ESRB Opinion on DNB Proposal for Stricter National Measure Under CRR
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.
Related Links
Keywords: Europe, EU, Netherlands, Banking, CRR, IRB, Systemic Risk, Internal Ratings Based, LTV, Residential Real Estate, Regulatory Capital, DNB, ESRB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Previous Article
FASB Issues Guidance to Assist in Transition to New Reference RatesRelated Articles
BIS Quarterly Review Discusses Developments in Fintech and ESG Space
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
BCBS to Consult on Supervisory Practices for Climate Risks by Year-End
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
OCC Identifies Operational Risk Deficiencies in MUFG Union Bank
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
EC Rule on Contractual Recognition of Write Down and Conversion Powers
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
ECB to Consider Climate Risks When Reviewing Collateral Framework
In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.
SRB Provides Update on Approach to Prior Permissions Regime
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
APRA Issues Further Guidance on Application of Securitization Standard
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
ACPR Publishes Corrective Version of RUBA Taxonomy
The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.
Nordea Bank and EIB Sign Agreement to Fund Green Projects in Nordics
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.
