Swedish FSA details Pillar 2 methodology

May 15th, 2015

The Swedish FSA (Finansinspektionen) has published a methodology for assessing three types of risk under Pillar 2 – credit-related concentration risk, interest rate risk in the banking book, and pension risk – that will be used in capital requirements from the third quarter.Finansinspektionen

Until now Finansinspektionen (FI) has used a standardised 2% Pillar 2 requirement excluding risk weight floor and systemic risk. The new methodology, released on Monday (11 May), follows a consultation begun in December and incorporates some changes from the initial proposals. FI said that all the banks covered are able to meet the requirements.

According to the regulator, the aggregate capital requirements for the three risk types are estimated at an average of 1.6% of the total risk-weighted exposure for the four major Swedish banks and 2.0% for another six banks for which FI publishes capital requirements – which it said is in line with estimates included in the consultation memorandum.

“The published requirements are generally in line with FI’s preliminary assessment and below the standard 2.0% Pillar 2 requirement currently in effect,” Moody’s said yesterday (Thursday). “However, the estimated requirements differ significantly among the 10 largest Swedish banks, providing a more accurate allocation of capital buffers based on the type and amount of risk each institution faces.”

The rating agency noted that SBAB has the highest requirement, at 4.5% versus the previous standardised 2%, whereas the three with the lowest – Nordea Bank, Kommuninvest I Sverige and Länsförsäkringar Bank – have requirements less than 1%.

“Although we do not expect these requirements to trigger additional capital raising because banks already have high capital levels, the announcement is credit positive because it mandates additional capital buffers for some banks and provides enhanced transparency,” said Moody’s.

It noted that FI has not yet published calculation methods for all the risks considered under Pillar 2.

“As such, Pillar 2 capital requirements for some Swedish banks could increase further as Finansinspektionen assesses additional risks,” said Moody’s.

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