By establishing a minimum limit to risk weight, the Bank of Estonia is seeking to ensure that banks have sufficient capital to cover risks in connection with housing loans, the Bank of Estonia said in a press release on Thursday.

Influenced by rapid wage growth and people's increased confidence, the annual growth of housing loans has remained relatively rapid at approximately 7 percent. As customers have done well with loan payments and loan losses have remained very low in recent years, bigger banks have estimated their need to hold capital to cover risks as progressively smaller.

Should Estonia's economy worsen, however, loan losses may increase considerably. It is for this reason that the Bank of Estonia considers it necessary that banks' capitalization does not decrease.

The changes announced Thursday affect Swedbank and SEB Pank, as these two banks use internal models for risk assessment that are influenced to a great extent by prior loan loss volumes. Other commercial banks operating in Estonia use a simpler standardized model according to which mortgage loan risk levels are assessed at a uniform risk weight of 35 percent; thus, the new requirements will not affect them.

In order to mitigate housing loan-related risks, banks are also subject to three additional requirements — the total size of the housing loan may equal up to 85 percent of the value of the securing property; all monthly loan and lease payments combined may account for up to 50 percent of the applicant's monthly net income; and a mortgage may be granted for a period of up to 30 years.

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