Meanwhile, the Capital Requirements Regulation (CRR3) is raising alarm bells in France. Americans are rightfully asking if it will result in higher interest rates and larger down payment requirements for home buyers. Beginning on January 1, 2025, CRR3 creates additional risk weights for residential mortgages. These amendments will directly link the variable loan balances with the respective loss in property values due to untenable debt loads. This regulation is in keeping with the finalized Basel III Accord, intended to make the European banking sector more stable.
Under the new framework, banks operating in the European Union must now consider the loan-to-value (LTV) ratio when calculating their regulatory capital. These risks are surfacing in the new attention from regulators and all loan producers toward the LTV of French home loans since March of 2023. LTV ratios are getting more attention to ameliorate risks associated with home mortgages. While this transition is necessary and long overdue, the change has created new challenges for borrowers and financial institutions alike.
Banks have two approaches available for calculating risk under CRR3: the ‘standard’ approach and the ‘advanced’ approach. The traditional method relies on risk weights set by regulators. The advanced method uses internal models, which supervisory authorities have cleared for use. The latter is viewed as offering a closer estimate of the risk associated with different assets. Since the implementation of CRR3, the maximum difference between these two methods’ risk weights has been limited. This amendment has set a more leveled playing field for states developing their risk assessment.
By 2030 ensure that the aggregate of exposure calculated with the standardized approach stays above 72.5%. This threshold is determined by evaluating those assets using the enhanced method. This requirement is intended to prevent boom-and-bust cycles in which banks are forced to re-evaluate their capital levels and, by extension, their ability to lend. Nevertheless, many experts argue that these new prudential requirements are not well-suited to the unique characteristics of the French market.
Consumer and industry concerns are growing about how these regulations will increase the cost of credit for consumers. The LTV ratios associated with home loans are already fuelling apprehensions about potential increases in interest rates and down payment requirements. Lending practices banks are shifting corporate lending practices in line with the new CRR3 requirements. Consequently, borrowers could face more unfavorable terms that would only further inhibit their ability to obtain home financing.