The German Federal Financial Supervisory Authority (“BaFin“) published the seventh amendment to the Minimum Requirements for Risk Management of Banks (“MaRisk“) on June 29, 2023.
The MaRisk codify BaFin’s administrative practice on risk management for German banks, in particular with respect to business organization and outsourcing, and in doing so substantiates the statutory requirements of Section 25a of the German Banking Act (“KWG“).
The amendments range from requirements of the European Banking Authority (“EBA“) for lending and monitoring to exceptions for securities trading in the home office and the managing of ESG and real estate risks.
- Loans: New stricter requirements for review and documentation in lending and monitoring in line with EBA guidelines.
- Home office: Securities trading is now to be permitted permanently from the home office under certain requirements.
- ESG: Sustainability risks are to be taken into account in the banks’ risk management in the future.
- Real estate: For the first time, BaFin has defined own requirements for the management of bank-owned real estate.
Integration of EBA guidelines for lending and monitoring
BaFin has now integrated all EBA requirements for lending and monitoring into the MaRisk and thus into its administrative practice. This has added a number of formal requirements for banks in terms of processes, particularly for lending.
These include, among other things, more differentiated and more specific rules for the lending process. When granting loans, for example, a distinction will now have to be made between the category of borrower (e.g. secured consumer loans or loans to small and micro enterprises) and the type of financing involved (e.g. financing of commercial real estate or project financing).
Integration of EBA guidelines for lending and loan monitoring
BaFin has now integrated all EBA requirements for lending and monitoring into MaRisk and thus into its administrative practice. This has added a number of formal requirements for banks in terms of processes, particularly for lending.
These include, among other things, more differentiated and more specific rules for the lending process. When granting loans, for example, a distinction will now have to be made between the category of borrower (e.g. secured consumer loans or loans to small and micro enterprises) and the type of financing involved (e.g. financing of commercial real estate or project financing).
In the context of risk classification and the drafting of contracts that is based on it, banks will have to examine more criteria in the future when determining the creditworthiness of customers. In addition, security assessments will have to be carried out even more carefully in the future as part of the drafting of contracts. If there are doubts about the potential customer’s ability to repay the loan, the reduction in creditworthiness must be calculated by means of simulations and taken into account accordingly when drawing up the contractual terms and conditions.
Securities trading now permanently possible from the home office
During the Covid 19 pandemic, BaFin had permitted securities trading from the home office under certain conditions. The 7th amendment to the MaRisk will now make this possible on a permanent basis, although the conditions formulated during the pandemic must still be met:
- Specifically, securities traders’ home workplaces must be located in specified locations and enable confidential business transactions.
- In addition, it must be ensured that trading can be relocated to the business premises in the event of (technical) impairments in the home office.
- Furthermore, a sufficient presence of other traders on the business premises shall be ensured at all times.
- In addition, all business transactions executed outside the business premises must be specially marked and brought to the attention of an area of the institute that is independent of the traders.
Appropriate consideration of ESG risks
Furthermore, the sustainability criteria of environmental, social and governance (“ESG“) have now found their way into the MaRisk and thus into the banks’ risk management. The practical requirements for dealing with risks now regularly include that the effects of ESG risks must be considered appropriately:
- To determine these risks, banks should use scientifically based scenarios, which they can source from generally recognized institutions or networks and apply to their own business model, for example.
- In any case, banks should not base their considerations on their own assumptions about climate change or the transition to a sustainable economy.
The wording of “appropriate consideration” refers to the proportionality principle and makes it clear that there cannot exist a “one size fits all” solution for sustainability risks. According to BaFin, smaller institutions can thus carry out a simpler ESG risk assessment depending on how they are exposed to ESG risks, for example, due to their business model. It is then possible, for example, to limit the risk analysis to the most affected risk positions or portfolios.
Managing the banks’ own real estate transactions
Since many banks have purchased real estate in the booming real estate market in recent years, BaFin has now included a new module in the MaRisk in which it formulates a large number of requirements for the assessment, valuation and risk analysis of real estate investments.
For example, in future the market value of real estate acquired by banks for their own portfolios must be determined by experts. In addition, the institution must analyse the relevant economic aspects before acquiring or constructing real estate and, in particular, include risks in the assessment.
Nevertheless, the requirements only apply if an institution’s real estate portfolio accounts for more than two percent of its total assets or exceeds the threshold of EUR 30 million. In addition, real estate funds are not affected by the new requirements.
Transition periods for the new MaRisk requirements
The new version came into force on the publication date on June 29, 2023. The amendments to the MaRisk that merely serve to clarify BaFin’s administrative practice (e.g., on the home office) already started to apply when they came into force. For the implementation of the amendments that entail new requirements (e.g., on real estate transactions), there is a transition period until January 1, 2024.
