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

EBA published an opinion regarding the extension of a measure proposed by the Estonian macroprudential authority, Eesti Pank. The measure, initially introduced in 2019, sets a minimum risk weight for retail exposures secured by immovable property to obligors residing in Estonia. Its purpose is to protect banks from systemic risks associated with lending to residential real estate. EBA reviewed the evidence provided and did not object to the two-year extension of the measure.
As a reminder, EBA mentions that it previously approved the first extension of the measure in June 2021, acknowledging the risks in the residential real estate sector. EBA did not object to the extension but expressed concerns about the effectiveness of alternative measures in addressing the risks and encouraged Eesti Pank to reassess the measure once housing market risks have subsided.
Under the extended measure, Eesti Pank maintains a credit institution-specific minimum level of 15% for the exposure-weighted average of risk weights applied to the portfolio of retail exposures secured by immovable property in Estonia. The measure applies to credit institutions using the IRB for calculating regulatory capital requirements.
EBA’s opinion acknowledges Eesti Pank’s concerns about financial stability risks arising from vulnerabilities in the housing market and the changing macroeconomic environment. EBA recognizes that macroeconomic and financial risks have not diminished since the first extension of the measure. Additionally, EBA highlights the new risks posed by increasing interest rates and high inflation, which may impact borrowers‘ ability to service their debts.