title: Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in Belgium (ESRB/2019/4)2019/C 366/01

text:
               30.10.2019

               EN

               Official Journal of the European Union

               C 366/1

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 27 June 2019
      on medium-term vulnerabilities in the residential real estate sector in Belgium
      (ESRB/2019/4)
      (2019/C 366/01)
      THE GENERAL BOARD OF THE EUROPEAN SYSTEMIC RISK BOARD,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (1), and in particular Articles 3, 16, 17 and 18 thereof,
      Whereas:

                  (1)

                  The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments.

                  (2)

                  These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

                  (3)

                  Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

                  (4)

                  As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

                  (5)

                  To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks.

                  (6)

                  In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation.

                  (7)

                  In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which Belgium was one (6).

                  (8)

                  In 2016 the main vulnerabilities identified in the residential real estate market in Belgium were the rapid growth in both house prices and mortgage loans, as well as the already high and increasing household indebtedness, with an increasing share of mortgagors being potentially vulnerable to adverse economic conditions or developments in the residential real estate market in Belgium.

                  (9)

                  The ESRB has recently concluded a systematic and forward-looking European Economic Area-wide assessment of vulnerabilities relating to residential real estate (7).

                  (10)

                  As regards Belgium, this recent assessment has revealed that, since 2016, strong growth in housing credit has continued to fuel household indebtedness. Despite the fact that the growth in house prices has decelerated, the previous dynamics raise concerns about potential overvaluation. Moreover, a significant share of mortgage loans continue to be provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market. Against this background, a 5 percentage point risk weight add-on, which was introduced in 2013 for the mortgage exposures of credit institutions that use the internal ratings-based (IRB) approach, has contributed to increasing the resilience of these institutions.

                  (11)

                  In 2018, the Nationale Bank van België/Banque Nationale de Belgique increased that 5 percentage point risk weight add-on by the application, pursuant to Article 458 of Regulation (EU) No 575/2013, of a proportionate risk weight add-on consisting of 33 % of the exposure-weighted average of the risk weights applied to the exposures at default in each credit institution’s residential mortgage portfolio.

                  (12)

                  The risk weight add-on currently in place aims to increase the resilience of credit institutions that use the IRB approach, and to mitigate the build-up of risks related to new mortgage loans. However, there are currently no borrower-based measures (e.g. limits to the loan-to-value (LTV) ratio, the debt-to-income (DTI) ratio or the debt service-to-income (DSTI) ratio) in place in Belgium that would directly limit the share of mortgage loans provided to households which are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market.

                  (13)

                  Therefore, the ESRB has concluded that the macroprudential measures that are in place or available in Belgium are partially appropriate and partially sufficient to address the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards in the medium term. Consequently, further policy action is required to address these vulnerabilities, which can be a source of systemic risk. The measures proposed in this Recommendation are intended to complement the existing macroprudential measures in Belgium, with the aim of strengthening resilience. They should not be considered as substitutes for the existing capital-based measures, which remain important in order to address existing vulnerabilities in the outstanding loan portfolio.

                  (14)

                  The purpose of this Recommendation is to recommend the activation of legally binding borrower-based measures to address the significant share of mortgage loans provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market in Belgium.

                  (15)

                  This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

                  (16)

                  ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATION

         Recommendation A — Activation of borrower-based measures

      It is recommended that the Belgian national authorities entrusted with recommendation powers or with the application of borrower-based measures, recommend the activation of, and activate, legally binding borrower-based measures, respectively, in order to prevent:

                  (a)

                  a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

                  (b)

                  a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses on these loans in the event of their default and a subsequent decrease in house prices.

            SECTION 2

         IMPLEMENTATION

      1.   Definitions

      For the purposes of this Recommendation the following definitions apply:

                  (a)

                  ‘borrower-based measures’ means macroprudential measures that target borrowers;

                  (b)

                  ‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority;

                  (c)

                  ‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective;

                  (d)

                  ‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the value of the property at the moment of the loan origination;

                  (e)

                  ‘debt-to-income ratio’ (DTI ratio) means the total debt of the borrower at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (f)

                  ‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (g)

                  ‘medium term‘ means within a three-year horizon;

                  (h)

                  ‘legally binding borrower-based measures’ means borrower-based measures that are introduced through legally binding acts;

                  (i)

                  ‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year);

                  (j)

                  ‘maturity’ means the duration of the residential real estate loan contract expressed in years at the moment of loan origination;

                  (k)

                  ‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8).

            2.   Criteria for implementation

                  1.

                  The following criteria apply to the implementation of this Recommendation:

                              (a)

                              due regard should be paid to the principle of proportionality, taking into account the objective and content of Recommendation A;

                              (b)

                              when activating borrower-based measures under Recommendation A, their calibration and phasing-in should take into account the position of Belgium in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (c)

                              specific criteria for compliance with Recommendation A are set out in Annex I.

                  2.

                  The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should as a minimum contain:

                              (a)

                              information on the substance and timeline of the actions undertaken;

                              (b)

                              an assessment of the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, and maturities, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation;

                              (c)

                              a detailed justification of any inaction or departure from this Recommendation, including any delays.

            3.   Timeline for the follow-up

      The addressees are requested to report to the ESRB and to the Council on the actions taken in response to this Recommendation, or adequately justify any inaction, in compliance with the following timelines:
      By 31 October 2020, and yearly thereafter until 31 October 2022, the addressees of Recommendation A are requested to submit to the ESRB and to the Council a report on any actions taken with regard to implementing borrower-based measures to address the vulnerabilities related to household indebtedness, house price overvaluation and lending standards for new mortgage loans in Belgium. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.
      4.   Monitoring and assessment

                  1.

