title: Recommendation of the European Systemic Risk Board of 2 December 2021 on medium-term vulnerabilities in the residential real estate sector in Germany (ESRB/2021/10) 2022/C 122/01

text:
               17.3.2022

               EN

               Official Journal of the European Union

               C 122/1

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 2 December 2021
      on medium-term vulnerabilities in the residential real estate sector in Germany
      (ESRB/2021/10)
      (2022/C 122/01)
      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 Article 3(2)(b) and (d) and Articles 16 and 18 thereof,
      Having regard to Decision ESRB/2011/1 of the European Systemic Risk Board of 20 January 2011 adopting the Rules of Procedure of the European Systemic Risk Board (2), and in particular Article 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 feedback loops between the financial system and the real economy may 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. 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. Furthermore, feedback loops between house prices and credit 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 (RRE) 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 RRE market. Indirect effects could be related to adjustments in household consumption or deleveraging by lenders, leading to further consequences for the real economy and financial stability.

                  (4)

                  As noted in recital 4 of Recommendation ESRB/2013/1 of the European Systemic Risk Board (3), the ultimate objective of macroprudential policy is to contribute to safeguarding 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 (4) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (5), 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 in relation to new housing loans.

                  (6)

                  In 2019, the European Systemic Risk Board (ESRB) conducted a systematic and forward-looking European Economic Area (EEA)-wide assessment of vulnerabilities relating to RRE (6). 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 five countries, including Germany (7).

                  (7)

                  In 2019, the main vulnerabilities identified in the RRE market in Germany were the significant overvaluation of house prices in urban areas, associated with widespread and rapid house price dynamics and some indication of a loosening of lending standards for housing loans, albeit in the context of the overall uncertainty due to significant data gaps.

                  (8)

                  The ESRB has recently concluded a further systematic and forward-looking EEA-wide assessment of vulnerabilities relating to RRE. The results of this assessment show that after receiving country-specific warnings in September 2019, some of the countries have taken further action to remedy the related vulnerabilities. In particular, Czech Republic adopted a legal framework for borrower-based measures, Germany established a legal basis for collection of data on lending standards of new housing loans to households, France activated limits on debt service-to-income (DSTI) ratios, Iceland tightened the limits on loan-to-value (LTV) ratios, and Norway tightened the rate of its systemic risk buffer. However, given the increasing vulnerabilities, the actions adopted by some of the countries were not considered sufficient according to the ESRB assessment.

                  (9)

                  The outbreak of the COVID-19 pandemic in 2020 and the related crisis have not led to a cyclical decline in housing markets. Rather, following a period of gradual growth, and amidst the low interest rate environment, real house price and lending growth have accelerated further in several countries, largely outpacing the growth in household income. In order to mitigate the impact of the pandemic and the resulting economic uncertainty, various measures and policies, such as moratoria and public guarantees, have been implemented. In this broad policy context, previously scheduled macroprudential measures have been temporarily relaxed or their activation delayed in some countries. The currently observed improvement in the economic situation allows for an adjustment of macroprudential policy in those countries in which RRE related vulnerabilities have continued to build up.

                  (10)

                  As regards Germany, this recent assessment has revealed that, despite the establishment of a legal framework for borrower-based instruments in 2017, consisting of a limited set of measures (an LTV ratio cap and an amortisation requirement), none of them were activated in order to address the accumulation of medium-term vulnerabilities in the RRE sector. The ESRB takes note of the fact that, under the current legal framework, requirements were not met for the activation of existing borrower-based measures.

                  (11)

                  The ESRB’s assessment also shows that rises in house prices have become more broad-based across both urban and rural areas. As a result, existing estimates point to high and increasing overvaluation of house prices in Germany. Comprehensive analysis of vulnerabilities is currently hindered by the lack of detailed data on lending standards for housing loans, albeit that action has been taken to collect data from 2023 due to the entry into force in 2021 of the national regulation on data collection regarding housing loans. For the recent period, the available information provides mixed evidence about the evolution of lending standards for housing loans. While the results of the euro area bank lending survey (BLS) suggest that credit conditions for house purchase tightened further over the course of 2020, an alternative private sector data source (8) indicates that the share of loan applications with high LTV ratios further increased in 2020. Another alternative private sector data source available to the German authorities, containing actual transactions and representing a part of the aggregate market, confirms that LTV ratios have increased over the last decade somewhat. Furthermore, consistent with the BLS, LTV ratios have receded in the wake of the crisis. The data also reveal that DSTI ratios and maturities declined in the first half of the 2010s and increased again in the second half. On the other hand, debt-to-income (DTI) ratios have increased steadily since 2009.

                  (12)

                  In addition, after relaxing its countercyclical capital buffer (CCyB) rate in response to the COVID-19 crisis, Germany did not make further use of capital-based measures to address existing vulnerabilities stemming from the RRE sector and foster financial stability.

                  (13)

                  In the light of these recent developments, in particular given the evidence of overvaluation of house prices, the ESRB has concluded that borrower-based measures should be activated to target medium-term vulnerabilities in the RRE sector in Germany. Therefore, the German authorities should promptly activate a legally binding or, if that is not possible under German law, a non-legally binding limit on the LTV ratio, to ensure sound lending standards against the overvaluation of house prices. At the same time, and to complement the LTV ratio measure, capital-based measures, such as activating the CCyB or the sectoral systemic risk buffer (SSyRB), would increase the resilience of the banking sector in Germany against the RRE vulnerabilities that might have already accumulated, given the prevailing overvaluation of house prices and uncertainty about lending standards for mortgage loans provided in recent years. Moreover, an appropriate combination with legally binding or, if that is not possible under German law, non-legally binding income-related instruments could increase the effectiveness of the limit on the LTV ratio in addressing any vulnerabilities relating to the financing of RRE. Therefore, the German legal framework for borrower-based measures should be complemented by income-based instruments and adapted accordingly so as to allow the activation of borrower-based measures in a more timely manner, thus avoiding the build-up of vulnerabilities,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A – Limit on the LTV ratio

      It is recommended that the relevant authorities impose a legally binding limit that applies to the LTV ratio in order to mitigate vulnerabilities in the residential real estate sector in Germany as a source of risk to financial stability, which may have the potential for serious negative consequences for the real economy. Where this is not possible under German law, it is recommended that the relevant authorities activate a non-legally binding limit that applies to the LTV ratio to address the objectives set out therein.

