New methods for banks' risk weights and capital requirements decided

FI has formally adopted the supervisory methods which will be used in the supervision of the banks' internal models for corporate exposures. The banks should now assume that at least every fifth year is a downturn year in probability of default calculations.

These methods are described in two separate memoranda. The methods will raise the capital requirements. The changes in the calculation of risk weights will make these more stable over time, which will mitigate business cycle-related fluctuations in the banks' risk weights and capital requirements. FI's new methods will be applied in 2016.

Risk-based capital requirements for banks are significant for financial stability and the manner in which the financial markets' function. Larger Swedish banks currently use an internal ratings-based (IRB) approach to calculate their capital requirements. The IRB approach contributes to good risk management at the banks since it requires them to hold more capital if they lend to customers with higher risk. The approach also introduces incentives for the banks to try to reduce their risk weights, and thus their capital requirements, more than what is justified based on the banks' actual risk level. The IRB approach can also lead to significant business cycle-related fluctuations in the banks' risk weights and capital requirements, which can reinforce fluctuations in credit supply across business cycles.

FI has now formally adopted the methods it will use in its supervision of the internal models and for the maturity floor which is introduced for the banks' corporate exposures. These methods are described in two separate memoranda which also describe the main problems FI has observed in the banks' implementation of the IRB approach. In brief, these methods entail that:

  • The banks' estimates of probability of default should anticipate a larger proportion of economic downturns, with higher default rates. More specifically, every fifth year should be considered a "downturn year".
  • A maturity floor of 2.5 years is implemented under Pillar 2 for banks that have authorisation to use the advanced IRB approach. Certain exemptions are permitted.

The new method to calculate default risk, together with the anticipated consequences of other supervisory activities, is expected to raise the risk weights for all banks that use the IRB approach. The risk weights for exposures to corporates are expected to be at least around 30 per cent for all banks once the changes have been fully implemented. FI emphasizes that the method does not amount to a floor for corporate risk weights, and that changes in the risk profile of the corporate exposures can lead to risk weights increasing or decreasing compared to the level indicated in the impact assessment. The maturity floor is expected to raise the capital requirements by up to around 0.5 percentage points.

FI expects the methodological changes in the calculation of risk weights and the maturity floor to increase the corporate sector's financing costs by at most 0.05 and 0.02 percentage points, respectively. The calculations are conservative and the final consequences are likely to be lower than this.

The banks that are authorised by FI to use the IRB approach are Swedbank, Handelsbanken, Nordea, Landshypotek, Länsförsäkringar Bank, SBAB, SEB, Swedish Export Credit Corporation (SEK), Volvo Finans and a number of savings banks. These banks will need to change to varying degrees the methods they use to calculate probability of default. The four major banks, Handelsbanken, Nordea, SEB and Swedbank, are authorised to use the advanced IRB approach for exposures to corporates and will also be subject to the maturity floor.

FI will apply the methods described in the memoranda into the banks' capital requirements during 2016.