The Central Bank has retained the requirement that Swedbank and SEB apply a risk weight of at least 15 percent of their home loan portfolio when calculating capital requirements to cover the risks associated with mortgage loans issued in Estonia.
The risk weight floor currently applies to Swedbank and SEB in Estonia as they value risk-weighted assets using internal models where the risk calculation is heavily influenced by previous loan defaults, the central bank says.
This threshold does not apply to the other commercial banks, as they generally use a simpler standardized approach in Estonia, which uses a fixed and uniform risk weight of 35 percent for mortgage loans to calculate the risk positions for capital requirements.
Central bank: lessons from the recent downturn
The Bank of Estonia says it has adopted the lessons of the previous economic crisis in 2010, including by introducing three home loan requirements in March 2015 that protect both borrowers and banks from excessive risk-taking.
The three requirements are that the loan-to-value (LTV) rate cannot exceed 85 percent, that all monthly loan and lease payments by the borrower, taken together, cannot be more than 50 percent of a borrower’s net income, and that the terms and conditions must not exceed 30 percent Years.
Regarding SEB and Swedbank, the central bank applied the terms in the fall of 2019, saying they are still necessary at a time when the housing market was buoyant after the 2020 coronavirus crisis and there was a lot of home loan making.
Q2 2021 saw a record number of real estate transactions
In the second quarter of this year, there was even a record number of completed property deals.
The aim of the central bank is to ensure that the banks have sufficient equity capital to cover the risks from mortgage loans.
Home loan defaults have been modest in recent years, so banks are using less equity to cover risk, which in turn further reduces risk weights that reflect mortgage loan risk.
However, protection against a further economic downturn, difficulties in repaying their loans and falling property prices is necessary, according to the central bank, which in turn would have an impact on the banks themselves.
Banks need sufficient capital both for their own health and to find solutions for customers who are confronted with arrears, the central bank cites as an example of the latter loan payment holidays, which are allowed in the early stages of the pandemic.
The bank’s original press release is here.
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