FI’s Pillar 2 capital assessment method for systemic risk associated with securitisation

Finansinspektionen considers it to be necessary to implement a back-stop within Pillar 2 to limit effects on the total credit supply from systemically critical securitisation. FI is publishing today a method that it intends to use during its capital requirements assessment.

The tightening of capital requirements in recent years combined with forthcoming regulations may strengthen the incentives Swedish banks face to engage in securitisation and contribute to a more significant securitisation market. As a whole, FI takes a positive view on the possibility of meeting Swedish demand for credit with a broader base of capital and funding sources, but makes the assessment that systemic risks may arise if the market for securitisation closes to new issues.

In such a situation, banks are left with the choice of either renewing the underlying credit or denying borrowers new or extended credit. Assuming the first choice, the bank's credit risk rises, and thus its capital requirements. The sudden increase in its capital requirement can result in the bank reducing other lending, which can reduce the supply of credit in the economy as a whole. Assuming the latter, the borrowers' financing is terminated, which could have serious consequences for them, particularly if the objective of the loan is more long-term than the contractual maturity. If a large part of the Swedish credit market is affected by securitisation, there is a greater risk of a serious contraction in the credit supply following a shock to the securitisation market.

Banks decide themselves if they want to renew the loans in question. As part of its macroprudential assignment, however, FI must take into consideration the need for banks to have capital that will enable them to issue loans to borrowers even under stressed conditions. Given this background, FI presents the capital assessment method it will use in the supervisory review and evaluation process starting in 2017. If a bank engages in securitisation transactions which cannot be judged to be systemically critical, FI's method will have no impact.

A proposal was submitted for consultation on 1 December 2016. FI has taken into consideration the consultation responses and now decided on the capital assessment method. Initially, only firms in supervision categories 1 and 2 will be affected.

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