Proposal for new risk weight floors for bank loans to commercial properties

On March 29, 2023, the Swedish financial regulator, Finansinspektionen (FI), published a press release to inform that it has launched a consultation on the introduction of a new risk weight floor under Article 458 of the Capital Requirements Regulation (CRR) for corporate loans whose collaterals are commercial and residential properties. The minimum risk weights would apply to institutions using an internal ratings-based approach to assess credit risk and thus to assess own fund requirements.
Specifically, FI seeks 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. FI intends to submit the proposal to the European Systemic Risk Board (ESRB) to ask for reciprocation in the other EU member states. 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.
Concurrently, FI would remove the current Pillar II risk weigh floors which are identical to the ones noted above.