BaFin Reduces Systemic Risk Buffer for Residential Real Estate Financing to 1 Percent Effective May 2025

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The systemic risk buffer for residential real estate financing under section 10e (1) of the German Banking Act (Kreditwesengesetz – KWG ), which was set at 2 percent in accordance with the administrative act dated 30 March 2022, will be reduced to 1 percent effective 1 May 2025.

Business sign: QA 2103/00002#00002

07.05.2025

The Federal Financial Supervisory Authority is enacting the following

General Administrative Act:

1. Effective 1 May 2025, the Federal Financial Supervisory Authority (hereinafter "
   BaFin
   ") is ordering a systemic risk buffer of Common Equity Tier 1 capital of 1 percent in accordance with section 10e (1) of the German Banking Act (Kreditwesengesetz – KWG ). In doing so, BaFin is amending its general administrative act dated 30 March 2022 ( ref. IFS 3-QA 2103-2022/0001).

2. In accordance with section 10e (1) sentence 2 of the
   KWG
   , this capital buffer is being ordered for all exposures – or parts of exposures –- to natural and legal persons for which mortgages on residential property located in Germany are taken into account as deductions when determining capital requirements.

3. The General Administrative Act is addressed to institutions as defined in section 1 (1b) of the
   KWG and to groups of institutions, financial holding groups and mixed financial holding groups in which at least one member is an institution that must meet the requirements of section 10e (1) sentence 1 of the KWG at the individual institution level, as well as institutions referred to in Article 22 of Regulation ( EU ) No. 575/2013. It does not apply to the undertakings referred to in sections 2 (4) sentence 1, (5) sentence 1, (7), (7a), (7b), (9a) sentence 1, (9e) and 51c (4) of the KWG , in each case subject to the conditions set out there.

4. This General Administrative Act is being made public in accordance with section 41 (3) and (4) of the German Administrative Procedure Act (Verwaltungsverfahrensgesetz –
   VwVfG
   ) in conjunction with section 17 (2) of the Act Establishing the Federal Financial Supervisory Authority (Finanzdienstleistungsaufsichtsgesetz – FinDAG ) in conjunction with section 10e (7) of the KWG and is deemed announced on the day following its publication.

Grounds

A. Factual circumstances

In its general administrative act dated 30 March 2022 , BaFin ordered a systemic risk buffer for residential real estate financing of 2 percent in accordance with section 10e (1) of the KWG effective 1 April 2022. The institutions concerned were required to comply with this buffer requirement from 1 February 2023 onwards. The sectoral systemic risk buffer was ordered in response to an increasingly dynamic upward trend in the German residential real estate market at the time, with significant price increases and growth in lending accompanied by significant overvaluations. In addition, there were clear indications of an increased risk appetite on the part of lenders, posing substantial risks to financial stability by overestimating borrowers' capability to service debt and overestimating the value of the real estate held as collateral.

At the beginning of 2024,
BaFin conducted a first review of the sectoral systemic risk buffer in accordance with section 10e (2) sentence 3 of the KWG . At that time, the German residential real estate market was still experiencing a downturn resulting from the interest rate rises that had begun in July 2022, and this was only slowly losing momentum. At the same time, risks that had gradually built up during the long upturn remained present to a considerable extent. Based on joint analyses with Deutsche Bundesbank, BaFin came to the conclusion that the risk situation on the German real estate market continued to require the sectoral systemic risk buffer to be maintained.

Since then, the vulnerabilities on the German residential real estate market have diminished but are not completely gone. Against this background, BaFin has reassessed the risk situation:

The specific risks on the residential real estate market that the sectoral systemic risk buffer was introduced to address have not materialised to date. The orderly decline in vulnerabilities went hand-in-hand with a trend reversal on the German residential real estate market triggered by the rising interest rates. The dynamic upward trend that had lasted years came to an end, and the ensuing downturn helped achieve a considerable reduction in residential real estate overvaluations over time (see Deutsche Bundesbank, Monthly Report – February 2025, p. 122). According to an estimation model, residential real estate prices in towns and cities were not far above the value that is justified in terms of socio-demographic and economic fundamentals. For Germany as a whole, the long-term relationship between real estate prices, interest rates and income points to an overvaluation of less than 10 percent.

