Impact of Final Basel III on the EU mortgage sector

In the autumn of 2021, the European Commission released Banking Package 2021 with a proposal on how to implement the Final Basel III agreement in the EU.

The package deviates somewhat from the European Banking Authority’s proposed solution, leaving an increase in capital requirements of 6%-8% for the entire EU banking sector. However, a heterogeneous impact across banks and portfolios can be expected.

Thus, the EMF-ECBC has asked Copenhagen Economics to analyse the impact of the package on the EU mortgage market. In doing so we analyse the impact on 80 of the largest credit institutions in 13 major mortgage markets in the EU. We consider all lending secured by real estate. 

We find that capital requirements for the European mortgage portfolios will increase by an estimated 18% compared to the end of 2020. This corresponds to EUR 22 billion in extra required capital. Fully restoring capital ratios to the pre-package level would require an additional EUR 17 billion. That leaves a total extra capital need of up to EUR 39 billion.

The average impact includes substantial variation across institutions and depends crucially on which approach the institutions use today to model risks:

Looking at different customer segments, we find substantial variations in impact; the corporate mortgage portfolio, with an average increase of 40% across the EU, will experience the highest increase in capital requirements. SME exposures will experience an increase of 23%., whereas households with an increase in capital requirements of 11% will experience the lowest impact of the three customer segments.

Finally, we find that making the transitional arrangement with lower risk weights for residential real estate under the output floor permanent could neutralise the increase in capital requirements.