ESRB published an opinion assessing the decision of NBB to extend the application period for a stricter measure on residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR). The measure imposes a macro-prudential risk-weight add-on for all domestic credit institutions applying the internal ratings-based approach, whose retail exposures are secured by residential immovable property located in Belgium. NBB has proposed to extend this measure by one year, until April 30, 2022. ESRB supports the intention of NBB to extend the application period of this macro-prudential measure and to keep risk-weights for exposures of internal ratings-based banks to the Belgian residential real estate sector at a higher level.
The measure consists of two components. The first component imposes a 5 percentage point risk-weight add-on for exposures of internal ratings-based banks to the Belgian mortgage loans. The second, more targeted, component further increases the risk-weights based on risk profile of the mortgage portfolio of the internal ratings-based banks, by applying a multiplier of 1.33 to the micro-prudential risk-weight of the residential mortgage loan portfolio. This measure was first activated on May 01, 2018 and, in line with Article 458 of the CRR, remained applicable for two years, until April 30, 2020. Due to the continuing systemic risks in the financial system, on May 01, 2020, the measure was extended for one year, until April 30, 2021. The current extension of the measure is intended to apply from May 01, 2021.
The primary aim of the proposed extension of the measure is to ensure that Belgian internal ratings-based banks are resilient to residential real estate risks. ESRB assessment focuses on the net benefits of the national measure in terms of maintaining financial stability. ESRB believes that the proposed extension of the measure will not have any procyclical effects on the real economy and the financial system. Although the COVID-19 pandemic has increased the probability of systemic risks materializing in the forthcoming quarters, the potential materialization of residential real estate risks is conditional on further economic impact of the pandemic. ESRB also believes that the alternative macro-prudential instruments listed in Article 458 of the CRR would not be adequate to address the identified risks. Finally, ESRB believes that the introduction of borrower-based measures through supervisory expectations from January 2020 does not constitute a reason for terminating or downwardly recalibrating the measure under Article 458 of the CRR.
Keywords: Europe, EU, Belgium, Banking, COVID-19, CRR, Basel, Residential Real Estate, Opinion, Regulatory Capital, Credit Risk, IRB Approach, RRE, Macro-Prudential Policy, NBB, ESRB
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