                  The ESRB Secretariat will:

                              (a)

                              assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up;

                              (b)

                              verify the follow-up by the addressees, provide assistance at their request, and submit three follow-up reports regarding the implementation of Recommendation A to the General Board; the first report by 31 December 2020, the second report by 31 December 2021, and the third report by 31 December 2022.

                  2.

                  The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.

         Done at Frankfurt am Main, 27 June 2019.

               Head of the ESRB Secretariat,

               on behalf of the General Board of the ESRB

            Francesco MAZZAFERRO

         (1)  OJ L 331, 15.12.2010, p. 1.

         (2)  Recommendation ESRB/2013/1 of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (OJ C 170, 15.6.2013, p. 1).

         (3)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

         (4)  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

         (5)  See ‘Vulnerabilities in the EU Residential Real Estate Sector’, ESRB, November 2016, available on the ESRB’s website at www.esrb.europa.eu.

         (6)  Warning ESRB/2016/06 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Belgium (OJ C 31, 31.1.2017, p. 45).

         (7)  See ‘Vulnerabilities in the residential real estate sectors of EEA countries’, ESRB, 2019, available on the ESRB’s website at www.esrb.europa.eu

         (8)  Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

         (9)  Recommendation ESRB/2016/14 of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps (OJ C 31, 31.1.2017, p. 1).

         ANNEX I

            SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATION

            Recommendation A — Activation of borrower-based measures

         The following compliance criteria are applicable to Recommendation A.

                     1.

                     In order to prevent:

                                 (a)

                                 a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

                                 (b)

                                 a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses in the event of their default and a subsequent decrease in house prices;

                           the Belgian national authorities should use one or several borrower-based measures in combination (e.g. limits to the LTV ratio in combination with limits to the DTI ratio, or to the DSTI ratio, and maturity limits), to ensure the effectiveness of the measures in place and to minimise any potential for their circumvention or for unintended consequences that could reduce their effectiveness and possibly create risks in other areas.

                     2.

                     Prior to activating borrower-based measures, an assessment should be made of the position of Belgium in the economic and financial cycles, in order to determine the appropriate calibration and phasing-in of such measures.

                     3.

                     After the activation of borrower-based measures, their further tightening or the activation of additional macroprudential measures may be needed to address the vulnerabilities identified in Belgium; this will depend on the choice of the borrower-based measures activated, on the initial calibration of those activated measures and on the results of the assessment of vulnerabilities.


title: Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in Luxembourg (ESRB/2019/6)2019/C 366/03

text:
               30.10.2019

               EN

               Official Journal of the European Union

               C 366/14

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 27 June 2019
      on medium-term vulnerabilities in the residential real estate sector in Luxembourg
      (ESRB/2019/6)
      (2019/C 366/03)
      THE GENERAL BOARD OF THE EUROPEAN SYSTEMIC RISK BOARD,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (1), and in particular Articles 3, 16, 17 and 18 thereof,
      Whereas:

                  (1)

                  The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments.

                  (2)

                  These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

                  (3)

                  Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

                  (4)

                  As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

                  (5)

                  To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks.

                  (6)

                  In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation.

                  (7)

                  In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which Luxembourg was one (6).

                  (8)

                  In 2016 the main vulnerabilities identified in the residential real estate market in Luxembourg related to the rapid growth in both house prices and mortgage loans, as well as the high and increasing household indebtedness. Moreover, a significant share of mortgagors had high debt and debt-servicing costs relative to income, thus making them vulnerable to a potential increase in interest rates.

                  (9)

                  The ESRB has recently concluded a systematic and forward-looking European Economic Area (EEA)-wide assessment of vulnerabilities relating to residential real estate (7).

                  (10)

                  As regards Luxembourg, this recent assessment has revealed that, since 2016, strong growth in mortgage loans has continued to fuel household indebtedness. Despite the fact that the growth in house prices has decelerated, the previous dynamics raise concerns about potential overvaluation. Moreover, the most recent evidence on lending standards confirms that a significant share of households are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market.

                  (11)

                  Since 2016, and following the recommendations issued by Comité du Risque Systémique (the Luxembourg macroprudential authority) several capital-based measures have been activated in Luxembourg: (i) in 2016, the Commission de Surveillance du Secteur Financier (CSSF, the Luxembourg Financial Sector Supervisory Commission) introduced for retail exposures secured by residential property located in Luxembourg, an average risk weight floor of 15 % for credit institutions that use the internal ratings-based approach, under Article 92 of Regulation (EU) No 575/2013; and (ii) in 2018, the CSSF increased the countercyclical capital buffer rate from 0 % to 0,25 %, from 1 January 2020.

                  (12)

                  Even though the national authorities in Luxembourg have proposed the establishment of a legal framework for legally binding borrower-based measures, these measures are not yet available in Luxembourg. However, the vulnerabilities identified, which are related to the growth in both house prices and mortgage loans as well as increasing household indebtedness, would require the activation of such measures.

                  (13)

                  While cyclical factors play an important role in fuelling the vulnerabilities identified in Luxembourg, there are also structural factors that have driven these vulnerabilities, resulting in a higher level of systemic risk. These factors include: (i) a lack of housing supply, which has been exerting upward pressure on house prices and debt for households that buy their own property; and (ii) the tax deductibility of interest paid on mortgage loans, which may act as an incentive for households to overborrow.

