FI's supervision of banks' calculations of risk weights for exposures to corporates

Banks that use the IRB approach will calculate going forward the risk weights for exposures to corporates under the assumption that at least every fifth year is a "bad year". This will enable the banks' risk weights to better reflect actual risk.

It is estimated that risk weights for exposures to corporates for all affected banks will increase at least a few percentage points, and the average risk weight is expected to be greater than 30 per cent for all banks. This estimation also includes other ongoing supervision measures that focus on the risk weights for exposures to corporates in internal models.

The risk weights will also be less variable, both over time and between banks. FI also notes that the capital requirement will increase even more as a result of changed maturity assumptions described in the memorandum, Pillar 2 capital requirements regarding maturity assumptions (FI Dnr 16-2703).

The new supervision methods and basis for assessment proposed here by FI entail in brief that:

• The calculations of probability of default should assume that at least every fifth year is a downturn year.
• The existing calibration of downturn years may also need to be raised. FI will specifically assess in its supervision whether the banks' assumptions regarding default frequencies during downturn periods are sufficiently conservative.
• FI expects the banks to change their calculations of credit risks and risk weights as soon as possible.

FI is now gathering comments from affected parties to the positions presented in this memorandum. Feedback shall be submitted to FI no later than 15 April 2016.