EBA issues Opinion on measures to address macroprudential risk following notification by Finansinspektionen

The European Banking Authority (EBA) published today an Opinion following the notification by Finansinspektionen, the Swedish Financial Supervisory Authority (FSA), of its intention to extend a measure introduced in 2018, which 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 extension of such measure, which Finansinspektionen intends to apply to credit institutions that have adopted the Internal Rating-Based (IRB) Approach. The extension will be applied from 31 December 2020 until 30 December 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, addressed to the Council, the European Commission and the Swedish Authorities, the EBA acknowledges, in line with the recommendation on medium-term vulnerabilities in the residential real estate sector in Sweden 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 in Sweden in the event of a downturn. The EBA also encourages the Swedish authorities to monitor closely the developments during the COVID-19 pandemic and potential unintended consequences.

In light of this conclusion, the EBA does not object to the extended deployment, by Finansinspektionen, of macroprudential measures, which will be applied from 31 December 2020 until 30 December 2021.

Background

Already in its Opinion issued on 28 June 2018, the EBA did not object to the adoption of this measure, taking into consideration its effect on increasing the resilience of the Swedish banking sector. For more information on this EBA Opinion, please see this news item.