The European Banking Authority (EBA) published an opinion in response to a notification of the Swedish Financial Supervisory Authority (Finansinspektionen or FI) on its intention to extend a regulatory measure. This measure, which was originally introduced in 2018 and extended in 2020, entails a credit institution-specific minimum level of 25% for the average risk-weight on Swedish housing loans applicable to Swedish credit institutions that have adopted the internal ratings-based (IRB) approach. In its Opinion—which is addressed to the European Council, the European Commission, and the Swedish Authorities and is based on the evidence submitted—EBA does not object to the two-year extension of the application period for this measure.
This risk-weight floor is intended to capture the credit loss risk of Swedish mortgages in a severe downturn scenario and to account for the broader systemic risks that could arise from the Swedish mortgages of individual credit institutions. EBA emphasized that such a measure has been in place since 2014 in different forms. FI's concern on indebtedness and dynamics built up in the market has been articulated over many years and tends to be permanent and not cyclical. EBA invites FI to reassess the rationale for the measure in light of the currently available and forthcoming instruments, which could be more targeted to, or compensate for, the risk as it appears to be a structural feature of the Swedish housing market. EBA also expressed a concern that the design of the risk-weight floor includes all retail exposures secured by real estate, for both small and medium enterprises (SMEs) and non-SMEs. The inclusion of SME exposures secured by real estate can be inferred from the reference to COREP and the rationale for this requires more explanation. EBA opines that it is important to monitor the impact of this measure on lending to SMEs and to intervene in the event that there are unintended consequences. EBA strongly encourages FI to undertake a comprehensive and thorough assessment in respect of the underlying causes and drivers. In its Opinion, EBA takes note of the FI concerns regarding systemic risk for the housing market and welcomes the ongoing review of IRB models through bottom-up repair measures and acknowledges the time horizon for carrying out such work.
Keywords: Europe, EU, Sweden, Banking, Regulatory Capital, Systemic Risk, Pillar 2, Macro-Prudential Policy, IRB Approach, Credit Risk, Basel, Lending, SMEs, EBA
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