Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
VI. The German Macroprudential Framework
1. Germany’s national macroprudential framework came to life in January 2013 with the entry into force of the Financial Stability Act. Germany thus implemented a 2011 European Systemic Risk Board (ESRB) recommendation on the macroprudential mandate of national authorities, and broadly addressed the 2011 FSAP recommendations on the macroprudential policy framework. The law delineates statutory responsibilities for financial stability, establishes the Financial Stability Committee (FSC), mandates the Bundesbank to provide the FSC with substantial analytical support, specifies arrangements for cooperation and information exchange between the Bundesbank and the Federal Financial Supervisory Authority (BaFin), and provides for backstop powers to collect additional information from financial institutions.
2. The FSC brings together the Federal Ministry of Finance, BaFin and the Bundesbank. Each institution has three voting representatives on the FSC, while the Federal Agency for Financial Market Stabilization has one non-voting representative in an advisory capacity. Within the FSC, the Bundesbank is responsible for macroprudential oversight and risk analysis of the German financial system.
3. The FSC can publicly voice concern, submit formal warnings, or propose concrete measures to any German public authority but has no direct power over the use of “hard” macroprudential instruments. The FSC can only recommend the deployment of such instruments by BaFin. As a general rule, decisions regarding warnings and recommendations should be taken unanimously, and the Bundesbank representatives have veto power on these decisions.
4. The German macroprudential toolkit for credit institutions is imported from the European Union Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR) which became applicable in January 2014. It includes the countercyclical capital buffer, capital surcharges for “other” systemically important institutions1, the systemic risk buffer, and risk-weights for exposures secured by residential or commercial mortgages (see Box 1). The first two instruments are scheduled to be introduced on a step-by-step basis, starting in 2016, while the latter two have been available since January 2014. The Bundesbank has been working on establishing the analytical foundations for the practical implementation of these instruments. The ESRB is to be notified prior to the use of macroprudential instruments defined in EU legislation and provide “opinions” or “recommendations” regarding the proper use of proposed measures.
5. Under the Single Supervisory Mechanism (SSM) the ECB will acquire macroprudential powers in Germany (and other SSM countries) from November 2014. The ECB will be tasked with the macroprudential oversight of all credit institutions in SSM countries. While macroprudential interventions remain the responsibility of each SSM country national authorities, they are required to inform the ECB in advance of the introduction of any measure. Furthermore, the ECB may, if deemed necessary, apply more stringent measures aimed at addressing systemic or macro-prudential risks than the ones established by the FSC (“topping-up power”). Neither the obligation to notify the ECB nor the ECB’s topping-up power apply to instruments implemented at national discretion.
Germany’s Current Macroprudential Toolkit
Since the European Capital Requirements Directive IV and the Capital Requirements Regulation for credit institutions became applicable in January 2014, the German supervisory authorities have access to the following macroprudential instruments:
Countercyclical capital buffer (CCCB). This instrument requires banks to build up capital when aggregate growth in credit is judged to be associated with a build-up of system-wide risk. The buffer can then be drawn down to absorb losses during stressed periods. An increase in the CCCB provides a larger cushion to absorb losses and provides incentives for banks to avoid excessive or underpriced exposures. A release of the CCCB when threats to stability are judged to have receded could help mitigate a contraction in credit supply. An ESRB recommendation outlining the CCCB’s concrete design is expected in mid-2014.
Systemically Important Institutions capital surcharge. Besides the capital surcharge that will be applied to global systemically important financial institutions (G-SIIs) as identified by the Financial Stability Board, the German authorities will be able to apply a capital surcharge to other systemically important institutions (O-SIIs). The surcharge will amount to up to 2 percent of risk-weighted assets. The European Banking Authority (EBA) is expected to publish a set of guidelines on identifying O-SIIs in early 2015.
Systemic risk capital buffer. This capital surcharge can be used to deal with non-cyclical risk exposures and can be directed at both credit institutions as a whole and at certain groups of institutions. The buffer can be set at a minimum of 1 percent or higher.