         Recommendation B – Activation of capital-based measures

      It is recommended that the relevant authorities activate appropriate capital-based measures, in order to ensure the resilience of credit institutions authorised in Germany and to complement the limit that applies to the LTV ratio as referred to in Recommendation A in mitigating vulnerabilities in the residential real estate sector in Germany as a source of risk to financial stability.

         Recommendation C – Legal framework for borrower-based measures with regard to the residential real estate sector

      It is recommended that the relevant authorities ensure that the existing legal framework for borrower-based measures includes at least the following legally binding borrower-based measures:

                  (a)

                  limits that apply to the DTI ratio and limits that apply to the DSTI ratio;

                  (b)

                  limits that apply to the LTV ratio;

                  (c)

                  limits that apply to the maturity; and

                  (d)

                  amortisation requirements.

         Recommendation D – Monitoring of vulnerabilities and activation of income-related borrower-based measures

                  1.

                  It is recommended that the relevant authorities closely monitor vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans over the medium term.

                  2.

                  It is recommended that, according to the results of the monitoring carried out pursuant to sub-Recommendation D(1) and in order to prevent the excessive accumulation of credit risk, relevant authorities activate legally binding income-related borrower-based measures, such as limits on the DTI ratio or on the DSTI ratio. Where this is not possible under German law, it is recommended that the relevant authorities activate non-legally binding income-related borrower-based measures to address the objectives set out therein.

            SECTION 2

         IMPLEMENTATION

      1.   Definitions

                  1.

                  For the purposes of this Recommendation the following definitions apply:

                              (a)

                              ‘relevant authorities’ means the authorities entrusted with the amendment of the legal framework for borrower-based measures, the activation of borrower-based measures, the monitoring of systemic risks or the activation of capital-based measures in Germany;

                              (b)

                              ‘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;

                              (c)

                              ‘capital-based measures’ means any own funds requirements imposed on a credit institution to prevent and/or mitigate systemic risk as defined in Article 2(c) of Regulation (EU) No 1092/2010, including, under Articles 124, 164 or 458 of Regulation (EU) No 575/2013 or Chapter 4 of Title VII of Directive (EU) 2013/36, such as the countercyclical capital buffer or the sectoral systemic risk buffer;

                              (d)

                              ‘credit institution’ means a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013;

                              (e)

                              ‘borrower-based measures’ means macroprudential measures that target borrowers, including limits on the LTV ratio, the DTI ratio, the DSTI ratio, maturity, and amortisation requirements;

                              (f)

                              ‘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;

                              (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)

                              ‘debt service’ means the combined interest and principal repayment on a borrower’s total debt over a given period;

                              (i)

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

                              (j)

                              ‘amortisation requirements’ means measures related to the repayment schedule of the loan.

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

                              (c)

                              specific criteria for compliance with this Recommendation are set out in the Annex.

                  2.

                  Addressees are requested to report to the European Parliament, the Council, the Commission and to the ESRB 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 lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, maturities, and amortisation profile 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

      In accordance with Article 17(1) of Regulation (EU) No 1092/2010, the addressees must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to this Recommendation or substantiate any inaction. The addressees are requested to submit such communication in compliance with the following timelines:

                  1.

                     Recommendation A

                  By 30 June 2023 and by 30 June 2025, the addressees of Recommendation A are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a report on any actions taken with regard to imposing a limit that applies to the LTV ratio in order to mitigate the vulnerabilities in the residential real estate sector in Germany as a source of risk to financial stability. Where there is more than one authority responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  2.

                     Recommendation B

                  By 30 June 2023 and by 30 June 2025, the addressees of Recommendation B are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a report on any actions taken with regard to implementing capital-based measures. Where there is more than one authority responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  3.

                     Recommendation C

                  By 30 June 2025, the addressees of Recommendation C are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a final report on the implementation of Recommendation C, including a statement clarifying which authority or authorities is responsible for the decision to activate and implement the borrower-based measures set out in that Recommendation. Where there is more than one authority responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  4.

                     Recommendation D

                  By 30 June 2023 and by 30 June 2025, the addressees of Recommendation D are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a report on monitoring vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans over the medium term, and actions taken to address such vulnerabilities. Where there is more than one authority 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 and 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.

                  2.

                  The General Board will assess the actions and justifications communicated 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, 2 December 2021.

               The 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)  OJ C 58, 24.2.2011, p. 4.

         (3)  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).

         (4)  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, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

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

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

         (7)  Warning ESRB/2019/11 of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in Germany (OJ C 366, 30.10.2019, p. 45).

         (8)  Information provided by a loan brokerage platform which may, however, not be fully representative of the German mortgage market.

         (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
         SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATION

            Recommendation A – Limit on the LTV ratio

         The following compliance criteria are applicable to Recommendation A.

                     1.

                     When activating a limit that applies to the loan-to-value (LTV) ratio, the addressees should seek to prevent a significant or an increasing share of new mortgage loans secured by residential real estate (RRE), that could result in credit losses in the event of their default combined with a decrease in house prices, following adverse economic or financial conditions, an increase in the cost of servicing their debt or adverse developments in the RRE market.

                     2.

                     The addressees should use one or several borrower-based measures 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, in particular by ensuring that the measures are applicable to loans granted by all types of lenders, to natural persons as borrowers and – to the degree deemed necessary – to all other types of borrowers.

                     3.

                     Prior to activating a limit that applies to the LTV ratio, an assessment should be made of Germany’s position in the economic and financial cycles, in order to determine the appropriate calibration and phasing-in of such measures.

                     4.

                     After the activation of a limit that applies to the LTV ratio, its further tightening or the activation of additional borrower-based measures may be needed to address the vulnerabilities identified in Germany. This will depend on the choice of the measures activated, on the initial calibration of those activated measures and on the results of the assessment of vulnerabilities.

                     5.

                     When activating or calibrating a limit that applies to the LTV ratio, the addressees should take into account all loans which are to be ultimately serviced by households from their income, regardless of the form of the loans.

            Recommendation B – Activation of capital-based measures

         The following compliance criteria are applicable to Recommendation B.

                     1.

                     When activating capital-based measures, the addressees should seek to ensure the resilience of credit institutions authorised in Germany in the face of the potential materialisation of systemic risk related to RRE 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.

                     2.

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

                     3.

