The Pfandbrief 2011 | 2012

Effects of Basel III on the Pfandbrief-based lending business
Development of regulatory capital requirements under Basel III
12%
Tier 1 (core) capital
10%
Conservation buffer
(consisting of common
equity Tier 1 capital)
Common equity Tier 1
capital
Hybrid capital
Supplementary (Tier 2)
capital
8%
6%
4%
2%
0%
2%
2%
4%
2%
2%
4%
3.5%
1%
3.5%
4%
1.5%
2.5%
4.5%
1.5%
2%
0.625%
4.5%
1.5%
2%
1.25%
4.5%
1.5%
2%
1.875%
4.5%
1.5%
2%
2.5%
4.5%
1.5%
2%
Countercyclical capital buffer
0% to 2.5% common equity Tier 1 capital – national discretion
No longer qualifying
capital instruments (Tier 1 + 2)
Deductions
10-year transition phase
20% 40% 60% 60% 100%
2011 2012 2013 2014 2015 2016 2017 2018 2019
32
New capital requirements introduced to reflect the counterparty credit risks of OTC derivatives
will be particularly relevant to Pfandbrief banks that have included derivatives in cover
in order to address interest-rate or exchange-rate risks. Here, the Basel III rules provide for
the introduction of a regulatory capital requirement for the CVA (Credit Valuation Adjustment)
risk, understood to refer to the risk of mark-to-market losses on derivatives due to deterioration
in the credit risk of the derivative counterparty. As a rule, the appropriate capital charge
is determined at the level of the entire derivative portfolio, using a prescribed regulatory formula
which, in particular, includes the EaD (Exposure at Default) values and the credit-risk
weighting, determined using the methods already applied for the purposes of the default risk
capital charge. For derivative contracts entered into with a central counterparty, the previous
exposure exemption will be repealed. However, for such derivatives, a privileged risk weighting
is proposed in order to preserve the incentive to clear through central counterparties. In
addition, banks using the IRB approach will be subject to higher capital charges for exposures
to most companies in the finance industry, as the Basel III rules increase the measure used for
the systematic risk of such companies within the risk-weighting formula.
Excursus: Treatment of mortgage loans under CRD IV
The CRD IV is intended not only to implement the Basel III framework at the level of the EU,
but also to bring about further standardisation of the regulatory framework in Europe by abolishing
national options and discretionary powers (creation of a “Single Rule Book”). Especially
relevant to Pfandbrief banks in this regard is the planned revision of options for privileged
treatment of mortgage loans within the context of regulatory risk-weighting. Above all the proposal
suggests to
introduce a “hard test”, within the meaning of Article 35, paragraph 3, clause 2 of the German
Solvency Regulation (SolvV) in the residential property segment (as a precondition for