# C_2019366EN.01000101.xml

| 30.10.2019 | EN | Official Journal of the European Union | C 366/1 |
| --- | --- | --- | --- |

30.10.2019

EN

Official Journal of the European Union

C 366/1

---

RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD

of 27 June 2019

on medium-term vulnerabilities in the residential real estate sector in Belgium

(ESRB/2019/4)

(2019/C 366/01)

THE GENERAL BOARD OF THE EUROPEAN SYSTEMIC RISK BOARD,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (1), and in particular Articles 3, 16, 17 and 18 thereof,

Whereas:

| (1) | The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments. |
| --- | --- |

(1)

The real estate sector plays an important role in the economy and its developments may have a material influence on the financial system. Past financial crises have demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole, which may also lead to negative cross-border spillovers. Adverse real estate market developments in some Member States have, in the past, resulted in large credit losses and/or had a negative impact on the real economy. Such effects reflect the close interplay between the real estate sector, funding providers and other economic sectors. Furthermore, the strong feedback loops between the financial system and the real economy reinforce any negative developments.

| (2) | These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions. |
| --- | --- |

(2)

These links are important because they mean that risks originating in the real estate sector may have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks of, and easier access to, funding may contribute to a rapid expansion of credit and investment, together with an increased demand for real estate, which puts upward pressure on property prices. Since the resulting higher collateral values further favour the demand for, and supply of, credit, these self-reinforcing dynamics may result in potential systemic consequences. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

| (3) | Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability. |
| --- | --- |

(3)

Vulnerabilities relating to residential real estate can be a source of systemic risk and they may affect financial stability both directly and indirectly. Direct effects are credit losses on mortgage portfolios due to adverse economic or financial conditions and simultaneous negative developments in the residential real estate market. Indirect effects could be related to adjustments in household consumption, leading to further consequences for the real economy and financial stability.

| (4) | As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth. |
| --- | --- |

(4)

As stated in recital 4 of Recommendation ESRB/2013/1 (2), the ultimate objective of macroprudential policy is to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

| (5) | To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks. |
| --- | --- |

(5)

To this end, macroprudential authorities may use one or more of the capital-based macroprudential measures set out in Directive 2013/36/EU of the European Parliament and of the Council (3) and Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), and/or borrower-based macroprudential measures, which are exclusively based on national law, depending on the assessment of risks. While the capital-based measures are primarily aimed at increasing the resilience of the financial system, the borrower-based measures may be particularly suitable for preventing the further build-up of systemic risks.

| (6) | In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation. |
| --- | --- |

(6)

In addition, Recommendation ESRB/2013/1 recommends that Member States establish a legal framework that permits the macroprudential authorities to have direct control or recommendation powers over the macroprudential instruments identified in that Recommendation.

| (7) | In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which Belgium was one (6). |
| --- | --- |

(7)

In 2016, the European Systemic Risk Board (ESRB) conducted a Union-wide assessment of the vulnerabilities relating to residential real estate (5). This assessment enabled the ESRB to identify a number of medium-term vulnerabilities in several countries as sources of systemic risk to financial stability, which led to the issuance of warnings to eight countries, of which Belgium was one (6).

| (8) | In 2016 the main vulnerabilities identified in the residential real estate market in Belgium were the rapid growth in both house prices and mortgage loans, as well as the already high and increasing household indebtedness, with an increasing share of mortgagors being potentially vulnerable to adverse economic conditions or developments in the residential real estate market in Belgium. |
| --- | --- |

(8)

In 2016 the main vulnerabilities identified in the residential real estate market in Belgium were the rapid growth in both house prices and mortgage loans, as well as the already high and increasing household indebtedness, with an increasing share of mortgagors being potentially vulnerable to adverse economic conditions or developments in the residential real estate market in Belgium.

| (9) | The ESRB has recently concluded a systematic and forward-looking European Economic Area-wide assessment of vulnerabilities relating to residential real estate (7). |
| --- | --- |

(9)

The ESRB has recently concluded a systematic and forward-looking European Economic Area-wide assessment of vulnerabilities relating to residential real estate (7).

| (10) | As regards Belgium, this recent assessment has revealed that, since 2016, strong growth in housing credit has continued to fuel household indebtedness. Despite the fact that the growth in house prices has decelerated, the previous dynamics raise concerns about potential overvaluation. Moreover, a significant share of mortgage loans continue to be provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market. Against this background, a 5 percentage point risk weight add-on, which was introduced in 2013 for the mortgage exposures of credit institutions that use the internal ratings-based (IRB) approach, has contributed to increasing the resilience of these institutions. |
| --- | --- |

