Macroprudential decision: Preparations for setting a higher minimum level than previously intended for average risk weights on mortgage loans, no changes to maximum loan-to-collateral for mortgage loans or to countercyclical capital buffer
The Board of the Financial Supervisory Authority (FIN-FSA) has decided to make preparations for setting a minimum risk weight level of 15% for those credit institutions that have adopted the Internal Ratings Based Approach for the calculation of capital requirements for residential mortgage loans. The minimum level applies to the average risk weight on a credit institution’s residential mortgage loan portfolio. The size of the risk weight determines the amount of own funds that a credit institution must hold on its balance sheet to hedge against credit losses from residential mortgage loans.
The aim is to have the 15% minimum risk weight in force as from 1 January 2018. This decision replaces a previous decision from 14 June 2016 on preparations for a 10% minimum risk weight level.
‘Higher risk weights are aimed at strengthening the ability of the financial system as a whole to withstand risks related to lending for house purchase, which are amplified by growing household debt,’ says Dr Olli Rehn, Chairman of the Board of the FIN-FSA.
‘It is, above all, a question of preparing for medium-term systemic risks within credit institutions and the financial system as a whole.’ Indebted households reduce strongly their consumption in crisis situations, which leads to a deepening of the crises.
‘It should be possible to address, whenever necessary, household borrowing and increasing lending for house purchase by, for example, restricting the maximum size of new loans relative to disposable income,’ notes Dr Rehn.
In recent years, the Bank of Finland and the FIN-FSA have repeatedly drawn attention to household debt and its growth. In November 2016, the European Systemic Risk Board also warned Finland regarding the high level of household indebtedness.
The Board also decided not to lower the maximum loan-to-collateral ratio for residential mortgage loans, nor to restrict the collateral to be taken into account in calculating the loan-to-collateral ratio. The maximum loan-to-collateral ratio will therefore remain at 90% (for a first home purchase at 95%) of the current value of collateral. Neither will the Board increase the countercyclical capital buffer requirement (variable capital add-on) applicable to banks, which will remain at 0.0%.
The value of the domestic private sector credit-to-GDP gap, used as the primary justification for assessment of the need to set a countercyclical capital buffer requirement, still gives a reference value of 0.0% for the capital buffer requirement. The gap has shown a downward trend since 2010, and its most recent observation is the smallest since 2003. Nor are supplementary risk indicators signalling such an increase in cyclical financial system vulnerabilities as would necessitate a higher countercyclical capital buffer requirement.
The Board of the FIN-FSA made its decision upon proposal by the Director General of the FIN-FSA and after consultation with the Bank of Finland, the Ministry of Finance and the Ministry of Social Affairs and Health. In accordance with the regulations governing the Single Supervisory Mechanism, the European Central Bank was also consulted in respect of the decision.
For further information, please contact
- Dr Olli Rehn, Chairman of the Board of the Financial Supervisory Authority, tel. +358 10 831 2002.
- Board decision (pdf)
- Proposal by the Director General of the FIN-FSA circulated for comment (pdf, in Finnish)
- Opinions (in Finnish):
- Bank of Finland (pdf)
- Ministry of Finance (pdf)
- Ministry of Social Affairs and Health (pdf)