14. Juli 2015

Association of German Banks believes new proposals on capital charges for interest rate risk will have significant implications

Kemmer: detrimental effect on long-term real estate loans

The Basel Committee has issued a consultation paper proposing that capital requirements for interest rate risk should in future be calculated not just with the help of internal models, but also using a standardised model. “But the model proposed will considerably distort risk to the detriment of long-term financing,” feared Michael Kemmer, General Manager of the Association of German Banks. Fixed-rate real estate loans with maturities of ten years or more would be among those affected.

Factors influencing such risk models include assumptions about when customers will pay back their loans and how often they react to changes in interest rates on deposits. “These factors don’t vary only from country to country, but frequently from region to region and consequently also from bank to bank,” Kemmer explained. Even if banks were still permitted to use internal models, he saw a danger of preference being given to the Basel standardised model in the proposed comparison of both models’ results. “This will make it more difficult for banks to offer long-term fixed-interest loans at rates reflecting true market conditions,” Kemmer warned.

Instead of opting for a one-size-fits-all standardised model, it would be more useful to improve the comparability of internal risk models. “This could be achieved by better prudential scrutiny and improved methods of validating models, for instance,” said Kemmer.

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