View more on these topics

Delicate task of making global rules local

The outbreak of the global economic crisis in 2007 was a brutal awakening for banking regulators. In December 2010 the Basel Committee on Banking Supervision agreed on a global response to the crisis, known as the Basel III Framework, which sets regulatory standards on bank capital adequacy and liquidity.

But measures that are defined at global level cannot at the same time take into account regional specificities. This generalisation of principles and rules may prove more or less suitable or even detrimental depending on the regions and their respective banking business models.

But the Basel III Framework looks much less compatible with the European Union market than, for instance, the US market.

EU institutions have to consider the need for adjustments to the global rules when transposing them into EU legislation, and to find a balance between the implementation of the agreed Basel measures and ensuring that European banks can continue to finance economic activity.

This is precisely the delicate stage we are at now, with the European Commission and European Parliament appreciating, on the one hand, the level of adjustment needed to avoid unnecessarily impeding the EU market and, on the other hand, the margin of manoeuvre available in the transposition of the Basel III Framework into the EU’s Capital Requirements Directive IV legislation.

The leverage ratio proposed is most likely to encourage a shift towards riskier and more expensive lending

The European Mortgage Federation supports the Basel III/CRD IV objective to strengthen the banking sector, with stability being a precondition to fulfil its essential role in sustaining economic recovery and providing wider access to housing in Europe.

However, this support for the proposals in principle does not preclude the industry from assessing the potential impact of them and their possible detrimental effect on European mortgage markets.

The European Commission published the CRD IV package on July 20, 2011. It is currently being debated at political level in the European Parliament and European Council. The Rapporteur for the CRD IV file in the European Parliament is MEP Othmar Karas.

The EMF has focussed its efforts on provisions that have a direct impact on the mortgage credit industry, which are plentiful, with some of them having the potential to severely constrain the operations of a number of EU financial institutions with well-functioning business models.

The EMF has put forward a number of constructive alternative amendments to the CRD IV proposal with respect to the treatment of mortgages, the leverage ratio, liquidity and the combined impact of the measures.

Treatment of mortgages

The EMF believes the combined impact of the measures proposed in respect to the treatment of mortgages will have a pro-cyclical effect and reduce the loan offer, with obvious negative consequences for consumers and the economy in general.

On a general basis, the industry strongly believes that the change in the treatment of mortgages that will arise from the new rules is not justified in light of the risk-mitigating role of the collateral, or in view of the actual losses suffered by the sector in Europe.

One of the major concerns here is the definition of default, which is based on the number of days a loan repayment is overdue and which has arbitrarily been set at 90 days, whereas the previous system allowed for a degree of flexibility in the definition.

The EMF believes that the likely consequences of this measure would be a decrease in lending and an increase in the costs of any lending that does take place. Furthermore, the proposal to set the loss given default floor at 10% could be damaging for a number of safe mortgage markets, where it will lead to an increase in lending costs.

Leverage ratio

The EMF believes that the concept of a leverage ratio as currently designed is not the right answer to the issues at hand because it would contradict the risk-based principle rules that apply to credit institutions. Therefore, it would not serve as a complement the Basel III Framework as is intended.

Furthermore, this measure does not take into account the specificity of the long-established European banking mortgage model, which is typically characterised by low risk, long maturity and high volume activity.

As it stands, the leverage ratio proposed is most likely to encourage a shift towards riskier and more expensive mortgage lending without any obvious benefits to the banking sector in terms of its stability or resilience.


The EMF agrees that the introduction of regulatory standards on liquidity risk could constitute an appropriate response to the challenges thrown up by the financial crisis. However, it feels that the calibration of the liquidity risk management tools, as designed in the current proposals, is not well suited to specialised lenders, such as mortgage lenders, and does not address the specificities of European covered bonds, which play an essential role in the funding of mortgage credit across Europe.

Combined impact of measures

Finally, the industry’s wider concern is that the combined impact of the proposed measures will have a destabilising pro-cyclical effect on European mortgage credit markets, nullifying some of the stability elements of CRD IV, such as the counter-cyclical buffer.

At the same time, there is a danger that they will impose considerable costs on lenders, which will impact on the broader economy and restrict consumers’ access to mortgage credit and, therefore, housing in general.

Following on from our contribution to the February 27 edition of Mortgage Strategy, this shows the size of the challenge that faces the industry, which we hope the EU institutions will tackle in a way that allows the proper functioning of a sector that constitutes a key driver of the EU economy. The full EMF position paper on CRD IV is available via


Why all lenders will not rush to raise SVR

As was widely predicted, the Bank of England left the base rate unchanged this month with the expectation that major banks will do the same for home owners.

Data for February shows another spike in year-on-year gross lending

Gross mortgage lending in February was almost identical to the previous month but increased significantly year-on-year, according to the Council of Mortgage Lenders. Lending in February was an estimated £10.7bn, relatively unchanged on January’s £10.65bn but 14% higher than February 2011. Bob Pannell, chief economist at the CML, says that while a seasonal decline is […]

Retirement - thumbnail

Pension freedoms: stop the scams

At the beginning of 2015, we highlighted that the new pension freedoms that come fully online on 6 April also represent a very attractive opportunity for the criminal fraternity to scam savers out of some, or all, of their accumulated retirement savings.


News and expert analysis straight to your inbox

Sign up