(10)

As regards Belgium, this recent assessment has revealed that, since 2016, strong growth in housing credit has continued to fuel household indebtedness. Despite the fact that the growth in house prices has decelerated, the previous dynamics raise concerns about potential overvaluation. Moreover, a significant share of mortgage loans continue to be provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market. Against this background, a 5 percentage point risk weight add-on, which was introduced in 2013 for the mortgage exposures of credit institutions that use the internal ratings-based (IRB) approach, has contributed to increasing the resilience of these institutions.

| (11) | In 2018, the Nationale Bank van België/Banque Nationale de Belgique increased that 5 percentage point risk weight add-on by the application, pursuant to Article 458 of Regulation (EU) No 575/2013, of a proportionate risk weight add-on consisting of 33 % of the exposure-weighted average of the risk weights applied to the exposures at default in each credit institution’s residential mortgage portfolio. |
| --- | --- |

(11)

In 2018, the Nationale Bank van België/Banque Nationale de Belgique increased that 5 percentage point risk weight add-on by the application, pursuant to Article 458 of Regulation (EU) No 575/2013, of a proportionate risk weight add-on consisting of 33 % of the exposure-weighted average of the risk weights applied to the exposures at default in each credit institution’s residential mortgage portfolio.

| (12) | The risk weight add-on currently in place aims to increase the resilience of credit institutions that use the IRB approach, and to mitigate the build-up of risks related to new mortgage loans. However, there are currently no borrower-based measures (e.g. limits to the loan-to-value (LTV) ratio, the debt-to-income (DTI) ratio or the debt service-to-income (DSTI) ratio) in place in Belgium that would directly limit the share of mortgage loans provided to households which are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market. |
| --- | --- |

(12)

The risk weight add-on currently in place aims to increase the resilience of credit institutions that use the IRB approach, and to mitigate the build-up of risks related to new mortgage loans. However, there are currently no borrower-based measures (e.g. limits to the loan-to-value (LTV) ratio, the debt-to-income (DTI) ratio or the debt service-to-income (DSTI) ratio) in place in Belgium that would directly limit the share of mortgage loans provided to households which are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market.

| (13) | Therefore, the ESRB has concluded that the macroprudential measures that are in place or available in Belgium are partially appropriate and partially sufficient to address the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards in the medium term. Consequently, further policy action is required to address these vulnerabilities, which can be a source of systemic risk. The measures proposed in this Recommendation are intended to complement the existing macroprudential measures in Belgium, with the aim of strengthening resilience. They should not be considered as substitutes for the existing capital-based measures, which remain important in order to address existing vulnerabilities in the outstanding loan portfolio. |
| --- | --- |

(13)

Therefore, the ESRB has concluded that the macroprudential measures that are in place or available in Belgium are partially appropriate and partially sufficient to address the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards in the medium term. Consequently, further policy action is required to address these vulnerabilities, which can be a source of systemic risk. The measures proposed in this Recommendation are intended to complement the existing macroprudential measures in Belgium, with the aim of strengthening resilience. They should not be considered as substitutes for the existing capital-based measures, which remain important in order to address existing vulnerabilities in the outstanding loan portfolio.

| (14) | The purpose of this Recommendation is to recommend the activation of legally binding borrower-based measures to address the significant share of mortgage loans provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market in Belgium. |
| --- | --- |

(14)

The purpose of this Recommendation is to recommend the activation of legally binding borrower-based measures to address the significant share of mortgage loans provided to households that are potentially vulnerable to adverse economic or financial conditions or adverse developments in the residential real estate market in Belgium.

| (15) | This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union. |
| --- | --- |

(15)

This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

| (16) | ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish, |
| --- | --- |

(16)

ESRB recommendations are published after the General Board has informed the Council of the European Union of its intention to do so and provided the Council with an opportunity to react, and after the addressees have been informed of the intention to publish,

HAS ADOPTED THIS RECOMMENDATION:

SECTION 1

RECOMMENDATION

Recommendation A — Activation of borrower-based measures

It is recommended that the Belgian national authorities entrusted with recommendation powers or with the application of borrower-based measures, recommend the activation of, and activate, legally binding borrower-based measures, respectively, in order to prevent:

| (a) | a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or |
| --- | --- |

(a)

a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

| (b) | a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses on these loans in the event of their default and a subsequent decrease in house prices. |
| --- | --- |

(b)

a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses on these loans in the event of their default and a subsequent decrease in house prices.

