The Pfandbrief 2011 | 2012

For banks specialising in public sector lending, the leverage ratio would quickly assume the
role of a truly binding constraint. This, in turn, would permanently reduce the actual significance
of the risk-based regulatory capital requirements. At the very least, it is questionable
whether such an arrangement is compatible with the regulatory intent to establish a “backstop
measure” and whether it is desirable.
Moreover, if the leverage ratio represents a binding constraint on the pfandbrief-based
business, additional equity will be required to accommodate additional capital charges of cover
loan business. The resulting shift in the composition of refinancing to capital instruments with
higher required returns will cause overall refinancing costs to rise, which must be incorporated
into the margin requirements calculation. Financial products for government financing may
become more costly as a result of introducing the leverage ratio.
Outlook
In order to assess the impact of the likely general rise in the cost of credit terms due to regulatory
changes, the issue needs to be considered in the overall context. In Germany, this situation
is significantly influenced at the present time by the collection of contributions for the
restructuring fund (bank levy or “Bankenabgabe”). Because refinancing instruments with a
debt component are mostly incorporated without differentiation into the basis used for calculating
the levy and the related expenses must be generated in the bank’s lending business, this
regulation is already leading to an increase in loan margins, to the extent that the current level
of annual results must be held.
This raises the question of whether the aforementioned margin increases can be achieved
in light of the demand pattern, particularly with respect to public sector lending. The sum total
of the causal mechanisms described will influence pfandbrief-based refinancing as well as
the traditionally low-credit-risk loan business of the Pfandbrief banks. Since the consultations
began, the Association of German Pfandbrief Banks has stated that this must be given due
consideration by the relevant banking supervision decision-makers when they debate the final
version of the leverage ratio.
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