                  (14)

                  Therefore, the ESRB has concluded that the macroprudential measures that are in place or available in Luxembourg are partially appropriate and partially sufficient to address the medium-term vulnerabilities that have been identified in Luxembourg. Consequently, further policy action is required to address these vulnerabilities, which can be a source of systemic risk. The measures proposed in this Recommendation are intended to complement the existing macroprudential measures in Luxembourg, with the aim of strengthening resilience. They should not be considered as substitutes for the existing capital-based measures, which remain important in order to address existing vulnerabilities in the outstanding loan portfolio. Given that the vulnerabilities are, to some extent, driven by structural factors which go beyond macroprudential policy, other policies are needed to complement and support the current macroprudential measures, with the aim of addressing factors contributing to the build-up of systemic risks in the residential real estate market in Luxembourg more efficiently and effectively, without producing excessive costs for the Luxembourg real economy and financial system.

                  (15)

                  The purpose of this Recommendation is to recommend the establishment in Luxembourg law of a framework for legally binding borrower-based measures, as well as the activation of such measures as soon as they are available under national law. This Recommendation also aims to emphasise the need for broader policy action aiming to curb factors which facilitate or promote increasing household indebtedness.

                  (16)

                  This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

                  (17)

                  ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A — Legal framework for borrower-based measures

      It is recommended that Luxembourg establish a legal framework for borrower-based measures which includes at least the following legally-binding borrower-based measures:

                  a.

                  limits that apply to the DTI ratio;

                  b.

                  limits that apply to the DSTI ratio;

                  c.

                  limits that apply to the LTV ratio; and

                  d.

                  maturity limits.

         Recommendation B — Activation of borrower-based measures

                  1.

                  It is recommended that, pending the establishment of the legal framework referred to in Recommendation A, the Luxembourg national authorities entrusted with the application of borrower-based measures apply non-legally-binding borrower-based measures in order to prevent:

                              (a)

                              a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

                              (b)

                              a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses on these loans in the event of their default and a subsequent decrease in house prices.

                  2.

                  It is recommended that, once the legal framework referred to in Recommendation A is established, the Luxembourg national authorities entrusted with the application of borrower-based measures activate legally-binding borrower-based measures to further address the objectives set out in sub-recommendation B(1).

         Recommendation C — Structural changes related to mortgage loans and the residential real estate sector

      It is recommended that Luxembourg review its policies with the aim of curbing the structural factors that have driven the vulnerabilities identified in Luxembourg as a source of systemic risk as they provide incentives for households to take on excessive mortgage debt, or cause excessive growth in house prices and mortgage debt.
      SECTION 2

         IMPLEMENTATION

      1.   Definitions

      For the purposes of this Recommendation the following definitions apply:

                  (a)

                  ‘borrower-based measures’ means macroprudential measures that target borrowers;

                  (b)

                  ‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority;

                  (c)

                  ‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective;

                  (d)

                  ‘medium term’ means within a three-year horizon;

                  (e)

                  ‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8);

                  (f)

                  ‘legally binding borrower-based measures’ means borrower-based measures that are introduced through legally binding acts;

                  (g)

                  ‘debt-to-income ratio’ (DTI ratio) means the total debt of the borrower at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (h)

                  ‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (i)

                  ‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the value of the property at the moment of loan origination;

                  (j)

                  ‘maturity’ means the duration of the residential real estate loan contract expressed in years at the moment of loan origination;

                  (k)

                  ‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year).

            2.   Criteria for implementation

                  1.

                  The following criteria apply to the implementation of this Recommendation:

                              (a)

                              due regard should be given to the principle of proportionality, taking into account the objective and content of Recommendation A and Recommendation B;

                              (b)

                              Recommendation A must be implemented before sub-recommendation B(2) to ensure compliance with sub-recommendation B(2);

                              (c)

                              when activating borrower-based measures under Recommendation B, their calibration and phasing-in should take into account the position of Luxembourg in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (d)

                              as regards Recommendation C, when making policy changes, the phasing-in of such measures should take into account the position of Luxembourg in the economic and financial cycles, so that these measures do not serve to amplify or trigger the materialisation of accumulated vulnerabilities in the residential real estate sector in Luxembourg;

                              (e)

                              specific criteria for compliance with Recommendation A, with Recommendation B and with Recommendation C are set out in Annex I.

                  2.

                  The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should as a minimum contain:

                              (a)

                              information on the substance and timeline of the actions undertaken;

                              (b)

                              an assessment of the vulnerabilities related to household indebtedness, house price overvaluation and lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, and maturities, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation;

                              (c)

                              a detailed justification of any inaction or departure from this Recommendation, including any delays.

            3.   Timeline for the follow-up

      The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions taken in response to this Recommendation, or adequately justify any inaction, in compliance with the following timelines:
      (a)   Recommendation A

                  (i)

                  By 31 October 2020, the addressee of Recommendation A is requested to submit to the ESRB and to the Council an interim report on the implementation of Recommendation A including at least a statement clarifying whether it is planned that Recommendation A be implemented and which body or bodies will be responsible for the decision to activate and implement the borrower-based measures set out in that Recommendation. The ESRB may inform the addressee of Recommendation A of its views on the interim report.

                  (ii)

                  By 31 March 2021, the addressee of Recommendation A is requested to submit to the ESRB and to the Council a final report on the implementation of Recommendation A.

            (b)   Recommendation B

      By 31 October 2020, and yearly thereafter until 31 October 2022, the addressees of Recommendation B are requested to submit to the ESRB and to the Council a report on any actions taken with regard to implementing borrower-based measures or any other available measures to address the vulnerabilities related to household indebtedness, house price overvaluation and lending standards for new mortgage loans in Luxembourg. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.
      (c)   Recommendation C

      By 31 October 2022, the addressee of Recommendation C is requested to submit to the ESRB and to the Council a report on the implementation of Recommendation C. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.
      4.   Monitoring and assessment

                  1.

