FI intends to extend banks’ risk weights floors for mortgages and commercial real estate lending

The EU's second banking package implements the final elements of Basel III. The package includes new rules for calculating risk-weighted assets (RWA). In the long term, the new rules limit how low the risk weights can be which banks apply when calculating their capital requirement. However, it will take time before the new rules have their full impact as they will be phased-in gradually. FI continuously analyses the effect of the new rules and has decided to disclose its assessment of the risk weight floors now before the new rules enter into force.

The Swedish banking sector remains highly exposed to the residential real estate market. The risks that high housing prices and highly elevated household indebtedness entail materially remain. These risks were also the purpose for introducing the measure. The risk weight floor ensures that sufficient capital is present in the system to ensure banks are fully resilient and can withstand a potentially severe downturn without restricting the supply of credit. This should help minimise the risk of spillover effects that could exacerbate the downturn.

The same applies to the commercial real estate sector. The sector is large, cyclically sensitive, and closely connected to the financial system. In addition, indebtedness in the sector is high and Swedish banks have large exposures to the sector. Payment defaults and insolvency in commercial real estate firms can entail credit losses for banks and this can affect financial stability.

The new capital requirement rules in the EU's second banking package will not address the risks that FI has identified for mortgages and commercial properties at the time of the entry into force of the new rules. To address these risks, there is still a need for macroprudential measures in the form of risk weight floors according to article 458 in the Capital Requirements Regulation (CRR) until at least 2027. If no major changes in the risk profile are observed, FI will start the process of extending the current risk weight floors during next year. An extension of the macroprudential measures is subject to approval from the European Commission.

FI's risk weight floors for mortgages and commercial properties

In August 2018, FI introduced a risk weight floor of 25 per cent for Swedish mortgages via article 458 of the CRR. The decision entered into force in 2018 and the measure has been extended after that. The current measure expires on 30 December 2025. FI also decided to introduce risk weight floors for the commercial real estate sector according to article 458 in the CRR in 2023. The levels of the risk weight floors are 35 percent average risk weight for Swedish corporate exposures secured by commercial properties and 25 percent average risk weight for Swedish corporate exposures secured by residential properties. The current measure expires on 29 September 2025.