                     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 Germany. This will depend on the choice of the capital-based measures activated, on the initial calibration of those activated measures and on the results of the assessment of vulnerabilities.

            Recommendation C – Legal framework for borrower-based measures with regard to the residential real estate sector

         The following compliance criteria are applicable to Recommendation C.

                     1.

                     The German 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 maturity limits, are applicable to loans granted to all types of borrowers and by all types of lenders, in order to avoid any circumvention of the limits, whereby these limits should be applied primarily to natural persons as borrowers, but also to all other types of borrowers if the financing structures imply such an extension in order to avoid circumvention of the limits;

                                 (b)

                                 German authorities entrusted with the activation of borrower-based measures are able to activate all 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 amendments to the German legal framework for borrower-based measures should be in force by no later than 1 June 2024.

            Recommendation D – Monitoring of vulnerabilities and activation of income-related borrower-based measures

         The following compliance criteria are applicable to sub-recommendation D(1).
         When monitoring vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans over the medium term, the addressees should monitor the share of borrowers taking out new mortgage loans that they are at risk of not being able to repay or service their debt regularly without significantly reducing their consumption following adverse economic or financial conditions, an increase in the cost of servicing their debt or adverse developments in the RRE market.
         The following compliance criteria are applicable to sub-recommendation D(2).

                     1.

                     When activating income-related borrower-based measures, the addressees should seek to prevent a significant or an increasing share of borrowers taking out new mortgage loans that they are at risk of not being able to repay or service their debt regularly without significantly reducing their consumption following adverse economic or financial conditions, an increase in the cost of servicing their debt or adverse developments in the RRE market.

                     2.

                     The addressees should use one or several borrower-based measures 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, in particular by ensuring that the measures are applicable to loans granted by all types of lenders, to natural persons as borrowers and, – to the degree deemed necessary – to all other types of borrowers.

                     3.

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

                     4.

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

                     5.

                     When activating or calibrating income-related borrower-based measures, the addressees should take into account all loans which are to be ultimately serviced by households from their income, regardless of the form of the loans.


title: Recommendation of the European Systemic Risk Board of 2 December 2021 on medium-term vulnerabilities in the residential real estate sector in Austria (ESRB/2021/11) 2022/C 122/02

text:
               17.3.2022

               EN

               Official Journal of the European Union

               C 122/9

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 2 December 2021
      on medium-term vulnerabilities in the residential real estate sector in Austria
      (ESRB/2021/11)
      (2022/C 122/02)
      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 Article 3(2)(b) and (d) and Articles 16 and 18 thereof,
      Having regard to Decision ESRB/2011/1 of the European Systemic Risk Board of 20 January 2011 adopting the Rules of Procedure of the European Systemic Risk Board (2), and in particular Article 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 (RRE) 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 RRE market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

                  (4)

                  As noted in recital 4 of Recommendation ESRB/2013/1 of the European Systemic Risk Board (3), the ultimate objective of macroprudential policy is to contribute to safeguarding 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 (4) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (5), 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 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to RRE (6). 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, including Austria (7).

                  (7)

                  In 2016, the main vulnerabilities identified in the RRE market in Austria were robust growth in RRE prices and mortgage credit and the risk of a further loosening in lending standards.

                  (8)

                  Since 2018, the Austrian national authorities have used communication tools to ensure prudent lending standards, supported by reinforced macroprudential supervisory activities. In its follow-up report on countries that received warnings in 2016 on medium-term vulnerabilities in the RRE sector (8), the ESRB acknowledged that the measures introduced by the Austrian national authorities may efficiently address the predominantly emerging vulnerabilities. However, the ESRB also noted that the Austrian national authorities were given powers to introduce legally binding borrower-based measures in 2017 that could be exercised if the emerging vulnerabilities accelerated.

                  (9)

                  The ESRB has recently concluded a systematic and forward-looking European Economic Area-wide assessment of vulnerabilities relating to RRE. In this context, the ESRB has identified certain medium-term vulnerabilities as sources of systemic risk to financial stability that have not been sufficiently addressed.

                  (10)

                  The outbreak of the COVID-19 pandemic in 2020 and the related crisis have not led to a cyclical decline in housing markets. Rather, following a period of gradual growth, and amidst the low interest rate environment, real house price and lending growth have accelerated further in several countries, largely outpacing the growth in household income. In order to mitigate the impact of the pandemic and the resulting economic uncertainty, various measures and policies, such as moratoria and public guarantees, have been implemented. In this broad policy context, previously scheduled macroprudential measures have been temporarily relaxed or their activation delayed in some countries. The currently observed improvement in the economic situation allows for an adjustment of macroprudential policy in those countries in which RRE-related vulnerabilities have continued to build up.

                  (11)

                  As regards Austria, this recent assessment has revealed that following a period of moderate growth, real house price growth has accelerated, outpacing the growth in real disposable income. In addition, lending to households has steadily increased. The ESRB assessment also shows that since September 2019, real house price growth has accelerated in the first quarter of 2021, outpacing growth in real disposable income over the same period. In line with these developments, according to the Oesterreichische Nationalbank’s estimates, house price overvaluation further increased in the first quarter of 2021. Real growth of lending to households for house purchase has been growing steadily since 2019. A communication from Austria’s Financial Market Stability Board in June 2021 (9) indicated that lending standards for mortgage loans in terms of loan-to-value (LTV) ratio and debt service-to-income (DSTI) ratio have recently continued to rise against the five-year average, and that the share of lending with elevated values of these ratios was substantial.

                  (12)

                  The current policy mix is considered only partially appropriate and partially sufficient to address the increasing vulnerabilities. Moreover, Austria has not made further use of the capital-based measures to address existing vulnerabilities and foster financial stability. In addition, the vulnerabilities identified in the RRE sector in Austria have not been fully reflected in the risk weights for mortgage loans, as used by credit institutions applying the internal rating-based (IRB) approach to the calculation of capital requirements.