                  The ESRB Secretariat will:

                              (a)

                              assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up;

                              (b)

                              verify the follow-up by the addressees, provide assistance at their request, and submit follow-up reports to the General Board. Three assessments will be initiated as follows:

                                          (i)

                                          by 31 December 2020, regarding the implementation of Recommendation B;

                                          (ii)

                                          by 31 December 2021, regarding the implementation of Recommendations A and B; and

                                          (iii)

                                          by 31 December 2022, regarding the implementation of Recommendations B and C.

                  2.

                  The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.

         Done at Frankfurt am Main, 27 June 2019.

               Head of the ESRB Secretariat,

               on behalf of the General Board of the ESRB

            Francesco MAZZAFERRO

         (1)  OJ L 331, 15.12.2010, p. 1.

         (2)  Recommendation ESRB/2013/1 of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (OJ C 170, 15.6.2013, p. 1).

         (3)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

         (4)  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

         (5)  See ‘Vulnerabilities in the EU Residential Real Estate Sector’, ESRB, November 2016, available on the ESRB’s website at www.esrb.europa.eu.

         (6)  Warning ESRB/2016/09 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Luxembourg (OJ C 31, 31.1.2017, p. 51).

         (7)  See ‘Vulnerabilities in the residential real estate sectors of EEA countries’, ESRB, 2019, available on the ESRB’s website at www.esrb.europa.eu.

         (8)  Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

         (9)  Recommendation ESRB/2016/14 of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps (OJ C 31, 31.1.2017, p. 1).

         ANNEX I

            SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATIONS

            Recommendation A — Legal framework for borrower-based measures

         The following compliance criteria are applicable to Recommendation A.

                     1.

                     The Luxembourg legal framework for borrower-based measures should ensure that:

                                 (a)

                                 the limits that apply to the debt-to-income (DTI) ratio and to the debt-service-to income (DSTI) ratio, as well as the maturity limits, are applicable to loans granted to all types of borrowers and by all types of lenders, in order to avoid circumvention of the limits;

                                 (b)

                                 when calculating the loan-to-value (LTV) ratio, only immoveable property can be considered as collateral;

                                 (c)

                                 the Luxembourg national authorities entrusted with the activation of borrower-based measures are able to activate legally-binding borrower-based measures in an effective and pre-emptive way and are provided with the necessary flexibility in order to design those measures based on the vulnerabilities identified.

                     2.

                     The Luxembourg legal framework for borrower-based measures should be in force by no later than 1 July 2021.

            Recommendation B – Activation of borrower-based measures

         The following compliance criteria are applicable to Recommendation B.

                     1.

                     In order to prevent:

                                 (a)

                                 a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

                                 (b)

                                 a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses in the event of their default and a subsequent decrease in house prices;

                           the Luxembourg national authorities should use one or several borrower-based measures in combination (e.g. limits to the LTV ratio in combination with limits to the DTI ratio, or to the DSTI ratio, and maturity limits), to ensure the effectiveness of the measures in place and to minimise any potential for their circumvention or for unintended consequences that could reduce their effectiveness and possibly create risks in other areas.

                     2.

                     Prior to activating borrower-based measures, an assessment should be made of the position of Luxembourg in the economic and financial cycles, in order to determine the appropriate calibration and phasing-in of such measures.

                     3.

                     After the activation of the borrower-based measures, their further tightening or the activation of additional macroprudential measures may be needed to address the vulnerabilities identified in Luxembourg; this will depend on the choice of the borrower-based measures activated, on the initial calibration of those activated measures and on the results of the assessment of vulnerabilities.

                     4.

                     Once the legal framework referred to in Recommendation A is in force, the Luxembourg national authorities entrusted with the application of borrower-based measures may decide to retain non-legally-binding borrower-based measures that are already in place, provided that there is evidence that the vulnerabilities identified have been adequately mitigated by such measures.

            Recommendation C — Structural changes related to mortgage loans and the residential real estate sector

         The following compliance criterion is applicable to Recommendation C.
         When formulating policy options, and before implementing any policy changes, an assessment should be made of the impact of the proposed measures considering the position of Luxembourg in the economic and financial cycles, to ensure that such measures do not amplify or trigger the materialisation of the accumulated vulnerabilities in the residential real estate sector in Luxembourg.


title: Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in the Netherlands (ESRB/2019/7)2019/C 366/04

text:
               30.10.2019

               EN

               Official Journal of the European Union

               C 366/22

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 27 June 2019
      on medium-term vulnerabilities in the residential real estate sector in the Netherlands
      (ESRB/2019/7)
      (2019/C 366/04)
      THE GENERAL BOARD OF THE EUROPEAN SYSTEMIC RISK BOARD,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (1), and in particular Articles 3, 16, 17 and 18 thereof,
      Whereas:

                  (1)

                  The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments.

                  (2)

                  These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

                  (3)

                  Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

                  (4)

                  As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

                  (5)

                  To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks.

                  (6)

                  In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation.

                  (7)

                  In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which the Netherlands was one (6).

                  (8)

                  In 2016 the main vulnerability identified in the residential real estate market in the Netherlands related to high household indebtedness, with a significant share of mortgagors having total debt exceeding the value of their home. This vulnerability reflected, among other things, that although the share of new amortising mortgage loans was increasing, a significant share of the existing mortgage loans was non-amortising – despite the fact that in 2016 there were no signs of overvaluation and house prices in major cities were returning to pre-crisis levels.

                  (9)

                  The ESRB has recently concluded a systematic and forward-looking European Economic Area (EEA)-wide assessment of vulnerabilities relating to residential real estate (7).

