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
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Previous ArticleFASB Issues Guidance to Assist in Transition to New Reference Rates
The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.