Risk weight floor for mortgage loans

Banks that have adopted the Internal Ratings Based (IRB) approach must use a risk weight of at least 15% for retail exposures secured by real estate to residents of Estonia when calculating risk-weighted assets. The floor is set for the average of the portfolio of retail exposures secured by real estate. The measure applies from 30 September 2019.

The aim of the measure is to limit pre-emptively the average risk weight of mortgage loans falling too low and to ensure the resilience of the banks to the risks associated with housing loans.

The risk weight floor rate

15%

Applies to

Retail exposures secured by real estate to obligors residing in Estonia

Scope

Banks that have adopted the Internal Ratings Based Approach

From

30/09/19

Legal basis

Decree No 6 of the Governor of Eesti Pank of 27 August 2019
Setting the risk weight floor for retail exposures secured by real estate.

Reasons. The requirement was introduced in 2019 because at a time when the risks from consistently rapid growth in housing loans were above the medium level, the weighted average 
risk weight for mortgage loans of the IRB banks had come down substantially. It was decided to set a minimum requirement for the average risk weight to prevent it from falling further. If the risks weights become too low, this could lead to insufficient capital being held against possible risks from housing loans. As housing loans are an important part of the assets of the banks and the IRB banks account for a substantial part of the housing loan market in Estonia, an excessive fall in the risk weights could increase the risks to financial stability in Estonia.

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