FI’s capital assessment method for securitisation within Pillar 2

Finansinspektionen considers it to be necessary to introduce a measure within Pillar 2 as a back-stop to limit the impact of system-critical securitisation on the total credit supply. FI is publishing today the method it will use in its assessment.

The tightening of capital requirements in recent years, in combination with forthcoming regulations, may strengthen the incentives Swedish banks face to utilise securitisation and contribute to a larger securitisation market. As a whole, FI takes a positive view on the possibility of meeting Swedish demand for credit with a broader base of capital and funding sources, but makes the assessment that stability risks may arise if the market for securitisation closes for new issues.

In such a situation, a bank is left with the choice of either renewing the loans or denying borrowers new or extended loans. In the former case, the credit risk flows back to the bank and the bank becomes subject to higher capital requirements. A sudden increase in the capital requirement could lead to the bank reducing other lending, which in turn could reduce the growth of credit in the economy as a whole. In the latter case, borrowers would lose access to funding, which could have serious consequences for the borrowers, particularly if the purpose of their loans has a longer horizon than the agreed maturity. If a large part of the Swedish credit market is financed through securitisations, there would be a greater risk of a serious reduction in the supply of credit following a disruption in the securitisation market.

It is at the discretion of the banks to decide if they want to renew the loans in question. However, as part of its macroprudential supervision assignment, FI must consider the need for the banks to have enough capital to be able to provide loans to borrowers even under stressed conditions. It is against this background that FI describes the capital assessment method it will use in its supervisory review and evaluation process starting in 2017. The method will only affect banks that perform securitisations that are judged to be system-critical.

A proposal was submitted for consultation on 1 December 2016. FI has now considered the responses to the consultation and decided on the capital assessment method. Initially, only firms in supervision categories 1 and 2 will be affected.

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