EBA issues Opinion on measures to address macroprudential risk following notification by the Estonian Central Bank (Eesti Pank)

The European Banking Authority (EBA) published today an Opinion following the notification by the Estonian macroprudential authority, Eesti Pank, of its intention to extend a measure originally introduced in 2019 to ensure that banks hold sufficient own funds to cover systemic risks related to housing loans and to act as a backstop limiting any further decrease in risk weights. For credit institutions that operate in Estonia and use the internal ratings-based (IRB) approach, the measure introduces a minimum level for the average risk weight for residential mortgage loans to obligors residing in Estonia. Based on the evidence submitted, the EBA does not object to the extension of the proposed measure, which will be applied for two years.

With the application of this measure, Eesti Pank extends the credit institution-specific minimum level of 15% for the exposure-weighted average of the risk weights applied to the portfolio of retail exposures secured by mortgages on immovable property to obligors residing in Estonia. The measure applies to credit institutions that operate in Estonia and use the IRB approach for calculating regulatory capital requirements.

In its Opinion, addressed to the Council, the European Commission and the Estonian Central Bank, the EBA acknowledged the concerns of Eesti Pank over the build-up of risks in the residential real estate sector, the risk stemming from the macroeconomic environment, and the high concentration of IRB banks in the housing loan market in the country. Based on this analysis, the EBA does not object to the two-year extension of the application period of the measure.

Background

In its Opinion dated 15 May 2019, the EBA concluded that the evidence presented by Eesti Pank was not sufficient to support the suitability and appropriateness of the suggested measure after taking into account that, at that time, other microprudential measures could be more efficient in tackling the risks identified by Eesti Pank. The EBA confirmed its Opinion following the request of the Commission dated 26 July 2019 in relation to the revised notification received from Eesti Pank.