The central bank maintained a requirement that Swedbank and SEB should apply a risk weight of at least 15% of their home loan portfolio when calculating the capital need to cover the risks associated with mortgages issued in Estonia.
The risk-weight floor currently applies to Swedbank and SEB in Estonia, as they assess risky assets using internal models in which the risk calculation is heavily affected by past loan losses, according to the bank. central.
This threshold does not apply to other commercial banks, as these generally use a simpler standardized approach in Estonia, where a fixed and uniform risk weight of 35% is used for mortgages, when calculating currency exposures. risk to capital requirements.
Central Bank: Lessons from the Latest Recession
The Bank of Estonia said it has taken into account lessons learned from the previous economic crisis in 2010, including introducing three requirements for home loans in March 2015 that protect both borrowers and banks from risk taking. excessive.
The three conditions are that the loan-to-value (LTV) rate must not exceed 85 percent, that all monthly loan and lease payments of the borrower can only amount to 50 percent of their income. net, and that the conditions over 30 years.
Regarding SEB and Swedbank, the central bank applied the conditions in the fall of 2019 and says they remain necessary at a time when the housing market is buoyant and when many mortgage loans have been issued, following the coronavirus crisis from 2020.
The second quarter of 2021 saw a record number of real estate transactions
The second quarter of this year saw a record number of real estate transactions concluded.
The central bank says its goal is to make sure banks have enough capital to cover the risks associated with mortgages.
Loan losses on home loans have been modest in recent years, meaning that banks have taken less capital into account to cover risks, which in turn pushes down further the risk weights reflecting the risk of banks. Mortgages.
However, hedge against another economic downturn, homeowners struggling to repay their loans and a drop in house prices is needed, according to the central bank, and which in turn would impact the banks themselves. .
Banks need sufficient capital both for their own health and to find solutions for customers facing payment arrears, the central bank said, citing the recent loan repayment holidays allowed in the early stages of payment as an example. the pandemic.
The bank’s original press release is here.
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