FI notifies the EU regarding the extension of the existing risk-weight floor for Swedish mortgages and commercial real estate

FI decided to apply the risk-weight floor of 25 per cent for Swedish mortgages under Article 458 of the CRR in August 2018 and the measure entered into force on 31 December 2018 for a period of two years. FI subsequently decided to prolong the risk-weight floor. The current extension period will come to an end later this year and FI has assessed that the underlying risks that necessitated the risk-weight floor remain to such an extent that the measure continues to be necessary.

The Swedish banking sector remains highly exposed to the residential real estate market and due to a long period of low loss levels, there is a risk that the models used by banks that have adopted the internal ratings based approach (IRB) may not provide sufficient capital to weather a potential crisis situation. This measure 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.

FI decided to apply the risk-weight floor of 35 per cent for Swedish corporate exposures secured on commercial properties, as well as 25 per cent for Swedish corporate exposures secured on residential properties, in September 2023. A corresponding Pillar 2 capital requirement previously applied from 2020. The measure entered into force on 30 September 2023 and applied for two years, expiring in September 2025. FI has assessed that the underlying risks that necessitated the risk-weight floor remain and the measure should therefore be extended for two years.

The commercial real estate sector still poses significant risks to the financial sector. The sector is large, cyclically sensitive, and closely connected to the financial system. In addition, the indebtedness in the sector is high and Swedish banks still have large exposures to the sector. Payment problems and insolvencies in commercial real estate firms can entail significant credit losses for banks and this can affect financial stability. FI assesses therefore that there is still a need for the risk-weight floors to manage these risks.