                  (13)

                  In the light of these recent developments, the ESRB has concluded that activating legally binding borrower-based measures would increase the effectiveness of the measures that are already in place to properly address medium-term vulnerabilities in the RRE sector in Austria. Whenever or wherever such binding borrower-based measures are assessed as not sufficiently effective to address medium-term vulnerabilities, the implementation of capital-based measures, such as instruments aimed at increasing the IRB risk weights for RRE exposures, the sectoral systemic risk buffer or the countercyclical capital buffer should be considered. These measures would increase the resilience of the banking sector in Austria to risks that might have accumulated, such as the prevailing overvaluation of house prices and to some extent loose lending standards for mortgage loans provided in recent years,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A – Activation of legally binding borrower-based measures

      It is recommended that the relevant authorities activate legally binding borrower-based measures in order to mitigate the vulnerabilities in the residential real estate sector in Austria as a source of risk to financial stability.

         Recommendation B – Activation or tightening of capital-based measures

      It is recommended that the relevant authorities activate or tighten capital-based measures in order to ensure the resilience of credit institutions authorised in Austria and complement borrower-based measures in mitigating the vulnerabilities in the residential real estate sector in Austria as a source of risk to financial stability whenever or wherever such binding borrower-based measures would be assessed as not sufficiently effective to address medium-term vulnerabilities.
      SECTION 2

         IMPLEMENTATION

      1.   Definitions

                  1.

                  For the purposes of this Recommendation the following definitions apply:

                              (a)

                              ‘relevant authorities’ means the authorities entrusted with the activation of legally binding borrower-based measures or capital-based measures in Austria;

                              (b)

                              ‘borrower-based measures’ means macroprudential measures that target borrowers, including limits on the LTV ratio, the debt-to-income (DTI) ratio, the DSTI ratio, maturity, and amortisation requirements;

                              (c)

                              ‘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;

                              (d)

                              ‘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;

                              (e)

                              ‘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;

                              (f)

                              ‘debt service’ means the combined interest and principal repayment on a borrower’s total debt over a given period;

                              (g)

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

                              (h)

                              ‘amortisation requirements’ means measures related to the repayment schedule of the loan;

                              (i)

                              ‘capital-based measures’ means any own funds requirements imposed on a credit institution to prevent and/or mitigate systemic risk as defined in Article 2(c) of Regulation (EU) No 1092/2010, including, under Articles 124, 164 or 458 of Regulation (EU) No 575/2013 or Chapter 4 of Title VII of Directive (EU) 2013/36, such as the countercyclical capital buffer or the sectoral systemic risk buffer;

                              (j)

                              ‘credit institution’ means a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013.

            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)

                              when activating legally binding borrower-based measures and/or capital-based measures, their calibration and phasing-in should take into account Austria’s position in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

                              (c)

                              specific criteria for compliance with this Recommendation are set out in the Annex.

                  2.

                  Addressees are requested to report to the European Parliament, the Council, the Commission and to the ESRB 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 lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, maturities, and amortisation profile with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/ 2016/14 of the European Systemic Risk Board (10), 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

      In accordance with Article 17(1) of Regulation (EU) No 1092/2010, the addressees must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to this Recommendation or substantiate any inaction. The addressees are requested to submit such communication in compliance with the following timelines:

                  1.

                     Recommendation A

                              (a)

                              By 30 June 2023 and by 30 June 2025, the addressees of Recommendation A are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a report on any actions taken with regard to activating legally binding borrower-based measures. Where there is more than one authority responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

                  2.

                     Recommendation B

                  By 30 June 2023 and by 30 June 2025, the addressees of Recommendation B are requested to submit to the European Parliament, the Council, the Commission and to the ESRB a report on any actions taken with regard to implementing capital-based measures. Where there is more than one authority 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 and 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.

                  2.

                  The General Board will assess the actions and justifications communicated 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, 2 December 2021.

               The 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)  OJ C 58, 24.2.2011, p. 4.

         (3)  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).

         (4)  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, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

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

         (6)  See Vulnerabilities in the EU residential real estate sector, ESRB, November 2016, available on the ESRB website at www.esrb.europa.eu.

         (7)  Warning ESRB/2016/05 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Austria (OJ C 31, 31.1.2017, p. 43).

         (8)  See Follow-up report on countries that received ESRB warnings in 2016 on medium-term vulnerabilities in the residential real estate sector, ESRB, September 2019, available on the ESRB website at www.esrb.europa.eu.

         (9)  Press release on the 28th meeting of the Financial Market Stability Board, available on the FMSG website at https://www.fmsg.at/en/publications/press-releases/2021/28th-meeting.html.

         (10)  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
         SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATION

            Recommendation A - Activation of legally binding borrower-based measures

         The following compliance criteria are applicable to Recommendation A.

                     1.

                     When activating legally binding borrower-based measures, the addressees should seek to prevent a significant or increasing share of:

                                 (a)

                                 new mortgage loans secured by residential real estate (RRE) that could result in credit losses in the event of their default combined with a decrease in house prices;

                                 (b)

                                 borrowers taking out new mortgage loans who are at significant risk of not being able to repay or service their debt regularly without significantly reducing their consumption following adverse economic or financial conditions, an increase in the cost of servicing their debt or adverse developments in the RRE market.

                     2.

                     The addressees should use one or several legally binding borrower-based measures 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, in particular by ensuring that the legally binding borrower-based measures are applicable to loans granted to all types of borrowers and by all types of lenders.

                     3.

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

                     4.

                     Prior to activating legally binding borrower-based measures, and in order to determine the appropriate calibration and phasing-in of such measures, the addressees should take into account the choice and calibration of the borrower-based measures currently in place, thus ensuring higher effectiveness in mitigating the vulnerabilities identified in Austria.

                     5.

                     After the activation of the legally binding borrower-based measures, their further tightening or the activation of additional macroprudential measures may be needed to address the vulnerabilities identified in Austria. 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.

                     6.

                     When activating or calibrating legally binding borrower-based measures, the addressees should take into account all loans which are to be serviced by households from their income, regardless of the form of the loans, i.e. treating loans to housing companies as household debt.

            Recommendation B – Activation or tightening of capital-based measures

         The following compliance criteria are applicable to Recommendation B.

                     1.

                     When activating additional, or tightening existing capital-based measures, the addressees should seek to ensure the resilience of credit institutions authorised in Austria in the face of the potential materialisation of systemic risk related to RRE 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.

                     2.

                     Prior to activating additional, or tightening existing capital-based measures, an assessment should be made of Austria’s position in the economic and financial cycles and the sufficiency of legally binding borrower-based measures, as activated in compliance with Recommendation A, in addressing the medium-term vulnerabilities in order to determine whether activating or tightening capital-based measures would be appropriate.

                     3.