                  (10)

                  As regards the Netherlands, this recent assessment has revealed that, since 2016, household indebtedness has decreased slightly and the share of new non-amortising mortgage loans has also continued to decrease. On the other hand, since 2016, house prices have continued to increase, leading to pockets of overvaluation in the major cities. Against this background, the loan-to-value (LTV) ratios of new mortgage loans have remained high, in particular because the regulatory limit of 100 % that applies to the LTV ratio does not require additional collateral for an event of a decrease in house prices. The vulnerabilities posed by these developments with regard to financial stability have not been reflected in the application of risk weights for mortgage loans in the Netherlands, which are among the lowest in the EEA.

                  (11)

                  Since 2016, the gradual tightening of the legally-binding limit that applies to the LTV ratio continued, and it was lowered to 100 % in 2018 (from 106 % in 2012). In 2018, the Dutch Government also announced that it would gradually reduce the maximum rate at which interest paid on mortgage loans can be deducted, from 49,5 % in 2018 to around 37 % in 2023.

                  (12)

                  Even though the macroprudential authority in the Netherlands (Financieel Stabiliteitscomité) has recommended a further tightening of the legally binding limit that applies to the LTV ratio to 90 %, the Dutch Government, which is responsible for implementing such measures, has chosen not to follow this recommendation. Furthermore, since the current legal framework does not provide for an ‘act or explain’ mechanism for recommendations made by the macroprudential authority, the Dutch Government has not been formally required to explain its inaction to the macroprudential authority, but has only explained its position to the Dutch Parliament. However, in order to address the vulnerabilities identified in the Netherlands as regards pockets of overvaluation of house prices and the collateralisation of new mortgage loans, the limit that applies to the LTV ratio would need to be reduced. Moreover, there are no macroprudential capital-based measures — for example higher risk weights for mortgage loans — currently in place to address the accumulated vulnerabilities related to the collateralisation of existing mortgage loans and the potential second-round effects related to household indebtedness.

                  (13)

                  Although the debt-service-to-income (DSTI) ratio for mortgage loans has important risk mitigating characteristics, such as assumptions about potential increases in interest rates, certain elements of the current methodology for calibrating the limit that applies to the DSTI ratio in the Netherlands reduce the effectiveness of the measure and may increase its procyclical effects on the financial and economic cycles. While some adjustments (such as the use of four-year averages of the calculated ratios as inputs for the calibration) have been made to address the procyclical elements of the methodology, certain of these elements remain.

                  (14)

                  While cyclical factors play an important role in fuelling the vulnerabilities identified in the Netherlands, there are also structural factors that have driven these vulnerabilities, resulting in a higher level of systemic risk. These factors include: (i) a lack of housing supply, which has been exerting upward pressure on house prices and debt for households that buy their own property; and (ii) the tax deductibility of interest paid on mortgage loans, which may act as an incentive for households to overborrow.

                  (15)

                  Therefore, the ESRB has concluded that the macroprudential measures that are in place in the Netherlands are partially appropriate and partially sufficient to address the vulnerabilities related to household indebtedness in the medium term. Consequently, further policy action is required to address these vulnerabilities, which can be a source of systemic risk. The measures proposed in this Recommendation are aimed at complementing the existing macroprudential measures in the Netherlands.

                  (16)

                  Given that the vulnerabilities are, to some extent, driven by structural factors which go beyond macroprudential policy, other policies are needed to complement and support the current macroprudential measures, with the aim of addressing factors contributing to the build-up of systemic risks in the residential real estate market in the Netherlands more efficiently and effectively, without producing excessive costs for the Dutch real economy and financial system.

                  (17)

                  The purpose of this Recommendation is to recommend: a) the establishment in Dutch law of an ‘act or explain’ mechanism in relation to recommendations issued by the macroprudential authority on the activation of legally binding borrower-based measures; (b) the tightening of the existing legally binding limit that applies to the LTV ratio; (c) an amendment to the methodology for determining the maximum limit that applies to the DSTI ratio; and (d) the activation of capital-based measures in order to ensure the resilience of the banking sector in relation to the medium-term vulnerabilities identified in the Netherlands. This Recommendation also aims to emphasise the need for broader policy action aiming to curb factors which facilitate or promote increasing household indebtedness.

                  (18)

                  This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

                  (19)

                  ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A — Legal framework for borrower-based measures

      It is recommended that the Netherlands ensure that the recommendation powers of the macroprudential authority over all applicable legally binding borrower-based measures are complemented by an ‘act or explain’ mechanism, or alternatively, where this is not possible under Dutch law, that an accountability mechanism is established in order to make public the views of the authority responsible for the application of borrower-based measures following a recommendation issued by the macroprudential authority in the Netherlands.

         Recommendation B — Tightening of borrower-based measures and approach to calibration

                  1.

                  It is recommended that the Netherlands lower the current legally binding limit that applies to the LTV ratio, thus ensuring that collateral for new mortgage loans is sufficient to cover credit losses corresponding to the potential decrease in house prices under adverse economic or financial conditions.

                  2.

                  It is recommended that the Netherlands change the methodology for determining the maximum limit that applies to the DSTI ratio so that the measure does not lead to increasing procyclicality of the economic and financial cycles.

         Recommendation C — Activation of capital-based measures

      It is recommended that the macroprudential authority, the designated authority or the competent authority in the Netherlands, as applicable, ensure, by activating capital-based measures, the resilience of credit institutions authorised in the Netherlands in the face of the potential materialisation of systemic risk related to residential real estate which could lead to direct and indirect credit losses stemming from mortgage loans or arising as a consequence of the decrease in consumption by households with housing loans.

