EBA issues Opinion on measures to address macroprudential risk following notification by the 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 originally introduced in 2018 and extended in 2020. The measure entails 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. Based on the evidence submitted, the EBA does not object to the extension of the measure.

The proposed measure, entails a credit institution-specific minimum level (floor) of 25% for the average risk weight on Swedish housing loans applicable to Swedish credit institutions that have adopted an IRB approach. This risk weight floor will act to capture the credit loss risk of Swedish mortgages in a severe downturn scenario and to account for the broader systemic risks that could arise from the Swedish mortgages of individual credit institutions.

The EBA emphasised that such a measure has been in place since 2014 in different forms. Finansinspektionen’s concern on indebtedness and dynamics built up in the market has been articulated over many years and tends to be permanent and not cyclical. The EBA strongly encourages Finansinspektionen to undertake a comprehensive and thorough assessment also in respect of the underlying causes and drivers.

In its Opinion, addressed to the Council, the European Commission and the Swedish Authorities, the EBA takes note of Finansinspektionen’s concerns regarding systemic risk relating to the housing market and the persistence of macroprudential vulnerabilities in the Swedish financial system. The EBA welcomes the ongoing review of IRB models through bottom-up repair measures and acknowledges the time horizon for carrying out such work.

Based on this analysis, the EBA does not object to the two-year extension of the application period of the measure.

Background

In its Opinions dated 25 June 2018 and 16 October 2020, the EBA did not object to the adoption of the measure and subsequently the first extension of this measure, taking into consideration its effect on increasing the resilience of the Swedish banking sector.