© European Federation of Building Societies 11 The financial crisis: stabilty through the Bauspar system Andreas J. Zehnder Managing Director of the European Federation of Building Societies (EFBS) Brussels, Belgium

© European Federation of Building Societies 2 Outline 1.The financial crisis revisited 2.The German housing market and housing finance system 3.Bausparen 4.Policies for fostering savings for housing 5.Preconditions for a Bauspar system 6.Conclusion – sustainable housing finance

© European Federation of Building Societies The financial crisis revisited The global financial crisis and the European sovereign debt crisis originated in the United States US housing finance system is at the core of the crisis -Low-interest rate policy of the US Federal Reserve caused real interest rates to be negative -US Mortgage loans became more affordable -Demand for property rose, prices increased, a building boom began -People believed that this situation would last forever -Speculation and over-investment in property were the result -Indebtedness of private households rose

© European Federation of Building Societies 4 US household debt as % of disposable income -US House prices rose quickly: From 1995 to 2007 by 135%! -Share of risky mortgages (less than 3% down payment) rose: From 4% in 1995 to 40% in US household income did not keep pace with house prices: House prices outpaced income by 70% -US household debt as a % of disposable income rose: From 80% in 1995 to 127% in The financial crisis revisited

© European Federation of Building Societies US lenders are also responsible for the house price bubble: -Lax underwriting standards -Inflated appraisal prices -Aggressive lending practices and high loan-to-value ratios -Very relaxed prudential and monitoring standards Why did US lenders not care about the quality of the loans? Lenders could offload all risks to the investors of MBS, CDOs… Originate-to-distribute-model This is how the US housing market could infect global financial markets 5 1. The financial crisis revisited Borrowers Lenders/ Originators MBS Sponsors/ Investment banks Special Purpose Vehicle International Investors: bear all risks Loan MBS $$$

© European Federation of Building Societies 6 1. The financial crisis revisited Collapse of the financial sector of the countries of the European periphery not centered at the first place on the proliferation of complex financial products or of exposure to US housing market -Spain and Ireland among the European countries with biggest markets for MBS but share of MBS on outstanding mortgage loans still below 25% in Spanish and Irish banks did not have high exposure to US subprime mortgage market Plain vanilla property bubble Causes: -Negative real interest rates (caused by weak US monetary policy) -Unprecedented competition in financial sector; financial innovation -Spirit of optimism and economic growth omitted risks

© European Federation of Building Societies 7 House price indices Spain and Ireland (1999=100) House prices in Spain and Ireland rose very fast (increase by 160% in 8 years!)… only to fall shortly after the US market crashed The German market rose only very modest, broadly in line with the inflation rate (increase by 12% in 9 years)… it was not affected by the financial crisis 1. The financial crisis revisited

© European Federation of Building Societies 2. The German housing market and housing finance system There are many reasons for the stability of the German housing market: -Very good housing supply (80 million inhabitants and 40 million housing units) -Negative demographic trend for young households -Newly build housing units matched demand -Real income of households is stagnating since Well developed rental market -Government policies do not push for owner occupation -Structure of housing finance market; attitude of borrowers and lenders 8

© European Federation of Building Societies 9 C Typical financing example for the purchase of an apartment in Germany: Price for the apartment: € Other equity Bauspar savings Bauspar loan (second mortgage) € € € € € Mortgage loan (first mortgage) Bauspar contract sum Total equity capital 2. The German housing market and housing finance system It is important that the buyer brings own equity – it is a form of self- commitment and a risk buffer for lender and borrower

© European Federation of Building Societies The German housing market and housing finance system German mortgage lenders can use many different funding instruments of which non dominates – this has several advantages: -Only a set of funding channels is able to meet the needs of lenders and borrowers properly -At various points in time some markets are more functional than others (e.g. markets for MBS and unsecured debt shut down in financial crisis) -High flexibility, competitive mortgage rates all time