         Recommendation D — Structural changes related to mortgage loans and the residential real estate sector

      It is recommended that the Netherlands review its policies with the aim of curbing the structural factors that have driven the vulnerabilities identified in the Netherlands as a source of systemic risk as they provide incentives for households to take on excessive mortgage debt, or cause excessive growth in house prices and mortgage debt.
      SECTION 2

         IMPLEMENTATION

      1.   Definitions

      For the purposes of this Recommendation the following definitions apply:

                  (a)

                  ‘borrower-based measures’ means macroprudential measures that target borrowers;

                  (b)

                  ‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority;

                  (c)

                  ‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective;

                  (d)

                  ‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the value of the property at the moment of the loan origination;

                  (e)

                  ‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8);

                  (f)

                  ‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year);

                  (g)

                  ‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (h)

                  ‘medium term‘ means within a three-year horizon;

                  (i)

                  ‘legally binding borrower-based measures’ means borrower-based measures that are introduced through legally binding acts.

            2.   Criteria for implementation

                  1.

                  The following criteria apply to the implementation of this Recommendation:

                              (a)

                              due regard should be given to the principle of proportionality, taking into account the objective and content of Recommendation A, Recommendation B, Recommendation C and Recommendation D;

                              (b)

                              when lowering the existing limit that applies to the LTV ratio under Recommendation B, the calibration and phasing-in of the measure should take into account the position of the Netherlands in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (c)

                              when activating capital-based measures under Recommendation C, their calibration and phasing-in should take into account the position of the Netherlands in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (d)

                              as regards Recommendation D, when making policy changes, the phasing-in of such measures should take into account the position of the Netherlands in the economic and financial cycles, so that these measures do not serve to amplify or trigger the materialisation of accumulated vulnerabilities in the residential real estate sector in the Netherlands;

                              (e)

                              specific criteria for compliance with Recommendation B, with Recommendation C and with Recommendation D are set out in Annex I.

                  2.

                  The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should as a minimum contain:

                              (a)

                              information on the substance and timeline of the actions undertaken;

                              (b)

                              an assessment of the vulnerabilities related to pockets of overvaluation of house prices and the collateralisation of new and existing mortgage loans, including the distribution of new mortgage loans according to their LTV ratios, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation;

                              (c)

                              a detailed justification of any inaction or departure from this Recommendation, including any delays.

            3.   Timeline for the follow-up

      The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions taken in response to this Recommendation, or adequately justify any inaction, in compliance with the following timelines:

                  (a)

                     Recommendation A

                  By 31 March 2021, the addressee of Recommendation A is requested to submit a final report to the ESRB and to the Council on the implementation of Recommendation A.

                  (b)

                     Recommendation B

                  By 31 October 2020, and yearly thereafter until 31 October 2022, the addressee of sub-Recommendation B(1) is requested to submit to the ESRB and to the Council a report on any actions taken with regard to tightening borrower-based measures. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.
                  By 31 March 2021, the addressee of sub-Recommendation B(2) is requested to submit to the ESRB and to the Council a report on the implementation of sub-Recommendation B(2). Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  (c)

                     Recommendation C

                  By 31 October 2020, and yearly thereafter until 31 October 2022, the addressees of Recommendation C are requested to submit to the ESRB and to the Council a report on any actions taken with regard to implementing capital-based measures. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  (d)

                     Recommendation D

                  By 31 October 2022, the addressee of Recommendation D is requested to submit to the ESRB and to the Council a report on the implementation of Recommendation D. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

            4.   Monitoring and assessment

                  1.

                  The ESRB Secretariat will:

                              (a)

                              assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up;

                              (b)

                              verify the follow-up by the addressees, provide assistance at their request, and submit follow-up reports to the General Board. Three assessments will be initiated as follows:

                                          (i)

                                          by 31 December 2020, regarding the implementation of sub-recommendation B(1) and Recommendation C;

                                          (ii)

                                          by 31 December 2021, regarding the implementation of Recommendations A, sub-recommendations B(1) and B(2) and Recommendation C;

                                          (iii)

                                          by 31 December 2022 regarding the implementation of subrecommendation B(1) and Recommendations C and D.

                  2.

                  The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.

         Done at Frankfurt am Main, 27 June 2019.

               Head of the ESRB Secretariat,

               on behalf of the General Board of the ESRB

            Francesco MAZZAFERRO

         (1)  OJ L 331, 15.12.2010, p. 1.

         (2)  Recommendation ESRB/2013/1 of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (OJ C 170, 15.6.2013, p. 1).

         (3)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

         (4)  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

         (5)  See ‘Vulnerabilities in the EU Residential Real Estate Sector’, ESRB, November 2016, available on the ESRB’s website at www.esrb.europa.eu

         (6)  Warning ESRB/2016/10 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Netherlands (OJ C 31, 31.1.2017, p. 53).

         (7)  See ‘Vulnerabilities in the residential real estate sectors of EEA countries’, ESRB, 2019, available on the ESRB’s website at www.esrb.europa.eu

         (8)  Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

         (9)  Recommendation ESRB/2016/14 of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps (OJ C 31, 31.1.2017, p. 1).

         ANNEX I

            SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATIONS

            Recommendation B — Tightening of borrower-based measures and approach to calibration

         The following compliance criterion is applicable to sub-recommendation B(1).
         Prior to further lowering the existing limits that apply to the loan-to-value (LTV) ratio, an assessment should be made of the position of the Netherlands in the economic and financial cycles in order to determine an appropriate calibration and phasing-in of such measures.
         The following compliance criterion is applicable to sub-recommendation B(2).
         When calibrating the limit that applies to the DSTI ratio, the Netherlands should assess the potential procyclical effects of different elements of the methodology used for the calibration.

            Recommendation C — Activation of capital-based measures

         The following compliance criteria are applicable to Recommendation C.

                     1.

                     Prior to activating capital-based measures, an assessment should be made of the position of the Netherlands in the economic and financial cycles in order to determine whether activating such measures would be appropriate.

                     2.

