ESRB published an opinion, along with an assessment note, regarding the DNB notification about the intention to impose a stricter national measure on institutions, based on Article 458 of the Capital Requirements Regulation (CRR). The proposed measure is intended for credit institutions that use the internal ratings-based (IRB) approach to calculate regulatory capital. DNB is proposing to impose a minimum average risk-weight for IRB banks’ portfolio of exposures to natural persons secured by mortgages on residential property located in the Netherlands. Loans covered by the National Mortgage Guarantee scheme will be exempt from the measure.
DNB had notified ESRB, on January 08, 2020, about its intention to adopt this stricter national measure. Dutch banks are heavily exposed to high loan-to-value (LTV) loans, which pose significant systemic credit risk. High LTV loans are more likely to have negative equity following a contraction in the housing market. The proposed measure reflects this negative externality, as the additional capital to be held for mortgage exposures will increase with the share of high LTV loans. The calibration of the measure is intended to increase the average risk-weights of IRB banks by 3 to 4 percentage points (from 11% to between 14% and 15%), resulting in a EUR 3 billion increase in the total amount of required capital.
ESRB highlights that the aim of the proposed measure is to mitigate an increase in systemic risk with respect to developments in the housing market. Micro-prudential supervision can contain, but not completely remove, concerns about low risk-weights during a macroeconomic expansion. The aim of micro-prudential supervision regarding internal models is to ensure compliance with regulatory requirements and the reduction of inconsistencies and unwarranted variability of risk-weights across institutions, rather than to target specific (minimum) levels of risk-weights required for macro-prudential reasons. ESRB believes that the vulnerabilities stemming from the residential real estate market, notably those of a systemic nature, have not been fully reflected in the application of risk-weights for mortgage loans in the Netherlands. Therefore, the proposed measure, which imposes a floor on risk-weights linked to LTV ratios, contributes to increase the resilience of Dutch banks to a possible materialization of systemic risk in the real estate market. Therefore, ESRB is of the view that the measure should be supported.
Keywords: Europe, EU, Netherlands, Banking, CRR, IRB, Systemic Risk, Internal Ratings Based, LTV, Residential Real Estate, Regulatory Capital, DNB, ESRB
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