Study shows negative impact of Basel IV

• Low-risk German residential real estate lending severely penalised 
• Adverse consequences for retail customers and businesses must be avoided
• Association of German Banks calls for appropriate European implementation

A current study by the Association of German Banks shows that European banks are more heavily burdened by the Basel IV reform package than hitherto assumed. Mainly to blame for this is the so-called “output floor” that sets a minimum level of capital for banks. This floor is to be applied by banks that have their own supervisor-approved risk-measurement models. The new Basel rules are to come into effect on 1 January 2022 and have to be transposed into European law beforehand.

“Our fears have been confirmed,” said Christian Ossig, the association’s chief executive. “The output floor leads to significantly higher capital requirements in all the loan portfolios we looked at. This makes residential real estate lending as well as lending to small and medium-sized enterprises (SMEs) more difficult and more expensive.” The association study examined residential real estate exposures, SME exposures, exposures to project finance, e.g. in the renewable energy sector, and commercial real estate exposures.

“The low-risk German residential real estate lending business is hit particularly hard,” Mr Ossig added. The fact that the average risk weight more than doubled (+125%) was unacceptable and had to be avoided at all costs. 

The output floor’s impact therefore needed to be softened considerably in implementation at European level. Otherwise adverse consequences for lending to retail customers and businesses were inevitable. To avoid these, certain low-risk portfolios could, for example, be exempted from application of the output floor or the output floor could be applied in a sensible manner.

Several association member banks took part in the Basel IV quantitative impact study. Owing to their size and business models, they represent a broad spectrum of corporate and retail customer relations in Germany.