Silvia Schütte works at the Association of German Banks in the Banking Supervision and Accounting team, among other assignments. Macroprudential supervision is one of her key remits. An expert on the subject, she has taken the time to answer three fundamental questions about this complex topic.
What are macroprudential instruments?
Macroprudential instruments are measures taken by financial supervisory bodies to strengthen financial stability as a whole. The main goal of these instruments is to monitor systemic risks, with the aim of ensuring that the financial system works smoothly, as well as preventing economic bubbles in individual sectors, such as the housing industry. Macroprudential measures apply to all financial institutions equally. Unlike microprudential measures, they do not take a bank’s individual situation into account.
One potential macroprudential measure is the implementation of capital buffers, which banks must then use as a preventative measure. They create an additional cushion of capital for use in difficult times. This means that the bank must keep more capital in reserve, a measure designed to prevent excessive loan grants.
There is currently an ongoing discussion regarding income-based macroprudential instruments. What does that mean?
Income-based macroprudential measures set limits on granting loans for residential real estate. These instruments are implemented on a household and income level. To do this, a borrower’s regular income is compared, for example, to all their debts. This is known as a debt-to-income ratio. Another key figure compares the borrower’s income to their obligations to service their debt. If this ratio falls below a specific value, the bank is not allowed to grant credit to the client.
Are there arguments against income-based instruments?
Introducing income-based macroprudential instruments in the current situation would send the wrong message. It’s not as though banks are in the habit of liberally handing out loans for residential properties. Germany is currently in need of 700,000 more homes than are available, and the number of residential real-estate loans is dropping at a rapid pace. That means that fewer and fewer people are planning to purchase or build a house or a flat. These instruments, if introduced, would represent serious interference with banks’ business activities, even though there is no compelling reason to do so. They will make it even more difficult to allocate residential real estate, resulting in even fewer construction projects. This means that it will become systematically more difficult for young or larger families, those with lower or median incomes, and those with a high number of assets but not much regular income, in particular, to purchase or build a home.
And of course, financial institutions already carefully check whether the borrower is able to make their interest and principal payments over a long period of time when issuing loans. Plus, borrowers can agree to a set interest rate for ten or twenty years, so it is easy to budget for loan payments. There is simply no need for additional regulatory requirements.
