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7th Amendment to MaRisk in the Financial Sector – These Regulatory Updates Await You

The 7th amendment to MaRisk (minimum requirements for risk management) in the financial sector contains several regulatory updates that affect financial service providers. To shed light on the situation, we have summarized the changes that are in store for companies below. 

Regulation of the real estate business 

The 7th amendment to MaRisk is a major enhancement of the regulator regime that applies to financial service providers. In addition to newly introduced key aspects such as the consideration of ESG risks or the adoption of the EBA guidelines for monitoring credit approvals, the new requirements also include adjustments to regulations for managing real estate business.  

But what exactly does “real estate business of financial service providers” mean? It is often confused with credit approval for real estate financing. In this case, however, it is important to note that the banks themselves act as real estate investors instead of merely financing transactions. In the last decade, real estate-related business has skyrocketed and emerged as a new, lucrative source of income, in light of low interest-rate policies by central banks.  

Why were the new regulations introduced? 

Since the real estate business is still quite a young discipline in the financial sector, there are also comparatively few legal requirements and controls. The increased interest among financial institutions and the resulting large amounts invested are also highly susceptible to crises and can suffer heavy damage in case of a risk event. While detailed regulations have applied to the credit approval process for some time now, for example, there were no separate guidelines for real estate transactions. They have now been introduced as part of the 7th amendment to MaRisk in the form of a new model, BTO 3.  

Content and significance of the requirements 

Like the other topics involved with MaRisk, the new section also establishes guidelines. In other words, the banks are given a framework within which they can act. The aim is to define lean, principled rules for the organizational structure and the processes. Requirements of the lending business are also applied on a large scale to the requirements of the real estate business. The new rules will ensure that investments are preceded by a well-founded valuation and risk analysis and that portfolio properties are monitored.  

The requirements must be met by all banks that have a real estate business volume of more than 10 million euros and/or whose balance sheet total in the real estate business exceeds two percent.  

The new requirements are defined in the separate part 3 of MaRisk. The core content is summarized clearly below: 

1. Requirements of the organizational structure

The real estate business processes must reflect a clear separation between the front office and back office units. A coordination process for real estate business must be established for these processes. The division of powers must be defined clearly in order to avoid and resolve any potential disputes.  

2. Requirements of the processes in real estate busines

The processes of the financial institutions must be clearly defined ahead of time and the processing principles must be formulated. An adequately meaningful valuation of the property is also required. The valuation approach used must be comprehensible, valid, and documented. A location inspection must be carried out beyond the mere valuation. In this process, the market value must be determined by an expert who is familiar with the market and property type involved – potential conflicts of interest must be avoided. If the valuation is carried out by a third party, the bank must (be able to) enrich the reports with its own relevant information and experience. 

3. Requirements for property purchase/construction

Suitable risk calculations must be carried out before the construction or purchase of a property; their intensity depends on the degree of risk involved. Particularly critical points must be highlighted and, where applicable, presented in suitable scenarios. The business aspects (such as the financing structure, preliminary and subsequent calculations, and so on) must also be analyzed – and included in the risk assessment – before the property is purchased or built. Relevant risks include the risk of increases in construction materials, maturity risks, and others. In addition, the technical feasibility, current trends, and legal risks also need to be taken into account. If a third party carries out this work, their suitability must be verified in advance. Lastly, the market value must also be determined prior to the investment.  

4. Requirements for further processing and monitoring

Regular checks of the current status and costs must be carried out during the development and execution phase. In addition, the property value must be appraised each year – this requirement can be waived as long as no deviations of more than ten percent are apparent. If significant, spontaneous changes occur, special checks must be carried out. For internal controlling, a report with all value changes must be submitted to management at least annually.  

5. Requirements of the processing checks

The structure of the checks is also defined in MaRisk. In particular, this involves checking compliance with the requirements from the agreed division of powers. This can involve the dual-control principle, for example. The exact designs of the checks should correspond to and satisfy the processes in the real estate business in any case.  

Learning nugget: Real estate business in the framework of the 7th amendment to MaRisk 

In short, the 7th amendment to MaRisk will introduce new regulations for the real estate business of financial institutions, along with other aspects. The regulations are based on those for the credit approval process and aim to establish suitable framework conditions to optimize the risk structure of real estate investments.  

If you have any other questions about this exciting topic, don’t hesitate – get in touch with us to arrange a meeting without any obligation. The experts from our Financial Services business unit will be happy to support you.