EBA Agrees to Extension of Macro-Prudential Measure by Swedish FSA
EBA published an opinion on the intention of the Swedish Financial Supervisory Authority (Finansinspektionen or Swedish FSA) to extend a measure to enhance the resilience of Swedish banks to potential severe downward corrections in the residential real estate markets. The measure, introduced in 2018 under Article 458 of Capital Requirements Regulation (CRR), is a credit institution-specific minimum level of 25% for the average risk-weight on Swedish housing loans applicable to credit institutions that have adopted an internal ratings-based (IRB) approach. In its opinion, EBA did not object to the extension of this measure for one year—up to December 30, 2021.
With the extension of the proposed measure, Swedish institutions adopting the IRB approach would be subject to a minimum level of 25% risk-weight on Swedish retail loans secured by real estate. This risk-weight floor will act as a backstop to ensure that these credit institutions fully capture the risk of credit losses stemming from a severe downward correction in real estate markets. In its opinion, EBA acknowledges, in line with the recommendation on medium-term vulnerabilities in the residential real estate sector in Sweden issued by ESRB, that the combined increase in house prices and debt levels could pose a threat to the financial stability in Sweden in the event of a downturn. In the light of the current circumstances and the COVID-19 pandemic, EBA provided some additional observations:
- The COVID-19 pandemic may have material implications for the systemic risk related to the housing market in Sweden. Since, it is too early to assess the impact of the current crisis, EBA invites the Swedish authorities to reassess the current measure as soon as the first effects of the crisis on Swedish households’ demand for residential mortgages and also on banks’ supply become visible, taking into consideration that, in the current exceptional circumstances, it is important to support the flow of credit to the real economy.
- It is also important to monitor the impact of this measure on lending to small and medium size enterprises (SMEs) and intervene in case there are unintended consequences.
The measure has been in place in one form or another since 2013, originally introduced through Pillar 2 and then replaced in 2018 by the current Article 458 measure. Over recent years, Sweden has experienced a significant and prolonged build-up and intensification of systemic risk related to the housing market and this risk has never been eliminated. Therefore, this measure is becoming permanent rather than temporary and is being used to fix structural issues in the modeling of IRB models that have remained throughout the years. EBA invited the Swedish authorities to reflect on how these issues could be fixed. In addition, EBA invited Swedish FSA to reassess rationale for the measure in the light of the effects of the forthcoming changes to the applicable regulatory framework (in particular, the sectoral systemic risk buffer and the output floor).
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Keywords: Europe, Sweden, Banking, CRR, IRB, Systemic Risk, Opinion, COVID-19, Swedish FSA, Macro-Prudential Policy, IRB Approach, Basel, Regulatory Capital, EBA
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