SECTION 2

IMPLEMENTATION

1.   Definitions

For the purposes of this Recommendation the following definitions apply:

| (a) | ‘borrower-based measures’ means macroprudential measures that target borrowers; |
| --- | --- |

(a)

‘borrower-based measures’ means macroprudential measures that target borrowers;

| (b) | ‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority; |
| --- | --- |

(b)

‘direct control’ means a real and effective capacity to impose and modify, where necessary to achieve an ultimate or intermediate objective, macroprudential measures applicable to the financial institutions that are under the scope of action of the corresponding macroprudential authority;

| (c) | ‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective; |
| --- | --- |

(c)

‘recommendation powers’ means the capacity to guide, by means of recommendations, the application of macroprudential instruments, where necessary to achieve an ultimate or intermediate objective;

| (d) | ‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the value of the property at the moment of the loan origination; |
| --- | --- |

(d)

‘loan-to-value ratio’ (LTV ratio) means the sum of all loans or loan tranches secured by the borrower on the immovable property at the moment of loan origination relative to the value of the property at the moment of the loan origination;

| (e) | ‘debt-to-income ratio’ (DTI ratio) means the total debt of the borrower at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination; |
| --- | --- |

(e)

‘debt-to-income ratio’ (DTI ratio) means the total debt of the borrower at the moment of loan origination relative to the borrower’s total annual disposable income at the moment of loan origination;

| (f) | ‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination; |
| --- | --- |

(f)

‘debt-service-to-income ratio’ (DSTI ratio) means the annual total debt service relative to the borrower’s total annual disposable income at the moment of loan origination;

| (g) | ‘medium term‘ means within a three-year horizon; |
| --- | --- |

(g)

‘medium term‘ means within a three-year horizon;

| (h) | ‘legally binding borrower-based measures’ means borrower-based measures that are introduced through legally binding acts; |
| --- | --- |

(h)

‘legally binding borrower-based measures’ means borrower-based measures that are introduced through legally binding acts;

| (i) | ‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year); |
| --- | --- |

(i)

‘debt-service’ means the combined interest and principal repayment on a borrower’s total debt over a given period (generally one year);

| (j) | ‘maturity’ means the duration of the residential real estate loan contract expressed in years at the moment of loan origination; |
| --- | --- |

(j)

‘maturity’ means the duration of the residential real estate loan contract expressed in years at the moment of loan origination;

| (k) | ‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8). |
| --- | --- |

(k)

‘macroprudential authority’ means a national macroprudential authority with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (8).

2.   Criteria for implementation

| 1. | The following criteria apply to the implementation of this Recommendation:






  (a) | due regard should be paid to the principle of proportionality, taking into account the objective and content of Recommendation A; |
| --- | --- | --- |

1.

(a)

due regard should be paid to the principle of proportionality, taking into account the objective and content of Recommendation A;

| (b) | when activating borrower-based measures under Recommendation A, their calibration and phasing-in should take into account the position of Belgium in the economic and financial cycles, and any potential implications as regards the associated costs and benefits; |
| --- | --- |

(b)

when activating borrower-based measures under Recommendation A, their calibration and phasing-in should take into account the position of Belgium in the economic and financial cycles, and any potential implications as regards the associated costs and benefits;

| (c) | specific criteria for compliance with Recommendation A are set out in Annex I. |
| --- | --- |

(c)

specific criteria for compliance with Recommendation A are set out in Annex I.

| 2. | The addressees of this Recommendation are requested to report to the ESRB and to the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should as a minimum contain:






  (a) | information on the substance and timeline of the actions undertaken; |
| --- | --- | --- |

2.

(a)

information on the substance and timeline of the actions undertaken;

| (b) | an assessment of the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, and maturities, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation; |
| --- | --- |

(b)

an assessment of the vulnerabilities related to household indebtedness, overvaluation of house prices and lending standards for new mortgage loans, including the distribution of new mortgage loans according to their LTV, DTI and DSTI ratios, and maturities, with the relevant ratios being calculated in accordance with Annex IV to Recommendation ESRB/2016/14 of the European Systemic Risk Board (9), together with the functioning of the actions undertaken, having regard to the objectives of this Recommendation;

| (c) | a detailed justification of any inaction or departure from this Recommendation, including any delays. |
| --- | --- |

(c)

a detailed justification of any inaction or departure from this Recommendation, including any delays.

