Optimizing Real Asset Investments for Bank's
Enhance your client offering with innovative securitisation solutions tailored to Switzerland's dynamic banking landscape.
New regulatory changes for banks: Basel IV/CRR/Output Floor
Capital Requirement:
In late 2022, the European Banking Authority (EBA) released its first Basel III monitoring report, predicting that full implementation by 2028 will raise EU banks' capital requirements by average 15%, necessitating an extra EUR 1.2 billion in core capital.
Increased Output Floor:
The new Output Floor of 72.5% limits the capital relief banks can gain from internal models. Banks must now hold at least 72.5% of the capital requirements under the standard approach, up from the previous 50%.
Risk Weighted Assets (view only on Real Estate):
Under Basel III, claims secured by residential or commercial real estate have risk weights of 35% and 100%, respectively. Basel IV introduces a revised approach with greater granularity. Exposures are treated differently based on whether the property is residential or commercial and whether the exposure depends on cash flows generated by the property. Banks must use the “Whole Loan” approach, assigning risk weights to different LTV buckets. Alternatively, with supervisory approval, a “Loan Splitting” approach can be applied for exposures not significantly dependent on cash flows.
Impact of Basel IV on the real estate and mortgage market
- Increased capital costs due to higher capital requirements:
Banks will need to hold more equity (by average 15%) for real estate loans due to higher risk weights and the Output Floor. This could strain bank margins and lead to higher interest rates for customers.
- Tighter lending criteria:
To offset higher capital requirements, banks may tighten their lending criteria, such as implementing stricter LTV limits or higher borrower creditworthiness requirements.
- Liquidation value:
Banks are placing greater emphasis on the liquidation value of properties, especially in crisis situations where properties are used as collateral.
Our Solution for Banks
Mortgage-backed securities
By opting for a listed and rated mortgage bond with a fixed interest rate, financing is streamlined through the capital market, by passing the elevated bank margins imposed by Basel IV’s increased capital requirements.
Unlike traditional bank financing that often prioritizes liquidation value, this approach leverages a going-concern perspective, focusing on future earnings. The bond, secured by high-quality real estate, will be issued in optimally sized tranches with tailored maturities and interest rates, aiming to secure the highest possible credit ratings.
The bonds will be listed at SIX Swiss Exchange to leverage on the Swiss regulatory framework.
Key features of mortgage-backed securities
- Mortgage bond with a fixed interest rate/coupon
- Issued by an independent party
- Tradable financial product via stock exchange listing
- 5 – 7 years duration
- Issued in Swiss Francs or applicable currency
- Structured in multiple tranches, allowing bondholders to choose return/risk level
- Rated by Standard & Poor’s, providing an assessment of credit risk
- Controlled by independent servicer
- Annual reporting and audits guaranteeing full transparency
- Green Bond status subject to quality of the underlying
Contact Our Expert Team Today
Reach out to SH Schweizer Hypotheken AG for securitisation platform inquiries.
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