                     After the activation of additional capital-based measures or the tightening of existing ones, it may be necessary to tighten the measures further or to activate additional macroprudential measures to address the vulnerabilities identified in Austria. This will depend on the choice of the capital-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 2 December 2021 on reform of money market funds (ESRB/2021/9) 2022/C 129/01

text:
               22.3.2022

               EN

               Official Journal of the European Union

               C 129/1

      RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD
      of 2 December 2021
      on reform of money market funds
      (ESRB/2021/9)
      (2022/C 129/01)
      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 Article 3(2)(b) and (d) and Articles 16 and 18 thereof,
      Having regard to Decision ESRB/2011/1 of the European Systemic Risk Board of 20 January 2011 adopting the Rules of Procedure of the European Systemic Risk Board (2), and in particular Article 18 thereof,
      Having regard to Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (3),
      Whereas:

                  (1)

                  The financial market turmoil at the onset of the coronavirus COVID-19 pandemic revealed persisting systemic vulnerabilities in certain sub-sectors of private debt money market funds (MMFs). This calls for a reassessment of certain aspects of the post-global financial crisis regulatory reforms.

                  (2)

                  The global financial crisis of 2008 showed that MMFs are vulnerable to credit risk and large volumes of redemptions. This vulnerability means that they can spread or amplify risks throughout the financial system. Recommendation ESRB/2012/1 of the European Systemic Risk Board (4) recommended the European Commission to address these vulnerabilities. Specifically, the European Systemic Risk Board (ESRB) recommended a move to variable net asset value for all MMFs, enhanced liquidity requirements, greater public disclosures, as well as more reporting and information sharing.

                  (3)

                  Regulation (EU) 2017/1131 (hereinafter the ‘MMFR’) sets out rules designed to make MMFs more resilient and limit the contagion channels highlighted during the global financial crisis. It imposes direct obligations on MMFs and their managers throughout the Union. The ESRB analysed the content of the MMFR against the provisions set out in Recommendation ESRB/2012/1 and found it to be largely compliant (5).

                  (4)

                  At the onset of the COVID-19 pandemic, as investors ‘dashed for cash’ (6), some MMFs investing in private sector debt securities experienced acute liquidity strains when faced with a high level of redemptions by investors combined with a lack of liquidity in private debt money markets. This led to concerns that liquidity strains in those MMFs would amplify the effects of the COVID-19 shock in other parts of the financial system. The situation was particularly serious in the United States and the Union. Exceptional measures taken by the Eurosystem, the Federal Reserve System and the Bank of England under their respective monetary policy mandates helped improve this situation.

                  (5)

                  The liquidity strains observed on MMFs reflect an underlying tension between the two primary economic functions performed by MMFs for the financial system and the real economy: (i) providing short-term funding to issuers, mainly banks and non-financial corporations; and (ii) being used as cash management vehicles by investors. The tension arises from the fact that MMFs offer on-demand liquidity to investors and are often assumed to be cash-like instruments, whereas the instruments in which they invest are not reliably liquid, especially during periods of stress when MMFs might need to sell them. This is particularly the case for MMFs that invest primarily in commercial paper and certificates of deposit (low-volatility net asset value (LVNAV) and variable net asset value (VNAV) MMFs), as these assets are generally held to maturity and do not benefit from deep secondary markets (7).

                  (6)

                  The European market for short-term debt securities is fragmented and composed of four main blocks: the market for negotiable European commercial paper (NEU-CP), for Euro commercial paper (Euro-CP), for other national commercial paper and certificates of deposit, and for sovereign short-term bills. This fragmentation and lack of information on these markets, in particular on secondary over-the-counter markets, impairs the assessment of their size and of their liquidity, which is important to enable MMFs to meet large redemption requests via the selling of assets if necessary (8).

                  (7)

                  This Recommendation contributes to the Commission’s forthcoming 2022 review of the MMFR to address persisting systemic vulnerabilities in certain sub-sectors of private debt MMFs. It is intended to reflect the aim of Recommendation ESRB/2012/1 of reducing deposit-like features being offered by certain MMFs via redemption at par in the context of the existing MMFR. It has been prepared in the context of wider work underway internationally and elsewhere in the EU on MMF reform. In particular, this Recommendation has been informed by the feedback the European Securities and Markets Authority (ESMA) received in response to its consultation on reform of the MMFR. It is also consistent with the proposals of the Financial Stability Board (FSB), albeit that it does not envisage requiring MMFs to have capital buffers or a minimum balance at risk (9). The ESRB believes that such own funds requirements are not needed, provided that features that make MMFs similar to deposit taking institutions are reduced and features that make MMFs similar to other investment funds are increased.

                  (8)

                  Recommendation A is designed to reduce threshold effects. In particular, it aims at eliminating the unintended consequences deriving from two regulatory requirements. First, the MMFR provides that LVNAV MMFs can value certain assets at amortised cost, provided that the resulting net asset value (NAV) remains within a collar of 20 basis points of the NAV that is calculated applying mark-to-market or mark-to-model valuation to all assets. This collar provides a first mover advantage to investors, as they can redeem their units at an NAV that does not reflect the market valuation of certain assets. This could incentivise runs and should be eliminated. Instead, the NAV of LVNAV MMFs should be fluctuating. Removing the collar will alter an important feature of LVNAV MMFs and, with it, may also impact the choices taken by investors attracted by the relative stability of the NAV so far. At the same time, Recommendation B seeks to enhance the liquidity requirements for LVNAV MMFs, which aims to make them relatively less risky and less volatile than short-term VNAV MMFs. Second, when other thresholds are breached, managers of LVNAV and public debt constant net asset value (PDCNAV) MMFs have to assess and document the appropriate course of action. This might include the use of certain specific liquidity management tools (LMTs), such as liquidity fees on investors and the use of redemption gates. At the onset of the COVID-19 pandemic, one of these thresholds may have caused some investors to redeem in anticipation of such actions being imposed automatically. They should therefore be removed. The removal of these thresholds would also facilitate the use by LVNAV and PDCNAV MMFs of the provisions of the MMFR that allow them, under certain conditions, to temporarily breach their liquidity requirements, as provided for in Article 24(2) of the MMFR.