                     After the activation of the capital-based measures, their further tightening or the activation of additional macroprudential measures may be needed to address the vulnerabilities identified in the Netherlands; this will depend on the choice of the capital-based measures activated, on the initial calibration of those measures and on the results of the assessment of vulnerabilities.

            Recommendation D — Structural changes related to mortgage loans and the residential real estate sector

         The following compliance criterion is applicable to Recommendation D.
         When formulating policy options, and before implementing any policy changes, an assessment should be made of the impact of the proposed measures considering the position of the Netherlands in the economic and financial cycles, to ensure that such measures do not amplify or trigger the materialisation of the accumulated vulnerabilities in the residential real estate sector in the Netherlands.


title: Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in Sweden (ESRB/2019/9)2019/C 366/06

text:
               30.10.2019

               EN

               Official Journal of the European Union

               C 366/35

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 27 June 2019
      on medium-term vulnerabilities in the residential real estate sector in Sweden
      (ESRB/2019/9)
      (2019/C 366/06)
      THE GENERAL BOARD OF THE EUROPEAN SYSTEMIC RISK BOARD,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (1), and in particular Articles 3, 16, 17 and 18 thereof,
      Whereas:

                  (1)

                  The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments.

                  (2)

                  These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

                  (3)

                  Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

                  (4)

                  As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

                  (5)

                  To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks.

                  (6)

                  In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation.

                  (7)

                  In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which Sweden was one (6).

                  (8)

                  In 2016 the main vulnerability identified in the residential real estate market in Sweden related to the substantial and prolonged growth in both house prices and mortgage loans, which led to an overvaluation of house prices as well as to high and increasing household indebtedness.

                  (9)

                  The ESRB has recently concluded a systematic and forward-looking European Economic Area (EEA)-wide assessment of vulnerabilities relating to residential real estate (7).

                  (10)

                  As regards Sweden, this recent assessment has revealed that, since 2016, the growth in house prices has decelerated, and they are currently at the same level as in 2016. However, house prices remain overvalued and household indebtedness has increased significantly.

                  (11)

                  Since 2016, the Swedish national authorities have tightened or introduced several borrower- and capital-based measures. In 2016, requirements for amortisation of new mortgage loans were introduced. These requirements were linked to the loan-to-value (LTV) ratio of the new loans, requiring amortisation by a minimum of 2 % annually for loans with an LTV ratio above 70 %, and by 1 % annually for loans with an LTV ratio of 50 % to 70 %. In 2017, these requirements were tightened in relation to the loan-to-income (LTI) ratio of the new loans, increasing these requirements by 1 percentage point per year for new mortgage loans with an LTI ratio above 4,5. In 2018, Finansinspektionen (the Swedish Financial Supervisory Authority) imposed on all domestic credit institutions that use the internal ratings-based approach, pursuant to Article 458 of Regulation (EU) No 575/2013, a credit institution-specific minimum level (floor) of 25 % for the exposure-weighted average of the risk weights applied to the portfolio of retail exposures to obligors residing in Sweden secured by mortgages on immovable property. Finally, Finansinspektionen increased the countercyclical capital buffer rate in 2018 from 2 % to 2,5 %, applicable from September 2019.

                  (12)

                  While cyclical factors play an important role in fuelling the vulnerabilities that have been identified in Sweden, there are also important structural factors that have driven these vulnerabilities, resulting in a higher level of systemic risk. These factors include: (i) a lack of housing supply, which has been exerting upward pressure on house prices and debt for households that buy their own property; and (ii) the favourable tax treatment of housing, such as the tax deductibility of interest paid on mortgage loans, which may facilitate house price increases and act as an incentive for households to overborrow.

                  (13)

                  Therefore, despite the fact that the ESRB acknowledges the wide range of macroprudential measures that are in place in Sweden, it has concluded that even though these macroprudential measures are appropriate, they are partially sufficient to address the identified vulnerabilities related to residential real estate, in particular the household indebtedness and overvaluation of house prices, in the medium term. Given that these vulnerabilities are, to some extent, driven by structural factors which go beyond macroprudential policy, other policies are needed to complement and support the current macroprudential measures, with the aim of addressing factors contributing to the build-up of systemic risks in the residential real estate market in Sweden more efficiently and effectively, without producing excessive costs for the Swedish real economy and financial system. The measures proposed in this Recommendation are aimed at complementing the existing macroprudential measures in Sweden.

                  (14)

                  The purpose of this Recommendation is to recommend: a) broader policy action aiming to curb factors which facilitate or promote increasing household indebtedness; and b) the tightening of the existing, or the activation of other, macroprudential measures if the vulnerabilities related to household indebtedness and overvaluation of house prices continue to increase due to cyclical economic and financial reasons.

                  (15)

                  This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

                  (16)

                  ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A – Structural changes related to mortgage loans and the residential real estate sector

      It is recommended that Sweden review its policies with the aim of curbing the structural factors that have driven the vulnerabilities identified in Sweden as a source of systemic risk as they provide incentives for households to take on excessive mortgage debt, or cause excessive growth in house prices and mortgage debt.

         Recommendation B – Monitoring of vulnerabilities and activation or tightening of macroprudential measures

                  1.

                  It is recommended that the Swedish national authorities entrusted with the monitoring of systemic risks closely monitor vulnerabilities related to household indebtedness and overvaluation of house prices over the medium term, including, inter alia, by:

                              a)

                              assessing – using loan-level data for new mortgage loans – the ability of borrowers taking out new housing loans to withstand adverse economic or financial conditions or adverse developments in the residential real estate market; and

                              b)

                              assessing potential credit losses on existing mortgage portfolios, as well as potential second-round effects on financial stability in the event of adverse economic or financial developments.

                  2.

