EBA published an opinion following the notification by Finansinspektionen, the Swedish Financial Supervisory Authority (FSA), of its intention to change the method it uses to apply a risk-weight floor for Swedish mortgages through Pillar 2. It is replacing the current method with a requirement within the framework of Article 458 of the Capital Requirements Regulation (CRR). EBA does not object to the adoption of the proposed measure, which the Swedish FSA intends to apply to credit institutions that have adopted the internal rating-based (IRB) approach.
With the application of the proposed measure, Swedish institutions adopting the IRB approach would incur in the same credit institution-specific minimum level of 25% for the average risk-weight on Swedish housing loans, as currently applied through Pillar 2. This limit will act as a backstop to ensure that these credit institutions fully capture the risk of credit losses stemming from Swedish mortgages. In its Opinion, addressed to the Council, EC, and the Swedish Authorities, EBA acknowledges, in line with the warning on the vulnerabilities of the residential real estate sector issued by ESRB, that the combined increase in house prices and debt levels could pose a threat to the financial stability of banks in Sweden in the event of a downturn. In light of this conclusion, EBA does not object to the deployment, by the Swedish FSA, of macro-prudential measures.
Keywords: Europe, Sweden, Banking, Macro-Prudential Policy, IRB Approach, Mortgage Exposures, CRR, Systemic Risk, EBA
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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