Residential real estate prices are rising slightly again year on year. According to data from the Association of German Pfandbrief Banks ( vdp ), residential real estate prices rose by a total of 2.3 percent in the three quarters following their low point in the first quarter of 2024. The moderate price increase is buoyed by high demand for housing combined with low construction activity.

In 2024, new lending recovered from a very low level following the slump in 2022 and stabilisation in 2023. In the fourth quarter of 2024, the volume for new real estate financing was up one-third on the previous year, and the upward trend continued at the beginning of 2025. Available information from the Bank Lending Survey and private data sources reveals that the banks are largely applying conservative lending standards and are not taking excessive risks.

Loss rates in the banks' existing business are low. The risk of default is being kept in check by the solid financial situation of private households, particularly as borrowers' capability to service debt is strengthened by higher salaries – both in nominal and real terms.

Vulnerabilities nevertheless remain in relation to mortgages granted when prices were at their peak, some of them based on overvalued collateral. Given that the overvaluation has largely been eliminated, however, there is now only limited potential for price set-backs. Looking ahead, collateral values are thus likely to remain at least stable, which will limit the risk of losses on seizure.

BaFin's risk assessment is also supported by the fact that the residential real estate market is currently more stable than others such as the commercial real estate market. Loss rates for residential real estate financing have remained low in the recent past, while those elsewhere, such as on the commercial real estate market, have risen dramatically.

On the other hand, some residual risks and uncertainties remain about how the risk situation will develop:

There is increased uncertainty due to the persistent economic weakness, a potential escalation of trade disputes and structural challenges in key sectors of German industry – the automotive and energy-intensive sectors in particular. Possible plant closures, moves to relocate production operations abroad and workforce reductions have the potential to weigh on the still relatively robust labour market, which could increase the likelihood of defaults on residential mortgages. Analysis carried out by the Bundesbank in this respect found no indications that shocks on a scale relevant to financial stability will materialise in the short term.

In the case of adverse developments that cannot be ruled out, such as another marked rise in mortgage interest rates, the residential property market could slip back into a downturn with price declines and lower demand for loans.

Given the residual risks still present in the residential real estate market and the increased uncertainty as to the lending standards applied to loans granted in the past (WIFSta data – Bundesbank administrative order concerning data collection on housing loans), the sectoral systemic risk buffer remains necessary. A certain degree of macroprudential leeway should be maintained. Having reassessed the risk situation, therefore, BaFin is reducing the sectoral systemic risk buffer from 2 percent to 1 percent.

B. Legal assessment (condition for the General Administrative Act)

The General Administrative Act is based on section 10e (2) in conjunction with (1) and (8) of the KWG .

In accordance with section 10e (1) of the
KWG
,
BaFin is responsible for ordering and determining the systemic risk buffer. This also includes reducing the buffer.

Re points 1 and 2:

The conditions for the previous order and for the current reduction in the amount of the sectoral systemic risk buffer from 2 percent to 1 percent of the total risk exposure amount under Article 92(3) of Regulation ( EU ) No 575/2013 are met.

The order is based on section 10e (1) to (3) and (8) of the KWG . That states that a systemic risk buffer can be ordered to reduce or prevent systemic or macroprudential risks that could lead to a disruption with serious negative consequences for the national financial system and the real economy in Germany.

Determining an appropriate level and target group

In its general administrative act dated 30 March 2022, BaFin determined that there were generally macroprudential risks within the meaning of section 10e of the KWG . The systemic risk was determined in particular with regard to a threat to the functioning and stability of the entire financial system. In its assessment at the time, BaFin came to the conclusion that a buffer of 2 percent was necessary to safeguard against the systemic risk.

BaFin has broad discretion in calibrating use of the instrument. The aim is to reduce or avoid long-term non-cyclical systemic and macroprudential risks, ignoring insignificant risks 1 .