                  It is recommended that, in order to prevent the accumulation of credit risk, the Swedish macroprudential authority entrusted with the activation of borrower-based measures tighten existing, or activate other, borrower-based measures, if the results of the monitoring carried out pursuant to point (a) of sub-Recommendation B(1) provide evidence that a significant or an increasing share of borrowers taking out new housing loans might not be able to service their debt following an adverse economic or financial development.

                  3.

                  It is recommended that the macroprudential authority, the designated authority or the competent authority in Sweden, as applicable, tighten existing, or introduce other, capital-based measures in order to ensure sufficient capital for mortgage loans granted by credit institutions authorised in Sweden, if the results of the monitoring carried out pursuant to point (b) of sub-Recommendation B(1) provide evidence that potential credit losses on existing mortgage loans in the event of adverse economic or financial conditions or adverse developments in the residential real estate market, as well as credit losses on other loans as a consequence of the decrease in consumption by households with housing loans, have increased due to cyclical, economic and financial factors.

            SECTION 2

         IMPLEMENTATION

      1.   Definitions

      For the purposes of this Recommendation the following definitions apply:

                  (a)

                  ‘borrower-based measures’ means macroprudential measures that target borrowers;

                  (b)

                  ‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority;

                  (c)

                  ‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective;

                  (d)

                  ‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immoveable property at the moment of loan origination relative to the value of the property at the moment of loan origination;

                  (e)

                  ‘loan-to-income ratio (LTI ratio)’ means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (f)

                  ‘medium term’ means within a three-year horizon;

                  (g)

                  ‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year);

                  (h)

                  ‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8);

                  (i)

                  ‘debt-to-income ratio’ (DTI ratio) means the total debt of the borrower at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (j)

                  ‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination;

                  (k)

                  ‘maturity’ means the duration of the residential real estate loan contract expressed in years at the moment of loan origination.

            2.   Criteria for implementation

                  1.

                  The following criteria apply to the implementation of this Recommendation:

                              (a)

                              due regard should be given to the principle of proportionality, taking into account the objective and content of Recommendation A and of Recommendation B;

                              (b)

                              as regards Recommendation A, when making policy changes, the phasing-in of such measures should take into account the position of Sweden in the economic and financial cycles, so that these measures do not serve to amplify or trigger the materialisation of accumulated vulnerabilities in the residential real estate sector in Sweden;

                              (c)

                              when activating or tightening borrower-based or capital-based measures under Recommendation B, their calibration and phasing-in should take into account the position of Sweden in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (d)

                              specific criteria for compliance with Recommendation A and with Recommendation B are set out in Annex I.

                  2.

                  The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should as a minimum contain:

                              (a)

                              information on the substance and timeline of the actions undertaken;

                              (b)

                              an assessment of the vulnerabilities related to household indebtedness and overvaluation of house prices, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios and maturities, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation;

                              (c)

                              a detailed justification of any inaction or departure from this Recommendation, including any delays.

            3.   Timeline for the follow-up

      The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions taken in response to this Recommendation, or adequately justify any inaction, in compliance with the following timelines:

                  (a)

                     Recommendation A

                  By 31 October 2022, the addressee of Recommendation A is requested to deliver to the ESRB and to the Council a report on the implementation of Recommendation A.

                  (b)

                     Recommendation B

                  By 31 October 2020, and yearly thereafter until 31 October 2022, the addressees of Recommendation B are requested to submit to the ESRB and to the Council a report on monitoring vulnerabilities related to household indebtedness and actions taken to address such vulnerabilities. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

            4.   Monitoring and assessment

                  1.

                  The ESRB Secretariat will:

                              (a)

                              assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up;

                              (b)

                              verify the follow-up by the addressees, provide assistance at their request, and submit follow-up reports to the General Board. Three assessments will be initiated as follows:

                                          (i)

                                          by 31 December 2020, regarding the implementation of Recommendation B;

                                          (ii)

                                          by 31 December 2021, regarding the implementation of Recommendation B; and

                                          (iii)

                                          by 31 December 2022, regarding the implementation of Recommendations A and B.

                  2.

                  The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.

         Done at Frankfurt am Main, 27 June 2019.

               Head of the ESRB Secretariat,

               on behalf of the General Board of the ESRB

            Francesco MAZZAFERRO

         (1)  OJ L 331, 15.12.2010, p. 1.

         (2)  Recommendation ESRB/2013/1 of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (OJ C 170, 15.6.2013, p. 1).

         (3)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

         (4)  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

         (5)  See ‘Vulnerabilities in the EU Residential Real Estate Sector’, ESRB, November 2016, available on the ESRB’s website at www.esrb.europa.eu.

         (6)  Warning ESRB/2016/11 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Sweden (OJ C 31, 31.1.2017, p. 55).

         (7)  See ‘Vulnerabilities in the residential real estate sectors of EEA countries’, ESRB, 2019, available on the ESRB’s website at www.esrb.europa.eu.

         (8)  Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

         (9)  Recommendation ESRB/2016/14 of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps (OJ C 31, 31.1.2017, p. 1).

         ANNEX I

            SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATIONS

            Recommendation A – Structural changes related to mortgage loans and the residential real estate sector

         The following compliance criterion is applicable to Recommendation A.
         When formulating policy options, and before implementing any policy changes, an assessment should be made of the impact of the proposed measures considering the position of Sweden in the economic and financial cycles, to ensure that such measures do not amplify or trigger the materialisation of the accumulated vulnerabilities in the residential real estate sector in Sweden.

            Recommendation B – Monitoring of vulnerabilities and activation or tightening of macroprudential measures

         The following compliance criterion is applicable to Recommendation B.
         Prior to activating other, or tightening existing, macroprudential measures, an assessment should be made of the position of Sweden in the economic and financial cycles in order to determine whether such activation or tightening would be appropriate.