The Bank of Estonia (Eesti Pank) has urged caution on the part of two significant banks in issuing home loans, and instigated specific requirements for the two banks in particular, in order to mitigate risk against any potential future downturn and at a time when the real estate market is particularly active.
The central bank has retained a requirement that Swedbank and SEB have to apply a risk weight of at least 15 percent of their portfolio of housing loans when calculating the need for capital to cover risks relating to mortgage loans issued in Estonia.
The risk weight floor currently applies to Swedbank and SEB in Estonia, since they assess risk assets using internal models in which the risk calculation is affected a great deal by earlier loan losses, the central bank says.
This threshold does not apply to the other commercial banks, as these generally use a simpler standard approach in Estonia, where a fixed and uniform risk weight of 35 percent is used for mortgage loans, when calculating risk exposures for capital requirements.
Central bank: Lessons drawn from last downturn
The Bank of Estonia says it took on board lessons learned in the previous economic crisis in 2010, including by introducing three requirements for housing loans in March 2015 which protect both borrowers and banks from excessive risk-taking.
Read more: ERR.EE