By Sonja Gerling
The anticipated 7th amendment to MaRisk (Minimum Requirements for Risk Management) at a glance
This year, the 7th amendment to BaFin’s MaRisk has been announced. The 6th amendment was published on 16 August 2021. The amendments to MaRisk define those adjustments and innovations to regulatory requirements in relation to risk management.
The expected points contained in the 7th amendment to MaRisk are as follows:
- Adoption of the EBA guidelines for lending and credit monitoring into MaRisk: Requirements that previously only applied to the large institutions directly supervised by the EBA will now also become relevant for small and medium-sized banks and financial institutions.
- Regulation of real estate transactions by banks: Due to the strong increase in direct investments in real estate, this business is to receive attention in the new MaRisk. In this regard, the guidelines for credit transactions will be followed.
- Business model analysis: The sustainability of business models has not been taken into account in MaRisk yet. Since the business model analysis is an important component of the SREP methodology (Supervisory Review and Evaluation Process), clarifications are to be made in this regard this year.
- Special requirements for special fund investments
- Home office trading
Adoption of the EBA guidelines into MaRisk
The topic of adopting the EBA guidelines for lending and credit monitoring is particularly exciting. A crucial point is the determination of the debt servicing capacity. Here, various regulatory requirements have been made that institutions supervised by BaFin have avoided to date. Due to the inclusion of the EBA guidelines in MaRisk, smaller banks are also affected by the requirements. Corresponding effects on processes and IT systems are expected.
One completely new aspect in the EBA guidelines concerns the requirements for the inclusion of ESG risks in lending. ESG stands for Environmental, Social, Governance and concerns topics related to sustainability. With regard to environment-related issues, this includes the possible effects of climate change, as well as legal requirements for the protection of the environment. Social affairs includes labour rights, working conditions and similar issues. Corporate governance includes, among others, business ethics and legal compliance.
ESG risks in the debt service assessment of loans
In future, the impact of ESG risks must also be taken into account when assessing the borrower’s solvency. If the borrower contributes to climate change in violation of the law, a corresponding liability may arise. Furthermore, adjustments to CO2 requirements may become necessary over time, which will have a financial impact on the borrower. The collateral valuation must also be closely scrutinised. In the course of climate policy, machinery, motor vehicles or real estate could suffer sudden losses in value.
While these new requirements previously only applied to institutions directly supervised by the EBA, this will change with the amended MaRisk. As soon as BaFin includes the EBA guidelines, the stricter requirements will also become relevant for smaller banks and financial institutions.
In principle, many banks already include ESG risks in their lending assessment. These include, for example, the topics of CO2 emissions or the working conditions in the complete manufacturing process. Since 2020, this has also been supported and driven by the UN Principles for Responsible Investment, a United Nations body. With the initiative “ ”, the committee advocates the integration of sustainability factors in the credit risk assessment.
Nevertheless, the inclusion of specific, further ESG risks in the lending process will lead to adjustments in various areas of the banks. The automatic calculation of debt service capacity will be affected. This means that the corresponding software must be adapted, expanded or purchased. A big question here is where the associated data for ESG risks comes from. It is not expected that MaRisk will make specifications in this regard.
Where does the data for ESG risk assessment come from?
Creditreform has conducted a survey as part of the new ESG requirements. In the non-risk-relevant area, 45% of the institutions surveyed can imagine using sector-oriented ESG scores for the time being. For the risk-relevant area, the determination is less simple. Real calculations can only be made with company-specific data. Further data on physical climate risks and political climate risks should be added. The integration of these risks requires either the introduction of complex data collection or the purchase of external data. The advantage of external data would be the conformity of the valuation methodology used by different institutions.
For the integration of data, interfaces must be created in the software being used. The ESG scores that can now be determined then require a process of parameterisation, in order to be able to use them for the portfolio assessment of ESG risks. The procedural and technical adjustments also require training of staff in the area of analysis, as well as in sales.
Sustainable positioning in the market
Following the introduction of ESG risks, there may also be a realignment of the business. If the sectors in which work has been carried out so far score very poorly overall in the ESG risk assessment, a change of sector may be the sustainable solution. The inclusion of ESG risks in the lending assessment of institutions will probably initially be associated with a level of effort that should not be underestimated. In the long run, however, a positive impact can be expected. It is anticipated that, regardless of regulatory requirements, the relevance of ESG will increase and play an important role in risk assessment. The conscious, increasingly sustainable positioning in the market is an additional positive effect. There is now an eager sense of anticipation for the release of the 7th amendment, in order to be able to fully assess the actual impact.
On 1 March 2023, another article on the 7th amendment to MaRisk appeared on our blog: https://dps.de/en/news/the-7th-amendment-to-the-marisk-challenges-and-opportunities-for-the-business-and-financial-sector/