ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR). The measure entails the imposition of a minimum level (floor) of 25% for the exposure-weighted average risk-weight on retail exposures in Sweden secured by immovable property. This minimum risk-weight would applies to all domestic credit institutions using the internal ratings-based (IRB) approach. ESRB supports the intention of Swedish FSA to extend the application period for this measure for an additional year, as informed by the Swedish FSA in September 2020.
This measure has been in force since December 31, 2018 and is due to expire on December 31, 2020. The extension of this measure is intended to continue to address the risk of asset bubbles in the residential property sector, along with their potential spillover effects. This extension comes in the backdrop of the continued increase in vulnerabilities in the Swedish residential real estate market that are likely to amplify in the light of the adverse impact of the COVID-19 crisis. The ESRB assessment focuses on the net benefits of the national measure for maintaining financial stability. ESRB believes that the proposed extension of the measure does not contradict the overall aim of guaranteeing lending to the real economy throughout the aforementioned economic crisis. Clear communication in this respect is important, explaining to the public that the extension of the measure is consistent with other measures taken in response to the COVID-19 pandemic.
ESRB believes that the stricter measure is justified, proportionate, effective, and efficient, as it does not entail disproportionate adverse effects on the internal market or other national financial systems. ESRB also believes that the alternative macro-prudential instruments listed in CRR, which must be considered before any stricter national measure can be taken, would not be adequate to address the risks at hand. Such measures are considered to be inadequate, as they do not provide the intended incentives, are too broad-based, or do not address the risk to the same extent. ESRB also found that the measure. ESRB highlighted that the effectiveness of this measure will depend on the extent to which it will continue to be reciprocated by other member states with credit institutions active in the Swedish residential mortgage market. ESRB also highlighted that the measure should be reconsidered once the implications of the COVID-19 pandemic on the Swedish residential real estate market and on the indebtedness of households become clearer. Finally, ESRB believes that the issues raised in its assessment of the original measure require continued follow-up by the Swedish authorities to ensure the effectiveness of the measure and avoid unwarranted consequences.
Keywords: Europe, Sweden, Banking, COVID-10, CRR, Credit Risk, Residential Real Estate, IRB Approach, Swedish FSA, Opinion, RRE, Macro-Prudential Policy, Basel, Regulatory Capital, ESRB
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