On 15 January 2019, the European Systemic Risk Board (ESRB) adopted a Recommendation for the EU-wide reciprocation of Sweden’s 25% floor for average risk weights applied by banks using the internal ratings-based approach to the portfolio of retail exposures to obligors residing in Sweden secured by immovable property. This Recommendation was published in the Official Journal of the European Union on 20 March 2019.
The measure applies from 31 December 2018 to banks using the internal ratings-based approach authorised in Sweden. Recommendation ESRB/2019/1 seeks to ensure that Sweden’s 25% risk-weight floor applies not only to exposures of banks in Sweden, but also to other EU banks’ retail exposures to obligors residing in Sweden secured by immovable property. It thereby enhances the effectiveness and consistency of macroprudential policy in the EU and contributes to a level playing field in the Single Market.
On 2 November 2018, Sweden’s Finansinspektionen requested that the ESRB recommend to other Member States that they reciprocate the 25% risk-weight floor applied by Sweden to its banks. Such a floor means that banks using the internal ratings-based approach have to apply a bank-specific floor for the average risk weight of 25%, at the portfolio level, on retail exposures to obligors residing in Sweden secured by immovable property. After considering the cross-border implications, the General Board of the ESRB decided on 15 January 2019 to include the Swedish measure in the list of macroprudential policy measures to be reciprocated under Recommendation ESRB/2015/2.
Relevant authorities are recommended to adopt reciprocating measures no later than three months following the publication of Recommendation ESRB/2019/1 in the Official Journal of the European Union. If the same macroprudential policy measure is not available in their jurisdiction, relevant authorities are recommended to apply a macroprudential policy measure available in their jurisdiction that has the most equivalent effect and to adopt said equivalent measure after consulting with the ESRB.
Recommendation ESRB/2015/2 provides details of the rationale behind the reciprocation of macroprudential policy measures. In particular, in a highly integrated financial market such as that existing in the EU, where financial intermediaries operate across borders, non-reciprocation could lead to macroprudential policy measures being circumvented and undermine a level playing field among financial intermediaries. For that reason, the ESRB recommends an approach that is based on two main pillars, namely:
- a systematic assessment of the cross-border effects of macroprudential policy;
- a coordinated policy response in the form of voluntary reciprocity for macroprudential policy measures when needed.
It is important that these pillars are implemented consistently throughout the EU.
More information on the macroprudential measures that have been recommended for reciprocation by the ESRB under its reciprocity framework and their follow-up by Member States can be found on the ESRB’s webpages dedicated to reciprocation.