The European Banking Authority (EBA) launched today a consultation on Regulatory Technical Standards (RTS) on the conditions that Competent Authorities have to take into account when tightening capital requirements for mortgage exposures. The proposed RTS illustrate the conditions, as well as financial stability considerations, that would ensure a harmonised approach in setting higher risk weights and higher minimum loss given default (LGD) values. The consultation runs until 6 October 2015.
Capital requirements for mortgage exposures are harmonised across the EU, for institutions applying both the Standardised Approach (SA) and the Internal Models Based (IRB) approach. For institutions applying the SA, capital requirements for mortgage exposures are regulated through the fixed risk weights of 35% for residential real estate and 50% for commercial real estate. For institutions applying the IRB approach, capital requirements are constrained by minimum values for the exposure weighted average LGD, which is set at 10% for retail exposures secured by residential mortgages and 15% for retail exposures secured by commercial real estate.
However, competent authorities may tighten the capital requirements of these mortgage exposures by setting higher risk weights (in the SA) or setting higher minimum LGD values (in the IRB approach). When competent authorities set higher risk weights or LGD values, they should comply with the proposed conditions specified in this consultation paper.
These conditions require among others that competent authorities specify the loss expectation or LGD expectation related to one or more property segments in their immovable property markets. Furthermore, the financial stability considerations stemming from the real estate market have to be specified and forward-looking immovable property market developments should be taken into account. The CP also consults on the appropriate level of indicative benchmarks for these loss expectations when setting higher risk weights.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is October 6th 1 pm (UK time). All contributions received will be published following the end of the consultation, unless requested otherwise.
A public hearing will take place at the EBA premises on September 1st 2015 from 2 pm to 4 pm UK time.
These draft RTS have been developed on the basis of Article 124(4)(b) and 164(6) of Regulation (EU) No. 575/2013 (Capital Requirements Regulation – CRR), which mandates the EBA to specify the conditions that competent authorities shall take into account when determining higher risk-weights and higher minimum LGD values, in particular the term of "financial stability considerations".