EBA published response to a letter received from EC regarding the EBA Opinion on the intention by Eesti Pank, the Estonian Central Bank, to introduce certain stricter national measures to address macro-prudential risk in Estonia. The proposed stricter measures are in scope for credit institutions in Estonia that are using the internal ratings-based (IRB) approach, in accordance with Article 458 of the Capital Requirements Regulation (CRR). In its Opinion dated May 15, 2019, EBA had concluded that the evidence presented by Eesti Pank was not sufficient to support the suitability and appropriateness of the suggested measure. EC had separately informed Eesti Pank that it considered the notification incomplete because the notification did not provide all the information required to ascertain that the proposed measure complies with the requirements of Article 458 of CRR. EC then received additional information from Eesti Pank, which it shared with EBA and invited EBA, in its letter of June 27, 2019, to either revise or confirm its original Opinion. EBA has now assessed the additional information received and concluded that its Opinion of May 15, 2019 remains valid.
The proposed stricter national measure is for credit institutions authorized in Estonia and using the IRB approach to calculate regulatory capital requirements applicable to the portfolio of retail exposures secured by mortgages on immovable property to obligors residing in Estonia. More specifically, Eesti Pank had intended to set a credit-institution-specific minimum level of 15% for the exposure-weighted average of the risk-weights applied to that portfolio, in accordance with Article 458(2) of the CRR. The intention in setting an average risk-weight floor was to uphold the resilience of banks by ensuring that they hold sufficient own funds to cover systemic risks related to the residential real estate market. The measure targets residential mortgage loans whose obligors are located in Estonia.
As this measure consists of an average risk-weight floor of 15% on the retail mortgage risk-weighted exposure amounts of Estonian IRB banks, it may affect de facto the total risk-weighted exposure amounts and, in turn, the minimum Pillar 1 capital requirements that IRB banks have to meet at all times, in accordance with Article 92 of the CRR. Only two IRB credit institutions in Estonia (which are subsidiaries of foreign banks) would be affected by the proposed measure; these institutions hold 75% of the total housing loan market and issued 80% of total new housing loans in 2018.
Article 458(2) of the CRR requires the designated or competent authority entrusted with the national application of that provision to notify the EBA if that authority identifies changes in the intensity of macro-prudential or systemic risk in the financial system that have the potential to have serious negative consequences for the financial system and for the real economy in a specific member state and which that authority considers would better be addressed by means of stricter national measures. Article 458(2) specifically refers to stricter national measures that can be taken to address the level of own funds, requirements for large exposures, public disclosure requirements, the level of the capital conservation buffer, liquidity requirements, risk-weights for targeting asset bubbles in the residential property and commercial immovable property sector, and intra financial sector exposures.
Keywords: Europe, EU, Estonia, Banking, Eesti Pank, Risk-Weighted Assets, IRB Approach, CRR, Opinion, Macro-Prudential Measures, EC, EBA
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