Episode highlights

“And this is quite critical because at the moment under the current UK CRR, loan to value is based on the market value of the property. And if firms are allowed to use, I guess, sort of automated valuation methods for example, so looking at computer models to see actually how much is your property worth, and that’s kind of what you use for loan to value calculation. However, for Basel 3.1, the proposals are actually, it’s much more strict the way you value the property and it has to be on the original value. So you have to go and basically use that value at the start, and a year later the property revalues, you still had to stick with the original value. So that comes back to my point that although some of the risk weights may be lower in the low to value bands, because you can go as low as 20% for example. You’ll still have probably be offset by the original value.”

– Oivind Andresen (06:37)

“I think one thing to say as well, if you look at the wider kind of property market is that the big banks on the IRB model, they will have what we call a sort of capital floor introduced at 75, 72.5% of the standardized risk weight. So basically we see some of the very biggest banks in the UK at the moment having a risk weight of 10% for residential mortgages and having a huge benefit. Now actually, they will also have to do a standardized calculation and then the capital requirement will be floored at 72.5% of that. So I think that will actually improve some of the competitiveness and be beneficial to, I guess, some of your customers. So there’s a bit of give and take, but I think there’s overall, I think there’s more result in increased capital requirements.”

– Oivind Andresen (15:02)