Requirement on IRB models for exposures to commercial real estate

FI has analysed the commercial real estate market and makes the assessment that it is vulnerable to shocks.

In its report Stability in the Financial System, May 2019, FI presents its overall assessment of the risks associated with banks' commercial real estate lending. FI believes that the banks do not set aside enough capital to cover the loss risks in this lending. FI therefore sees a need to take action in 2019 to ensure that the banks are holding capital already in the shorter term that fully covers risks associated with lending to commercial real estate firms. FI will conduct a more in-depth analysis of how much the capital requirement should be increased to meet the loss risks in commercial real estate lending. It is FI's preliminary assessment that the risks weights in the banks' lending to commercial real estate firms should be at least 30 per cent. Today, corresponding risk weights are at around 23 per cent.

Following the analysis of the capital need, FI intends in the autumn of 2019 to decide on a Pillar 2 measure that will require banks to hold capital that covers the risks associated with lending to commercial real estate firms.

FI has also prepared guidance to clarify how the regulations governing the internal ratings-based approach should be interpreted for IRB models to be representative and appropriate for exposures to this sector. FI believes the changes described in the memorandum below will increase the banks' risk weights in general for exposures covered by the IRB approach, and FI will thus apply a strict assessment in accordance with new requirements in the regulatory framework. The Pillar 2 requirement may be adjusted later if the overview of the IRB regulatory framework, which is expected to be implemented at the end of 2020, results in an increase in the risk weights that is large enough to ensure that the capital requirements cover the loss risks in commercial real estate lending.

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