Financial crisis 2008: Learning from mistakes
In order to understand the context, it is important to look back at the financial crisis of 2008. This impacted the entire financial industry and was responsible for one of the largest bank failures and job losses in history. The crucial factor for the development at that time was the granting of residential real estate loans to persons with low creditworthiness, and an incorrect assessment of the risk regarding the granted loans – also known as triple-A or AAA ratings. This process endangered the financial stability of the U.S. and European markets in particular, and ultimately caused them to collapse. Studies also show that a threat to financial stability often arises when the volume of loans is expanded at the same time as lending standards are weakening. In Germany, the Deutsche Bundesbank is responsible for maintaining this financial stability. It is the guarantor of a functioning capital and credit market that is as low-risk as possible. Control of the real estate financing business is of essential importance here: around 70% of the loans granted to private individuals are used for real estate financing. Furthermore, roughly 50% of the balance sheet credit volume of German banks is used for housing construction by private households and companies. For this reason, and in response to pressure from other national regulatory standards that German guidelines have surpassed to date, the Data Collection on Housing Loans (WIFSta) was launched.
So what is meant by WIFSta and the data collection model?
As mentioned at the beginning, WIFSta was created with the intention of obtaining a better overview of the capital market. The new regulation was announced on September 29, 2021. It grants a transitional period of 18 months to persons and entities required to report. The first notification deadline is March 31, 2023, and covers the first quarter of the new year.
But what exactly does the new standard regulate? In principle, WIFSta is intended to be used to record, document and report all new loan transactions related to real estate financing. The reporting obligation here applies only to the granting of loans to natural persons. The granting of loans to legal entities is regulated by the AnaCredit Regulation. In addition to the main aspect of new business, a small amount of information is also collected on banks' portfolios, although this is of secondary importance. Credit institutes are also given the option of collecting feedback. This records all loan processes and loan data since 2019 in accordance with the new standard and extra tables provided.
The new regulations can be roughly divided into four main categories, for each of which individual indicators are provided:
- Data indicators in the area of lending for the construction or acquisition of residential real estate
- Data indicators in the area of lending for residential real estate acquired for subletting purposes
- Data for the purpose of calibration and verification of the de minimis limit, the lower and upper thresholds
- Additional data indicators for the purpose of fulfilling the Bundesbank's tasks
Exemplary indicators in this context are the collection of data on residential real estate, such as market value, mortgage lending value, or location. The loan volume/real estate value ratio or subsidies are also recorded. All indicators can be found on the Deutsche Bundesbank's website on WIFSta.
Reporting regulations and reporting obligation
Now that you have learned everything about the creation and the contents of WIFSta, the question arises as to who actually has to report.
Basically, all credit institutions as defined in § 1 (1) No. 2 of the German Banking Act (KWG) must comply with the WIFSta regulations, in other words, all institutions that grant loans for the purpose of acquiring or restructuring real estate. These include banks, asset management companies and insurance companies. However, exceptions can be made to this: for example, WIFSta delimits the reporting obligation, i.e. the scope and frequency of reporting, according to the number of loans.
The three categories of credit institutes are shown below:
- Small lenders (75 loans or more annually): Reporting requirement of a data summary (annually)
- Medium-sized lenders (200 loans or more annually): Obligation to report a full set of data (annually)
- Large lenders (700 loans and more annually): Reporting obligation of a comprehensive and unrestricted data transmission (quarterly)
à Perspective of the credit institutes: Less stringent rules apply to insurance companies and asset management companies
All smaller credit institutions are exempt from a notification obligation, or may submit such information voluntarily, provided their loan portfolio volume is less than EUR 90 million
Can or must? Challenges and appropriate solutions
Implementation of the new requirements requires a certain amount of infrastructure and restructuring of the same. In addition to many reportable indicators which are already recorded, new reporting requirements will be added, such as reporting whether the acquisition of a property is a first-time acquisition. For these reasons, the reporting system may need to be reorganized and expanded. Various tools such as BAIS can be used to address this issue. Furthermore, interfaces to the ExtraNet reporting portal of the Deutsche Bundesbank can be set up to ensure an automated and smooth process. In addition, audit workflows can be created to capture, for example, loan numbers and volumes should the institution regularly fall between the size thresholds. There is often talk of aggregation of data in the context of WIFSta. This data protection measure, which is ensured by aggregating reportable items (e.g., loan volume is reported instead of individual loans), could be enabled by appropriate software for extraction and consolidation of data from an ERP system.
Source: BAIS software solution, msg data model, accessed via WIFSta (msgforbanking.de) on 11/25/2022.
Conclusion: The WIFSta Regulation
WIFSta makes it easier for the Deutsche Bundesbank to fulfill its function as guarantor of financial stability and to provide institutions with a framework. For this, credit institutes are required to report on loans granted to natural persons, which must satisfy certain requirements and contents, depending on their size. In this context, loans include financial transactions for residential real estate financing of private households and entrepreneurial activities. The data collection, which must be carried out on a quarterly basis, is carried out digitally, but poses extensive challenges for institutes and makes high demands on the internal reporting system. Possible solutions could take the form of an appropriate process optimization and professional and technical advice, plus the use of suitable software.
Have we aroused your interest? Please feel free to contact us with your questions regarding the WIFSta regulatory standard.
