The implementation of Basel III concept in the EU has brought the so-called macroprudential tools. The EU Member States are already making significant use of these tools. Apart from the capital buffers, 14 EU countries and Norway introduced 32 measures in the first five quarters following the implementation of the CRR/CRD IV in January 2014 as specified in EBA report (See the EBA report: „On the range of practices regarding macroprudential policy measures communicated to the EBA – July 2015“). According to this report approximately half of these measures relate to real estate risks.
Pursuant to Article 124 CRR competent authorities must periodically, and at least annually, assess whether the preferential risk weights under the standardised approach (i.e. 35 % for exposures secured by mortgages on residential property and 50 % for exposures secured by mortgages on commercial property) are appropriate. If not, competent authorities may set higher risk weights or stricter criteria than those set out in CRR. Pursuant to Article 164 CRR competent authorities may also set higher minimum values of exposure weighted average LGD for retail exposures secured by property in their territory under IRB approach (i. e. more than 10 % set by CRR for exposures secured by residential property and 15 % set for exposures secured by commercial property). Both of these tools are the so-called Pillar 1 tools. Articles 124 and 164 CRR assume that EBA will develop regulatory technical standards (RTS) to specify their usage by the end of 2014.
With more than 6 months delay the EBA launched on 6 July 2015 a public consultation on RTS on the conditions that Competent Authorities have to take into account when tightening capital requirements for mortgage exposures. See: http://www.eba.europa.eu/-/eba-consults-on-conditions-for-capital-requirements-for-mortgage-exposures
The draft RTS proposes that three sets of conditions are assessed when setting higher risk weights or LGD floors: (i) the assessment of the appropriateness of the risk weights or LGD floors (ii) the financial stability considerations, and (iii) other conditions. The loss indicators reported by institutions to the competent authorities according to Article 101 CRR play an important role in the assessment. The draft RTS assumes the direct relationship between losses and risk weights for capital requirement purposes and therefore, it consults on indicative benchmarks which aim to provide further guidance to the setting of higher risk weights for one or more property segments by competent authorities. The benchmarks for loss expectations are proposed in two levels (see Article 4 of the draft RTS). Exceeding the lower level benchmark would indicate setting a risk weight up to but below 100 %, while exceeding the upper level benchmark would indicate setting a risk weight ranging from 100 % to 150 %.
The final level of benchmarks may depend to a large extent on the responses and explanations received in the public consultation. The consultation runs until 6 October 2015.