The EBA issues Opinion to Latvijas Banka on a measure adjusting the risk weight for commercial immovable property

The European Banking Authority (EBA) today published an Opinion following notification by Latvijas Banka, the central bank of Latvia, of its intention to adjust the risk weight for exposures secured by mortgages on commercial immovable property. The measure aims to limit risks associated with commercial immovable property. Based on the information provided, the EBA does not object to the risk weight adjustment.

With the application of this measure, Latvijas Banka sets the risk weight for exposures secured by commercial immovable property to 80%, applicable from June 2024. Since 2007, exposures secured by mortgages on commercial immovable property registered in Latvia have been subject to a risk weight of 100%. Higher risk weights compared to the default level of 50% were deemed necessary to address concerns on the local commercial immovable property market related to liquidity and the risk of higher losses and longer recovery periods for credit institutions in case of foreclosures.

In its Opinion, the EBA acknowledges the concerns of Latvijas Banka regarding the financial stability risks stemming from exposures to commercial immovable property. The EBA understands that these exposures represent a large share of banks’ total non-financial corporations (NFC) portfolio. The EBA, therefore, invites Latvijas Banka to closely monitor the situation in light of the high uncertainty in the macroeconomic environment and reminds Latvijas Banka that the CRR requires a reassessment of the appropriateness of the risk weights at least annually.

Legal basis and background

On 20 November 2023, the EBA received a notification from the European Systemic Risk Board (ESRB) on the intention of Latvijas Banka to apply a measure in accordance with Article 124(2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (Capital Requirements Regulation, CRR). In accordance with the third subparagraph of Article 124(2) of the CRR, within one month of receiving notification from the designated or competent authority entrusted with the national application of Article 124 of the CRR, the EBA is required to provide its Opinion to the Member State concerned.