                  (9)

                  Recommendation B is designed to reduce the liquidity transformation of MMFs and improve their asset-liability matching. Higher liquidity requirements for VNAV and LVNAV MMFs, composed of daily and weekly maturing assets and public debt assets, ensures greater and more diversified liquidity in the portfolio and reduces the risk that MMFs destabilise the wider money markets in stressed market conditions. To ensure sufficient availability of public debt assets, these can be of a longer maturity than weekly maturing assets. While this can increase maturity risk, it also decreases liquidity risk. The MMFR provides some flexibility to MMF managers, who may breach their liquidity requirements for reasons beyond their control. Flexibility at individual level might, however, not be sufficient in case of market-wide stress. In such cases, MMF managers should, in addition, be explicitly allowed to use their liquid assets to meet redemptions and hold less weekly maturing assets and public debt assets than is usually required. National competent authorities (NCAs) should have the power to specify, for all or a subset of MMFs in their jurisdiction, a time limit defining the period during which MMFs may opt to hold fewer liquid assets than are usually required. This would ensure a system-wide response to a market-wide development. Coordination by ESMA during this process would avoid distortions within the Single Market.

                  (10)

                  Recommendation C is designed to increase the availability and encourage the use of LMTs that impose on redeeming (and subscribing) investors the cost of their respective redemptions (and subscriptions). Recommendation ESRB/2017/6 of the European Systemic Risk Board (10) provides that relevant Union legislation should make LMTs available to all types of investment funds, including MMFs. Furthermore, all MMFs should have available at least one LMT, such as anti-dilution levies, liquidity fees or, for MMFs with a fluctuating NAV, swing pricing, that can impose redemption (and subscription) costs on departing (or incoming) investors, respectively. In addition, criteria should be developed for inclusion in relevant Union legislation to facilitate more generally the use of LMTs. When mandating ESMA to develop these criteria and additional guidance, the Commission should request that no threshold effects be introduced.

                  (11)

                  Recommendation D is designed to enhance monitoring and stress testing. This will provide national and Union bodies with better information to identify systemic vulnerabilities in the MMF sector as a whole. First, regular reporting should be enhanced by increasing its frequency and by providing more information on the investor base of MMFs. Second, it should be made possible for NCAs to share data stemming from regular reporting and from crisis-specific reporting with Union bodies with a financial stability mandate. Further to this Recommendation, data sharing between central banks and NCAs would also contribute to the capacity of authorities to assess risks. Finally, Union-wide stress tests should complement existing internal stress tests performed by individual MMFs. To ensure consistent application of the scenarios and to validate the results, ESMA, in cooperation with NCAs, should coordinate the tests. On the basis of these results, ESMA should publish its assessment of financial stability risks.

                  (12)

                  To comprehensively address the vulnerabilities stemming from the MMF sector the measures set out in this Recommendation should be implemented as a package.

                  (13)

                  The ESRB believes that the MMFR should be further reviewed five years after the entry into force of the new provisions to assess whether the resilience of MMFs has been improved by the legislative reforms and contagion channels reduced. This review should include the calibration of the liquidity requirements and assess whether additional tools with macroprudential effect are needed,

            HAS ADOPTED THIS RECOMMENDATION:
      SECTION 1

         RECOMMENDATIONS

         Recommendation A – Reducing threshold effects

      The Commission is recommended to propose:

                  1.

                  that relevant Union legislation should require all low-volatility net asset value (LVNAV) money market funds (MMFs) to have a fluctuating net asset value;

                  2.

                  the repeal of the regulatory thresholds set out in Article 34(1)(a) and (b) of Regulation (EU) 2017/1131 (hereinafter the ‘MMFR’).

         Recommendation B — Reducing liquidity transformation

      The Commission is recommended to propose that relevant Union legislation:

                  1.

                  should incorporate new liquidity requirements for variable net asset value (VNAV) MMFs and LVNAV MMFs, composed of daily maturing assets, weekly maturing assets and public debt assets;

                  2.

                  should permit individual MMF managers to take actions leading them to hold fewer weekly maturing assets and fewer public debt assets than required if:

                              (a)

                              there are market-wide developments negatively affecting the assets MMFs hold or MMF unit holders; and

                              (b)

                              MMF managers immediately inform their national competent authorities (NCAs) accordingly.

                  3.

                  should authorise NCAs to specify a time limit defining the period during which MMFs under their supervision may hold fewer weekly maturing assets and public debt assets than required as is envisaged in sub-Recommendation B(2) in the case of market-wide developments negatively affecting multiple MMFs;

                  4.

                  should provide for the European Securities and Markets Authority (ESMA) to coordinate the action taken by NCAs when acting as envisaged in sub-Recommendation B(3), in order to ensure consistency in the application of the measure across the Union.

         Recommendation C — Imposing on redeeming and subscribing investors the cost of their redemptions and subscriptions

      The Commission is recommended to propose that relevant Union legislation:

                  1.

                  should require the incorporation in the constitutional documents of MMFs and any other pre-contractual information of at least one of the following liquidity management tools (LMTs):

                              (a)

                              anti-dilution levies;

                              (b)

                              liquidity fees;

                              (c)

                              swing pricing for MMFs with a fluctuating net asset value (NAV);

                  2.

                  should mandate ESMA to develop criteria for inclusion in relevant Union legislation to facilitate the use of LMTs by MMF managers in all market conditions, as well as guidance on those criteria.

         Recommendation D — Enhancing monitoring and stress testing

      The Commission is recommended to propose that the relevant Union legislation:

                  1.

                  should incorporate provisions aimed at enhancing the timely sharing of data stemming from the regular reporting of MMFs to their respective NCAs;

                  2.

                  should mandate ESMA to coordinate and, where necessary, to harmonise ad hoc data requests made by the NCAs to MMFs in times of stress resulting from market-wide developments;

                  3.

                  should incorporate provisions to ensure that NCAs share the data referred to in sub-Recommendations D(1) and D(2) with Union bodies with a financial stability mandate;

                  4.

                  should provide for ESMA to initiate and coordinate Union-wide stress tests on MMFs in cooperation with NCAs; to develop scenarios and parameters for an adequate Union-wide stress testing regime for MMFs in cooperation with the European Systemic Risk Board (ESRB); to publish an assessment of the impact of such scenarios on the MMF sector, including the potential contagion to other market participants; and, where appropriate, to coordinate the follow-up supervisory actions.

            SECTION 2

         IMPLEMENTATION

      1.   Definitions

                  1.