Changing sectoral risk-weights. The risk-weights on exposures secured by mortgages on immovable property can be increased up to 150 percent. The choice of risk-weights should be based on loss experience and take into account forward-looking market developments and financial stability considerations. EBA is expected to propose regulatory technical standards to specify these conditions by the end of 2014.
6. There is currently no national legal basis for the use of other macroprudential instruments than those in the CRR – CRD IV package. Experience from other countries suggests that other tools that those contained in the CRD IV / CRR may be better-suited to address certain types of systemic risk, are less prone to circumvention, and/or can have a reinforcing effect (IMF, 2013). For example, loan-to-value ratios (LTV), debt-to-income (DTI), and debt-service-to-income ratios (DSTI), which target the demand side of credit, have been effective at managing housing price inflation and mortgage growth in some East Asian countries (IMF, 2013b and Box 2). Other tools to be considered include leverage ratio, stable funding requirements, and liquidity buffers (ESRB, 2014). The Bundesbank has been analyzing other countries’ experiences with the use of some of these instruments. As the legislative process necessary to deploy a new tool may be time-consuming, in particular in times of financial excesses or financial stress, it can be useful to define ex ante the full contour of the macroprudential toolkit and to ensure that its legal underpinnings are sound. Another reason to act sooner rather than later is that, as discussed in Bundesbank (2013) and the 2014 Germany Article IV Report, the current low interest rate environment in Germany may persist and foster the build-up of systemic risk.
The usefulness of LTV, DTI and DSTI instruments
As discussed in IMF (2013a), the international experience justifies a particular emphasis on macroprudential tools that can contain vulnerabilities in residential housing markets. Because the pass-through of an increase in risk-weights on mortgage loans to loan growth can be limited when strong increases in asset prices and credit feed each other, the use of additional tools that act on credit demand and directly increase the resilience of borrowers to shocks can be useful. An LTV ratio introduces a cap on the size of a mortgage loan relative to the value of a property, thereby imposing a minimum down payment. A DTI ratio restricts the size of total debt to a fixed multiple of household income, while a DSTI ratio restricts the size of annual debt payments to a fixed multiple of annual household income. Both thereby contain unaffordable and unsustainable increases in mortgage debt. Papers surveyed in IMF (2013b) suggest that these tools can reduce feedback between credit and prices in an upswing, as well as improve resilience to shocks, thereby reducing default rates and supporting recovery values when the housing market turns. However, they are more intrusive and calibration can seek to soften their impact, for example by exempting certain types of borrowers or differentiating by geographical areas.
7. The March 2014 FSB Review pointed at other elements of the German framework that could also be strengthened. The Review encouraged the authorities to promptly develop and implement a comprehensive macroprudential strategy, and to make it operational (FSB, 2014). According to the Review, several aspects of the FSC’s institutional design remain unclear, including the following four points. First, the types of issues that are within the scope of the FSC for discussion and/or for decision-making purposes could be clarified as each member institution still has the mandate and authority to act if the need arises. Second, whether FSC members act as official representatives of their institutions or in personal capacity also could be specified. Third, protocols and procedures for reconciling the diversity of views in decision-making could be developed. Fourth, the FSC could reflect on its communication strategy, identify its target audiences, and ensure that appropriate communication tools to each audience are available.
8. The FSC will soon have an opportunity to publicly address some of these issues. By law, the FSC is required to present a report to the Bundestag once a year. The first such report is expected to be delivered in the middle of this year and will provide an opportunity to explain its analytical and operational frameworks in detail.2 Beyond that immediate horizon, per an April 2013 ESRB recommendation, the FSC will have to define its intermediate objectives and assess its available macroprudential instruments by end-2014, and to fully articulate a policy strategy by end-2015.
References
Bundesbank (2013), Financial Stability Review.
FSB (2014), Peer Review of Germany – Review Report.
IMF (2013a), “Key Aspects of Macroprudential Policies”.
IMF (2013b), “Key Aspects of Macroprudential Policies – Background Paper”.
ESRB (2014), The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector.