Recommendation of the European Systemic Risk Board of 13 November 2023 regarding the Portuguese notification of its intention to set a sectoral systemic risk buffer rate in accordance with Article 133 of Directive 2013/36/EU (ESRB/2023/11)

The European Systemic Risk Board (ESRB) has issued a new recommendation regarding a notification of the Portuguese Central Bank, Banco de Portugal, of its intention to set a sectoral systemic risk buffer rate (sSyRB) in accordance with Article 133 of Directive 2013/36/EU, the Capital Requirements Directive IV (CRD IV).
Specifically, Banco de Portugal has notified the ESRB of its plan to set a 4% sectoral sSyRB for institutions applying the internal ratings-based (IRB) approach for the assessment of credit risk. The 4% sSyRB would apply to retail exposures secured by residential property located in Portugal and would thereby capture four domestic credit institutions. The parents of two institutions are located outside Portugal in other EU member states which is why the recommendation is needed.
The Central Bank seeks to address the risks related to potential losses in banks’ residential real estate mortgage portfolios resulting from increased interest rates and strains on households to service their mortgage loans. The Central Bank also seeks to address decreasing housing prices in Portugal leaving credit institutions vulnerable in case of foreclosures. The 4% sectoral sSyRB would be applied from October 1, 2024 for a period of two years or until the targeted risks either materialize or dissipate.
In its recommendations now, the European Systemic Risk Board finds this measures suitable to address the current risks in the retail real estate market, both in terms of potential loan losses and decreasing real estate prices. The measure is also deemed to be proportionate and not adversely effecting „on the whole or parts of the financial system of other Member States, or of the Union as a whole“. However, the ESRB reminds the Central Bank that it is obliged to review the measure on a regular basis to ensure its continued effectiveness to mitigate the noted risks.