Risk weight floor for mortgage loans

Banks that have adopted the Internal Ratings Based (IRB) approach must use a risk weight of at least 15% for retail exposures secured by real estate to residents of Estonia when calculating risk-weighted assets. The floor is set for the average of the portfolio of retail exposures secured by real estate. The measure applies from 30 September 2019.

The aim of the measure is to limit pre-emptively the average risk weight of mortgage loans falling any further and to ensure the resilience of the banks to the risks associated with housing loans.

Reasons. The measure is introduced because the weighted average risk weight for mortgage loans at IRB banks has in recent years fallen significantly, though the risks from housing loans have at the same time remained above the average level. If risk weights continue falling while the economic climate remains favourable, this could lead to insufficient capital being held against the systemic risks related to lending for residential real estate. As the IRB banks account for a substantial part of the banking market in Estonia, a further fall in the risk weights could increase the risks to financial stability in Estonia.