The Board of the Financial Supervisory Authority (FIN-FSA) has set a minimum risk weight level of 15% for residential mortgage loans applicable to credit institutions that have adopted the Internal Ratings Based Approach for the calculation of capital requirements. The decision will enter into force as from 1 January 2018, in accordance with the plan announced earlier. The European Commission did not object to the decision.
The size of the risk weight determines the amount of own funds that a credit institution must hold on its balance sheet to hedge against credit losses from residential mortgage loans. The minimum risk weight applies to the average risk weight on residential mortgage loans of credit institutions, and it is set under Article 458 of the Capital Requirements Regulation.
The maximum loan-to-value ratio applied by banks to residential mortgage loans will remain at 90% (for a first home purchase at 95%) and the collateral security requirements for calculating the maximum loan-to-value ratio will not be tightened. The countercyclical capital buffer requirement (variable capital add-on) applicable to banks will remain at 0.0%.
The credit-to-GDP gap, used as the primary indicator for setting a countercyclical capital buffer requirement, continues to give a reference value of 0.0% for the countercyclical capital buffer requirement.
In addition, the supplementary risk indicators used in the preparation of the assessment are not signalling such an increase in the financial system's cyclical vulnerabilities as would necessitate a higher countercyclical capital buffer requirement. Nor are key indicators pointing to an immediate need to tighten the conditions for the maximum loan-to-value ratio. The Board of the FIN-FSA is monitoring the housing loan market and household indebtedness. Banks should avoid very long loan repayment periods and the use of long interest-only periods without special reasons.
The Board of FIN-FSA made its decision upon a proposal by the Director General of the FIN-FSA and after consultation with the Bank of Finland, the Ministry of Finance and the Ministry of Social Affairs and Health. In accordance with the regulations governing the Single Supervisory Mechanism, the European Central Bank was also consulted.
For more information, please contact
Peik Granlund, Macroprudential Analyst, tel. +358 9 831 5236