3.   Timeline for the follow-up

The addressees are requested to report to the ESRB and to the Council on the actions taken in response to this Recommendation, or adequately justify any inaction, in compliance with the following timelines:

By 31 October 2020, and yearly thereafter until 31 October 2022, the addressees of Recommendation A are requested to submit to the ESRB and to the Council a report on any actions taken with regard to implementing borrower-based measures to address the vulnerabilities related to household indebtedness, house price overvaluation and lending standards for new mortgage loans in Belgium. Where there is more than one body responsible for taking actions to address the vulnerabilities identified, one joint report should be submitted.

4.   Monitoring and assessment

| 1. | The ESRB Secretariat will:






  (a) | assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up; |
| --- | --- | --- |

1.

(a)

assist the addressees, ensuring the coordination of reporting, the provision of relevant templates and detailing, where necessary, the procedure and the timeline for the follow-up;

| (b) | verify the follow-up by the addressees, provide assistance at their request, and submit three follow-up reports regarding the implementation of Recommendation A to the General Board; the first report by 31 December 2020, the second report by 31 December 2021, and the third report by 31 December 2022. |
| --- | --- |

(b)

verify the follow-up by the addressees, provide assistance at their request, and submit three follow-up reports regarding the implementation of Recommendation A to the General Board; the first report by 31 December 2020, the second report by 31 December 2021, and the third report by 31 December 2022.

| 2. | The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction. |
| --- | --- |

2.

Done at Frankfurt am Main, 27 June 2019.

Head of the ESRB Secretariat,

on behalf of the General Board of the ESRB

Francesco MAZZAFERRO

---

(1)  OJ L 331, 15.12.2010, p. 1.

1

(2)  Recommendation ESRB/2013/1 of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (OJ C 170, 15.6.2013, p. 1).

2

(3)  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

3

(4)  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

4

(5)  See ‘Vulnerabilities in the EU Residential Real Estate Sector’, ESRB, November 2016, available on the ESRB’s website at www.esrb.europa.eu.

5

(6)  Warning ESRB/2016/06 of the European Systemic Risk Board of 22 September 2016 on medium-term vulnerabilities in the residential real estate sector of Belgium (OJ C 31, 31.1.2017, p. 45).

6

(7)  See ‘Vulnerabilities in the residential real estate sectors of EEA countries’, ESRB, 2019, available on the ESRB’s website at www.esrb.europa.eu

7

(8)  Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

8

(9)  Recommendation ESRB/2016/14 of the European Systemic Risk Board of 31 October 2016 on closing real estate data gaps (OJ C 31, 31.1.2017, p. 1).

9

---

ANNEX I

SPECIFICATION OF COMPLIANCE CRITERIA APPLICABLE TO THE RECOMMENDATION

Recommendation A — Activation of borrower-based measures

The following compliance criteria are applicable to Recommendation A.

| 1. | In order to prevent:






  (a) | a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or |
| --- | --- | --- |

1.

(a)

a significant or an increasing share of borrowers taking out new mortgage loans who might not be able to service their debt or maintain consumption following adverse economic or financial conditions or adverse developments in the residential real estate market; or

| (b) | a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses in the event of their default and a subsequent decrease in house prices; |
| --- | --- |

(b)

a significant or an increasing share of new mortgage loans, secured by residential real estate, that could result in credit losses in the event of their default and a subsequent decrease in house prices;

the Belgian national authorities should use one or several borrower-based measures in combination (e.g. limits to the LTV ratio in combination with limits to the DTI ratio, or to the DSTI ratio, and maturity limits), to ensure the effectiveness of the measures in place and to minimise any potential for their circumvention or for unintended consequences that could reduce their effectiveness and possibly create risks in other areas.

| 2. | Prior to activating borrower-based measures, an assessment should be made of the position of Belgium in the economic and financial cycles, in order to determine the appropriate calibration and phasing-in of such measures. |
| --- | --- |

2.

| 3. | After the activation of borrower-based measures, their further tightening or the activation of additional macroprudential measures may be needed to address the vulnerabilities identified in Belgium; this will depend on the choice of the borrower-based measures activated, on the initial calibration of those activated measures and on the results of the assessment of vulnerabilities. |
| --- | --- |

3.

---