                  For the purposes of this Recommendation the following definitions apply:

                              (a)

                              ‘money market funds’ (MMFs) means regulated and supervised Union collective investment undertakings whose primary objective is to maintain the principal of the fund, while providing a return in line with money market rates, by investing in money market instruments or deposits with credit institutions that are established, managed or marketed in the Union;

                              (b)

                              ‘MMFR’ means Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds;

                              (c)

                              ‘liquidity management tools’ (LMTs) means tools that assist MMFs as well as their managers to manage requests for redemption appropriately and effectively at all times and especially in stressed market conditions;

                              (d)

                              ‘low-volatility net asset value MMF’ or ‘LVNAV MMF’ means a low-volatility net asset value MMF as defined in point (12) of Article 2 of Regulation (EU) 2017/1131;

                              (e)

                              ‘variable net asset value MMF’ or ‘VNAV MMF’ means a variable net asset value MMF as defined in point (13) of Article 2 of Regulation (EU) 2017/1131;

                              (f)

                              ‘public debt assets’ means money market instruments listed in Article 17(7) of the MMFR, with legal or residual maturities in line with Article 10(1)(b) of the MMFR for short-term MMFs and Article 10(2) of the MMFR for standard MMFs and aligned with the predominant investment currency of the individual MMF;

                              (g)

                              ‘public debt constant net asset value MMF’ or ‘PDCNAV MMF’ means a public debt constant net asset value MMF as defined in point 11 of Article 2 of Regulation (EU) 2017/1131;

                              (h)

                              ‘central banks’ means central banks as defined in point (46) of Article 4(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (11);

                              (i)

                              ‘new liquidity requirements’ means the requirements listed under the compliance criteria for sub-Recommendation B(1);

                              (j)

                              ‘competent authority’ means competent authority of the MMF as defined in point 17 of Article 2 of the MMFR;

                              (k)

                              ‘redemption gates’ means a liquidity management tool to prevent investors in the fund from withdrawing a portion of their capital for a period of time;

                              (l)

                              ‘suspension of redemptions’ means a liquidity management tool to prevent investors in the fund from withdrawing the entirety of their capital for a period of time;

                              (m)

                              ‘liquidity fees’ means charges applied to individual transacting investors, payable to the fund, to protect remaining investors from bearing the costs associated with an MMF’s purchases or sales of assets because of large inflows or outflows. Such charge is not derived specifically from the associated transaction costs, but instead is a flat (or tiered) fee outlined in advance. A liquidity fee does not involve any adjustment to the value of the fund’s shares (e.g. NAV);

                              (n)

                              ‘swing pricing’ means a liquidity management tool that applies a dilution adjustment to a fund’s NAV to pass on to investors who redeem or purchase shares liquidity costs stemming from net flows into or out of the fund;

                              (o)

                              ‘anti-dilution levies’ means charges applied to individual transacting investors, payable to the fund, to protect remaining investors from bearing the costs associated with an MMF’s purchases or sales of assets because of large inflows or outflows. An anti-dilution levy does not involve any adjustment to the value of the fund’s shares (e.g. NAV);

                              (p)

                              ‘Union bodies with a financial stability mandate’ means:

                                          i.

                                          the European Banking Authority;

                                          ii.

                                          the European Insurance and Occupational Pensions Authority;

                                          iii.

                                          the European Securities and Markets Authority;

                                          iv.

                                          the European Systemic Risk Board;

                                          v.

                                          the European Central Bank;

                                          vi.

                                          the Single Supervisory Mechanism;

                                          vii.

                                          the Single Resolution Board;

                              (q)

                              ‘daily maturing assets’ means eligible money market instruments issued by private or public entities as referred to in Article 10(1) and (2) of the MMFR and maturing within a day, reverse repurchase agreements which are able to be terminated by giving prior notice of one working day, or cash which is able to be withdrawn by giving prior notice of one working day, as set out in point (c) of Article 24(1) of the MMFR;

                              (r)

                              ‘weekly maturing assets’ means eligible money market instruments issued by private or public entities as referred to in Article 10(1) and (2) of the MMFR and maturing within a week, reverse repurchase agreements which are able to be terminated by giving prior notice of five working days, or cash which is able to be withdrawn by giving prior notice of five working days, as set out in point (e) of Article 24(1) of the MMFR.

            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 this Recommendation;

                              (b)

                              the Recommendation covers all MMFs as defined;

                              (c)

                              regulatory arbitrage should be avoided;

                              (d)

                              specific criteria for compliance with this Recommendation are set out in the Annex.

                  2.

                  The addressee is 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)

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

            3.   Timeline for the follow-up

      In accordance with Article 17(1) of Regulation (EU) No 1092/2010, the addressee must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to this Recommendation or substantiate any inaction. The addressee is requested to submit such communication by 31 December 2023.
      4.   Monitoring and assessment

                  1.

                  The ESRB Secretariat will:

                              (a)

                              assist the addressee, ensuring the coordination of reporting and 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 addressee, provide assistance at their request, and submit a follow-up report to the General Board.

                  2.

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

         Done at Frankfurt am Main, 2 December 2021.

               The 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)  OJ C 58, 24.2.2011, p. 4.

         (3)  OJ L 169, 30.6.2017, p. 8.

         (4)  Recommendation ESRB/2012/1 of the European Systemic Risk Board of 20 December 2012 on money market funds (OJ C 146, 25.5.2013, p. 1).

         (5)  See Compliance assessment of the implementation of the Recommendation of the European Systemic Risk Board of 20 December 2012 on money market funds (ESRB/2012/1), March 2019, available on the ESRB website at www.esrb.europa.eu

         (6)  See Holistic Review of the March Market Turmoil, FSB, 17 November 2020, available on the FSB website at www.fsb.org

         (7)  See Issues note on systemic vulnerabilities of and preliminary policy considerations to reform money market funds (MMFs), July 2021, available on the ESRB website at www.esrb.europa.eu

         (8)  See Economic rationale and assessment of the Recommendation of the ESRB of 2 December 2021 on money market funds, available on the ESRB website.

         (9)  See Policy Proposals to Enhance Money Market Fund Resilience, FSB, 11 October 2021, available on the FSB website at www.fsb.org

         (10)  Recommendation ESRB/2017/6 of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks in investment funds (OJ C 151, 30.4.2018, p. 1).

