The European Banking Authority (EBA) published today an Opinion following the notification by Finansinspektionen, the Swedish Financial Supervisory Authority (FSA) of its intention to change the method it currently uses to apply a risk weight floor for Swedish mortgages through Pillar 2 by replacing it with a requirement within the framework of Article 458 of the Capital Requirements Regulation (CRR). The new proposed measure is primarily driven by structural changes in the Swedish banking market and aims at enhancing the resilience of Swedish banks to potential severe downward corrections in residential real estate markets. Based on the evidence submitted, the EBA does not object to the adoption of the proposed measure, which the Swedish FSA intends to apply to credit institutions that have adopted the Internal Rating-Based (IRB) Approach.
With the application of the proposed measure, Swedish institutions adopting the IRB approach would incur in the same credit institution-specific minimum level of 25% for the average risk weight on Swedish housing loans as currently applied through Pillar 2. This limit will act as a backstop to ensure that these credit institutions fully capture the risk of credit losses stemming from Swedish mortgages.
In its Opinion, addressed to the Council, the European Commission and the Swedish Authorities, the EBA acknowledges, in line with the warning on the vulnerabilities of the residential real estate sector issued by the European Systemic Risk Board (ESRB), that the combined increase in house prices and debt levels could pose a threat to the financial stability of banks in Sweden in the event of a downturn.
In light of this conclusion, the EBA does not object to the deployment, by the Swedish FSA, of macroprudential measures