

capital requirement for mortgage lending will rise by 36% relative

to capital requirements already known. This effect does not allow

for the Commission’s temporary adjustments for home loans in

output floor calculations.

This will force mortgage lenders to hold significantly more capital

to cover potential losses than is warranted by the actual risk re-

lating to their lending. And this comes at a cost: Investors demand

interest to provide such funding. That will make household and

business loans more expensive than necessary, to the detriment

of homeowners and businesses. The output floor is the main rea-

son for these increases.

Impact on Danish borrowers1

For a homeowner with a typical, fully mortgaged home

and a loan of DKK 2 million, the additional cost will be DKK

4,400 a year before tax.

For an owner of agricultural property with a loan of DKK 6

million and an LTV of 60%, the additional cost will be DKK

14,500 a year before tax.

1 "The Final Basel III Standard And The Danish Mortgage Sector Impact on Danish

mortgage banks and customers", Copenhagen Economics, January 2022.

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

The European Commission’s

solution is not sufficient

The Commission acknowledges the need for action in relation to

the banks and mortgage lenders that will be hit disproportionate-

ly hard by the new requirements. The Commission has therefore

proposed several temporary solutions, for instance an adjust-

ment of the requirement for homeowner mortgage loans in output

floor calculations.

This is a step in the right direction. But since these solutions are

only temporary, they are not acknowledged by credit rating

agencies, investors, and supervisory authorities. In practice, all

mortgage lenders must therefore comply with the full implemen-

tation of the capital requirements already from day one, meaning

that regrettably the solution proposed by the Commission will be

of no real relevance to them.

Like the Danish government, the European financial sector is

therefore striving, for instance through the EMF-ECBC , to ensure

that the Commission’s proposals are made permanent. The EMF-

ECBC2 is working to ensure that also business mortgage loans

with a proven track record of low losses will be part of a perma-

nent solution.

2 European Mortgage Federation - European Covered Bond Council

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

No adjusted treatment

for mortgage loans

Concern is sometimes expressed over the idea of adjusting the

capital requirement for mortgage loans in output calculations as

proposed by the Commission. But this is fully justifiable. To bene-

fit from the lower capital requirement, the loans will be tested in-

tensely. For example, mortgage loan losses of up to 55% of prop-

erty values must not exceed 0.25% of total residential mortgage

lending on average over the past six years. Such testing provides

an objective and satisfactory foundation for applying a lower

capital requirement to residential mortgage loans in output floor

calculations.

ERU, Alm.del - 2021-22 - Bilag 356: Opfølgning på rejserapport fra Erhvervsudvalgets delegationsrejse til Bruxelles om Basel-anbefalingerne

Finance Denmark

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Tel. 33 70 10 00 · www.finansdanmark.dk