France: Will the new prudential requirements result in interest rate hikes and higher down payments?

Since 1 January 2025, banks in the European Union have had to consider the loan-to-value (LTV) ratio of loans to households for house purchases when calculating their regulatory capital. This new prudential requirement is ill-suited to the French market. The criteria for granting home loans are based mainly on the debt service-to-income ratio, leading to historically low default rates. However, since mid-2025, the supervisor has been paying increasing attention to the LTV of home loans in France, which is fuelling concerns about higher borrowing costs and an increase in down payment rates.

Banks can choose between two approaches. The first, known as the ‘standard’ approach, is based on risk weights provided by the regulator. The second, known as the ‘advanced’ approach, is based on internal models validated by the supervisor and provides a more accurate reflection of the level of risk associated with assets. However, since the entry into force of the CRR3 – the European translation of the finalised Basel III Accord – on 1 January 2025, the maximum difference between the risk weights resulting from these two approaches has been limited. From 2030 onwards, total risk-weighted assets may not be less than 72.5% of those same assets calculated exclusively using the standardised approach. This is the “output floor”. The CRR3 also introduces, as part of the standardised approach, a risk weight for home loans based on the ratio between the outstanding amount of home loans and the value of the properties financed. The higher the LTV, the higher the risk weight.

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