The major banks Pillar 1 requirements will increase
Economic Commentaries, News The major Swedish banks have for a long time now needed to meet several different types of capital requirement. They are often divided up into so-called Pillar 1 and Pillar 2 requirements. Finansinspektionen has recently decided to move the risk-weight floor for Swedish mortgages from Pillar 2 to Pillar 1. This change means that the major banks’ risk-weighted assets and the percentage of Pillar 1 requirements will increase, but it does not change the major Swedish banks’ total CET 1 capital requirements if measured in SEK.
Finansinspektionen's board of directors has decided that the Pillar 2 requirement commonly known as the risk weight floor for Swedish mortgages will become a Pillar 1 requirement with effect from 31 December 2018. In addition, there is currently a comprehensive legislative project within the EU that is commonly referred to as the "banking package". When this work is complete, it will entail a number of changes to the framework governing European banks' capital requirements. Even if the banking package has not yet been formally decided by the European Parliament, it is probable that its contents will involve further changes in the major Swedish banks' Pillar 1 and Pillar 2 requirements going forward.
In this Economic Commentary the author describes how major Swedish banks' CET 1 requirements in Pillar 1 and Pillar 2 may change and how the major banks' CET 1 capital ratios may be affected by these changes. The most important conclusions are that:
- The conversion of the Pillar 2 requirement "risk weight floor for Swedish mortgages" to a Pillar 1 requirement will not change the major Swedish banks' total CET 1 capital requirement or the CET 1 capital ratios when measured as a percentage of the banks' total assets or in SEK, on the other hand, the percentage of Pillar 1 requirements will increase.
- When the Pillar 2 requirement "risk weight floor for Swedish mortgages" is converted to a Pillar 1 requirement, the banks' average risk weights will increase, which means that their risk-weighted assets will also increase. This means that the major banks' capital requirements and capital ratios will decline when measured as a percentage of their risk-weighted assets.
- When the Pillar 1 requirements increase, the major banks will face automatic restrictions on share dividends and limits to bonus payments to employees at an earlier stage than would otherwise have been the case on condition that they do not increase their capital ratios.
By Tomas Edlund. The author works in the Riksbank's Financial Stability Department.
The Riksbank's Economic Commentaries contain, for instance, short analyses and debate articles. The opinions expressed in Economic Commentaries are those of the authors and are not to be seen as the Riksbank's view.