FI notifies the EU regarding the introduction of new risk weight floor for commercial real estate

On May 15, 2023, the Swedish financial regulator, Finansinspektionen (FI), published a press release to announce that it has sent a notification to the EU Commission and the European Systemic Risk Board (ESRB) to inform of its plans to introduce a new risk weight floor under Article 458 of the Capital Requirements Regulation (CRR) for corporate loans whose collaterals are commercial and residential properties. According to the FI, the new floors would be effective September 30, 2023.
Specifically, FI plans to set the risks weight floors at 35% for Swedish corporate loans secured by commercial properties and 25% for same loans secured by residential properties for those institutions using an internal rating-based approach to assess risk-weights on loans and subsequent capital requirements on such. As to the reason for this measure, Finansinspektionen explains that Swedish banks have exceptionally large corporate exposures backed by real estate. Additionally, the real estate sector is highly cyclical which poses some extra risks on financial institutions and the entire financial market at the moment. Finally, the real estate market has been „overheating“ in the past months which is why FI deems this step necessary to reduce risk in the market.
Concurrently, FI seeks to remove the current Pillar II risk weigh floors which are identical to the ones noted above. The notification follows a corresponding consultation by the regulator in March 2023.