There are mainly two categories of loans affected: housing loans and loans to unrated corporates that are not SMEs. For Swedish banks, the largest impact will be on loans to unrated corporates. If a bank is restricted by the output floor, these loans will have a uniform risk weight that in most cases will be much higher than today.
The effect on Swedish housing loans is more difficult to predict since we already have a national risk weight floor, decided by the Swedish FSA, Finansinspektionen, that will either be kept or abolished once the new rules come into force.
VS: What do you think will be the biggest changes for banks from the implementation of Basel IV? And how will lending to corporates be affected? Impact on availability or pricing?
JH: In December 2021, the EU Commission presented its proposal for implementation of Basel IV in the EU. The proposal is currently being negotiated in the European Parliament and between EU member states.
The most notable elements of the Commission proposal, from a Swedish and Nordic perspective, are the transitional arrangements for mortgage loans and loans to unrated corporates that have low risk. These arrangements mean that the full effect of the output floor will be delayed until 2033. However, such transitional rules are of limited importance since banks, investors and other stakeholders often focus on the long-term situation, assuming the toughest regulatory scenario.
The outcome of the EU negotiations is difficult to predict. Some important EU members have the view that it is important to take EU specifics into consideration for the implementation. One such specific is that corporates are to a much larger extent financed by banks compared to the US, where market financing is dominant. At the same time, many EU members stress the importance of being Basel-compliant in the implementation.
In a worst-case scenario (from a banking perspective), most large banks in northern Europe will be restricted by the output floor. This will, in general, imply increased capital requirements of 10-20% and risk weights that are not based on risk. For the Swedish market, we may see the largest negative effect for stable and low-risk corporates.