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

         ANNEX

            SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATION

            Recommendation A – Reducing threshold effects

         The following compliance criterion is applicable to sub-Recommendation A(2).
         The current reference in Article 34(1)(a) of Regulation (EU) 2017/1131 of the European Parliament and of the Council (1) (hereinafter the ‘MMFR’) to the proportion of weekly maturing assets falling below 30 % of the total assets of the money market fund (MMF) and the net daily redemptions on a single working day exceeding 10 % of the total assets and the reference in Article 34(1)(b) to the proportion of weekly maturing assets falling below 10 % of the total assets should be repealed.

            Recommendation B — Reducing liquidity transformation

         The following compliance criteria are applicable to sub-Recommendation B(1).
         New liquidity requirements for variable net asset value (VNAV) and low-volatility net asset value (LVNAV) MMFs should ensure that:

                     —

                     the depth of liquidity in the portfolios of private debt-focused MMFs is enhanced;

                     —

                     further reassurance to investors is provided and hence run risk is reduced;

                     —

                     MMFs have enough liquidity to meet heightened redemptions demands during periods of market stress without involving spill-over effects to other parts of the financial system; and

                     —

                     MMFs hold a portion of their liquid assets in public debt assets issued by a diversified set of bodies, where possible in the main investment currency of that fund, in order to contribute to greater diversification and stability in the net asset value (NAV) of private debt MMFs.

               In respect of LVNAV MMFs in particular, Article 24(1)(g) of the MMFR should be repealed to align the eligibility of assets for the weekly maturing assets, daily maturing assets and public debt assets with those of VNAVs.
         The new liquidity requirements for short-term VNAV MMFs should at least be equal to 20 % of their assets and be split between:

                     —

                     at least 15 % of weekly maturing assets, including at least 10 % of daily maturing assets; and

                     —

                     at least 5 % of additional public debt assets.

               The new liquidity requirements for standard VNAV MMFs should at least be equal to 25 % and be split between:

                     —

                     at least 15 % of weekly maturing assets, including at least 10 % of daily maturing assets; and

                     —

                     at least 10 % of additional public debt assets.

               The new liquidity requirements for LVNAV MMFs should at least be equal to 45 % and be split between:

                     —

                     at least 30 % of weekly maturing assets, including at least 15 % of daily maturing assets; and

                     —

                     at least 15 % of additional public debt assets.

               Where public debt assets are not sufficiently available in the currency of the fund, MMFs should, provided that they inform their national competent authorities (NCAs) immediately, be allowed to meet their public debt liquidity requirements through:

                     —

                     deposits with credit institutions that can be withdrawn at any time upon giving prior notice of no more than one working day, without prejudice to the diversification requirements set out in Article 17(1)(b) of the MMFR; and

                     —

                     reverse repurchase agreements secured with public debt assets and which are able to be terminated at any time upon giving prior notice of no more than one working day.

               The following compliance criteria are applicable to sub-Recommendation B(3).
         The Commission’s proposed changes to the relevant Union legislation should ensure that NCAs’ decisions are applicable to subsets of MMFs according to their type and currency or to all MMFs under their supervision.
         The following compliance criteria are applicable to sub-Recommendation B(4).
         The Commission’s proposed changes to the relevant Union legislation should provide for the European Securities and Markets Authority (ESMA) to coordinate NCAs’ decisions as referred to in sub-Recommendation B(3) with regard to:

                     —

                     subsets of MMFs located in several Member States, according to their type and currency of denomination; and

                     —

                     the time limit by which MMFs that benefit or may benefit from decisions as referred to in sub-Recommendation B(3) should correct their situation.

            Recommendation C — Imposing on redeeming investors the cost of their redemptions

         The following compliance criteria are applicable to sub-Recommendation C(2).
         The Commission should ensure that relevant Union legislation mandates ESMA to develop specific criteria and guidance defining the circumstances in which liquidity management tools, including but not restricted to those referred to in sub-Recommendation C(1), redemption gates and suspensions, should be deployed. The choice of the tool, the activation of the tool and the calibration of its deployment should be decided upon by the individual MMF manager, subject to the criteria to be developed. Where quantitative parameters are considered, threshold effects should not be introduced.

            Recommendation D — Enhancing monitoring and stress testing

         The following compliance criterion is applicable to sub-Recommendation D(1).
         The Commission’s proposed changes to the relevant Union legislation should increase the frequency of the reporting by MMF managers to their respective competent authority, as referred to in Article 37 of the MMFR, to a monthly frequency at least for the main indicators and parameters used for supervisory purposes. MMFs whose assets under management in total do not exceed EUR 100 million should report on a quarterly basis at least.
         In addition, the data should include information on the percentage of NAV categorised both by the type of investor and their place of domicile. An investor’s sector breakdown should at least include the following sectors:

                     —

                     non-financial corporations, specifying their economic activity, for example according to the Statistical Classification of Economic Activities in the European Community (NACE);

                     —

                     credit institutions;

                     —

                     insurers;

                     —

                     pension funds;

                     —

                     governments;

                     —

                     MMFs;

                     —

                     non-MMF investment funds;

                     —

                     other financial institutions;

                     —

                     households;

                     —

                     others.

               The following compliance criteria are applicable to sub-Recommendation D(2).
         ESMA should be empowered to design templates for ad hoc data requests made by NCAs as provided for in Article 39 of the MMFR. These templates should at least include the following data:

                     —

                     NAV per share/unit and, in the case of PDCNAV MMFs, the variable NAV per share;

                     —

                     total assets;

                     —

                     weighted average maturity as defined in point (19) of Article 2 of the MMFR;

                     —

                     weighted average life as defined in point (20) of Article 2 of the MMFR;

                     —

                     inflows and outflows;

                     —

                     public debt assets;

                     —

                     weekly maturing assets;

                     —

                     daily maturing assets;

                     —

                     cash balances.

               The following compliance criterion is applicable to sub-Recommendation D(4).
         The Commission’s proposed changes to the relevant Union legislation should be without prejudice to the provisions of Article 28 of the MMFR regulating stress test carried out by individual MMFs.
         The adequate Union-wide stress testing regime for MMFs should be based on a common severe but plausible scenario and offer the possibility to conduct reverse stress tests to identify the point (in terms of redemptions, shocks to credit, liquidity, or interest rate risk) past which MMFs would not be able to operate in an orderly manner.

            (1)  Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (OJ L 169, 30.6.2017, p. 8).