Eesti Pank sets a risk weight floor for mortgage loans
From 30 September, Swedbank and SEB Pank will have to apply an average risk weight of at least 15% in calculating the risk weighted exposure for mortgage loans issued in Estonia. Eesti Pank is applying the requirement in order to make sure that banks have sufficient capital to cover the risks from housing loans.
Rapid growth in wages and high levels of confidence have led yearly growth in housing loans to remain quite high in the past couple of years at around 7%. As clients have managed well with repaying their housing loans and loan losses have been very small in recent years, it has allowed the larger banks to reduce their model-implied risk weights and consequently their capital requirements to safeguard against risks that arise from housing loans. If the state of the Estonian economy should deteriorate though, loan losses could increase significantly, and for this reason Eesti Pank considers it important that banks not reduce their capitalisation.
The changes will affect Swedbank and SEB Pank in Estonia, which use internal models when calculating risk weighted exposures. The other commercial banks in Estonia use simpler standard models, where the risk weighted exposure of mortgage loans is calculated with a single risk weight of 35%, and so the new requirement does not apply to them.
To reduce the risks from housing loans, the banks are subject to three other requirements. These are that the amount borrowed may not exceed 85% of the value of the real estate collateral, all the monthly loan and lease payments of the borrower taken together may amount to only 50% of the borrower’s net income, and housing loans may not be issued for more than 30 years.
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