In its current adjustment of the systemic risk buffer, BaFin must assess the changed risk situation. The significant stabilisation on the market and considerably reduced likelihood of a systemic risk materialising compared with when the systemic risk buffer was ordered are arguments in favour of reducing it. At the same time, it was noted that significant uncertainties and residual risks still remain in the banks' existing business given the weak economic growth and somewhat deteriorating situation on the labour market. In light of this, BaFin considers it necessary for Germany's bankingsystem to remain resilient to potential unexpected shocks on the residential real estate market in order to limit negative contagion and feedback effects between financial market participants and between the financial system and the real economy in the event of a crisis. BaFin therefore considers it inappropriate to completely remove the sectoral systemic risk buffer for the time being.

There are no changes in the target group for this General Administrative Act as against 30 March 2022. Section 10e (1) sentence 2 second half-sentence of the KWG allows for the formation of the subset referred to in point 2 of the Act. This is compliant with section 36a (1) of the Solvency Regulation (Solvabilitätsverordnung – SolvV ), which provides application guidance for section 10e (1) sentence 2 of the KWG , and with the EBA Guidelines on the appropriate subsets of exposures in the application of SyRB , which are based on Article 133(5) of Directive 2013/36/EU. The subset is formed from risk exposures in Germany (section 36a (1) no. 2 of the SolvV ), a signatory state to the EEA ( no.
3) or a third country (
no.
5) to natural persons and legal entities (no 2(a), (d) and (c)), further restricted by the criterion of including mortgages on residential property located in Germany (when determining the capital requirements). The sectoral systemic risk buffer defined in this way therefore refers to the standard financing arrangements for residential property in Germany, with the result that distortions of competition in the residential property market are largely avoided because of the measure.

There is no other way to address the above risks within the meaning of section 10e (1) no.
2 of the
KWG because measures under Regulation (
EU
) No 575/2013 (
CRR
) or the capital buffers under sections 10d, 10f and 10g of the KWG would not be available or effective.

BaFin has no evidence that there is any disproportionate impairment of the financial system or of parts of the financial system of another state or of the European Economic Area as a whole.

Even after announcing this General Administrative Act, BaFin will seek to prevent future evasive reactions to circumvent the order by means of cross-border financing of residential real estate located in Germany by asking the European Systemic Risk Board to issue a recommendation under Article 16 of Regulation ( EU ) No 1092/2010 to relevant states of the European Economic Area (in particular neighbouring countries) on the reciprocal application by European states of the systemic risk buffer now reduced to 1 percent.

The sectoral systemic risk buffer reduced to 1 percent is proportionate. It is suitable for achieving the intended goal of reducing or preventing disruption with serious negative consequences for the national financial system and the real economy in Germany. The instrument is addressed to all members of the target group referred to in point 3 of this General Administrative Act that offer financing for residential real estate located in Germany. By setting it at 1 percent, increased capitalisation remains in place for those banks that are active in residential mortgage lending and would be particularly affected by the above-mentioned systemic risks in the German residential real estate market. Setting the sectoral systemic risk buffer strengthens the banks' resilience, specifically to risks in the residential mortgage lending portfolio, on a preventative basis. The sectoral systemic risk buffer is therefore suitable for achieving the objective described above. BaFin does not have any milder but equally effective means available to do so. The capital buffer set at 1 percent from 1 May 2025 is also appropriate. For the purpose of this General Administrative Act, BaFin examined the economic and macroeconomic environment and the sectoral systemic risk buffer introduced on 30 March 2022 and concluded that reducing it to 1 percent is justified and necessary in light of the risk situation.

BaFin did not identify any significant impact on lending or pricing as a result of the sectoral systemic risk buffer that became mandatory for the first time on 1 February 2023. This assessment has been confirmed by the adequacy reviews carried out, in particular the current review in connection with reducing the buffer to 1 percent.

Re point 3:

The target group results from sections 1 (1b), 2 (4) sentence 1, (5) sentence 1, (7), (7a), (7b), (9a) sentence 1, (9e) and section 51c (4) of the KWG in conjunction with section 10e (1) of the KWG .

Re point 4:

The timing of the announcement is based on section 17 (2) of the FinDAG in conjunction with section 41 (4) sentence 4 of the VwVfG .

Rupert Schaefer

1
Schwennicke/Auerbach/Auerbach, 4th ed. 2021,
KWG
section 10e, margin
no.
9.

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