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    EBA Issues Opinion on Dutch Macro-Prudential Measure for IRB Banks

    September 12, 2022

    The European Banking Authority (EBA) issued an opinion on the extension of a macro-prudential measure by the central bank of Netherlands (DNB). The measure imposes a minimum average risk-weight on Dutch housing loan portfolios for credit institutions that have adopted an internal ratings-based (IRB) approach. Meanwhile, the European Supervisory Authorities (ESAs) have published a report examining the risks and vulnerabilities in the financial sector in European Union.

    Opinion on macro-prudential measure in Netherlands. The European Systemic Risk Board (ESRB), on August 08, 2022, notified the European Banking Authority (EBA) about the intention of DNB to apply Article 458(9) of the Capital Requirements Regulation or CRR (575/2013). Post this, EBA issued an opinion on the proposed two-year extension of this measure by DNB (initially activated on January 01, 2022) to introduce a minimum average risk-weight for the calculation of regulatory capital requirements applicable to exposures to natural persons secured by mortgages on residential property located in the Netherlands and applicable to credit institutions that use the IRB approach for calculating regulatory capital requirements. For each individual exposure item in scope of the measure, a 12% risk-weight is assigned to the portion of the loan not exceeding 55% of the market value of the property that serves as collateral to the loan and a 45% risk-weight is assigned to the remaining portion of the loan. In its opinion, EBA acknowledged the DNB concerns that prompted the intent to extend this measure and did not object to the two-year extension of the current measure as long as the systemic risk stemming from the housing market persists. However, EBA expressed its reservations regarding the potentially pro-cyclical calibration of the measure and encouraged DNB to continue to monitor and to consider the appropriate calibration of the measure. 

    Report on risks and vulnerabilities. The report highlights that the deteriorating economic outlook, high inflation, and rising energy prices have increased vulnerabilities across the financial sectors. The report highlights that financial institutions face increased operational challenges associated with heightened cyber risks and implementation of sanctions against Russia. The financial system has, to date, been resilient despite the increasing political and economic uncertainty. In light of the risks and vulnerabilities highlighted in the report, the joint committee of the ESAs advised national competent authorities, financial institutions, and market participants to take the following policy actions:

    • Financial institutions and supervisors should continue to be prepared for a deterioration in asset quality in the financial sector and monitor developments including in assets that benefitted from temporary measures related to the pandemic and those that are particularly vulnerable to a deteriorating economic environment, to inflation as well as to high energy and commodity prices.
    • The impact of further increases in policy rates and of potential sudden increases in risk premia on financial institutions and market participants at large should be closely monitored.
    • Financial institutions and supervisors should closely monitor the impact of inflation risks.
    • Supervisors should continue to monitor risks to retail investors, in particular with regard to products where consumers may not fully realize the extent of the risks involved, such as crypto-assets.
    • Financial institutions and supervisors should continue to carefully manage environmental risks and cyber risks to address threats to information security and business continuity.

     

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    Keywords: Europe, EU, Banking, CRR, Basel, Residential Real Estate, Lending, Risks and Vulnerabilities, IRB Approach, EBA, ESAs

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