© European Federation of Building Societies Bausparen – central role in Germany The Bausparkassen take a central position in the German mortgage process: -Traditional providers of the second mortgage -They provide also all other kinds of mortgage products -Market share in 2010: 24% Bausparkassen are very flexible to adapt their business to changes in the interest rate environment, the overall economic situation or the behavior and needs of the customers

© European Federation of Building Societies Loans are funded only by savings and amortisation payments → closed circuit Excess liquidity can be invested only within narrow limits (gilt- edged investments) Safety is the top priority. Bauspar bank People with Bauspar contract save Saver becomes debtor and pays the loan back (interest + amortisation) Loans are funded by savings and amortisation payments 3. Bausparen – how it works 12

© European Federation of Building Societies Bausparen – how it works Savings phase Allocation phase Loan phase Deposit/ Saver‘s effort Bank‘s output/ Loan Duration Contract sum in % Conclusion of contract Customer saves and recieves interest on deposit Payback of loanRight of payoff of contract sum (deposit +loan)

© European Federation of Building Societies Bausparen – the balance sheet structure Bauspar loans/ collective loans Advance loans Other assets Other liabilities Bauspar deposits assetsliabilities Balance sheet of all Bausparkassen 1990 Total balance: 86 billion Euros: Average interest rate: 10% (fixed 5 years) 57% 21% 22%26% 74% Traditional business of providing second mortgages: 78% Bauspar loans Advance loans Other assets Other liabilities Bauspar deposits assetsliabilities Traditional business of providing second mortgages: 52% 32% 68% 14% 38% 48% Balance sheet of all Bausparkassen 2010 Total balance: 196 billion Euros: Average interest rate: 3.5% (fixed 5 years) When interest rates are high, traditional business is strong When interest rates are low, other mortgage businesses become more important; also Bauspar savings become more attractive

© European Federation of Building Societies Bausparen – safe haven in times of crisis 2008 was one of the best years for the Bauspar industry – while the rest of the financial industry was crumbling: Bausparen is valued by the people for its stability and safety Bausparen attracts in unstable times and times with low interest rates many savings: Bauspar deposits increased within 3 years ( ) by 20 billion Euro or 16%! The large reservoir in Bauspar savings enables Bausparkassen to provide all customers readily with cheap mortgages when interest rates and the demand for Bauspar loans rise again. 120 billion Euro 140 billion Euro + 16% Bauspar deposits 2008/2011:

© European Federation of Building Societies 4. Policies for fostering savings for housing The German government supports and encourages savings and equity formation: -Savings bonus on Bauspar deposits as tax free surplus on savings expenditures tied to a future usage for housing (with income ceiling) -Employee savings allowance granted as tax free surplus to savings expenditures made for certain investment products including Bauspar contracts (with income ceiling) Bonus on savings as best way to support equity generation: -Increases savings efforts → national savings rate may rise -Transparent → easily budgeted, low administrative expenses -Socially reasonable → resources can be concentrated on target group -Demand subsidy → empowers families to make their own choices -Perfect complement to Bauspar system → increases acceptance and eases access for new customers 16

© European Federation of Building Societies 5. Preconditions for a Bauspar system The Bauspar system is a very robust and safe system but there are preconditions for its successful establishment: -Stable macroeconomic environment -Low inflation rate (<10%) -Well-functioning banking law -Strong supervisory authority for credit institutions -Special Bauspar Act (optional, but recommended) -Savings bonus (optional, but recommended) 17

© European Federation of Building Societies Conclusion – sustainable housing finance Latin America has avoided so far the high leverage and indebtedness so characteristically for households in the United States. It should stay on track and opt for a save and sustainable housing finance system. Vengan a Austria!

© European Federation of Building Societies 19 Questions? Thank you for your attention! Contact details European Federation of Building Societies Andreas J. Zehnder Rue Jacques de Lalaing 28 B Brussels Tel.: +32/2/