The Polish Financial Supervision Authority (UKNF) sent a position to presidents of banks and directors of branches of credit institutions regarding actions aimed at limiting the level of credit risk in the event of a high probability of a further interest rate increase scenario. The supervision recommends that all banks adopt a minimum change in the interest rate level by 5 percentage points in the creditworthiness assessment process.
The UKNF Office reported that due to the increasing costs of debt servicing by borrowers in recent months and the resulting possible increase in credit risk, it identified the need to take urgent measures to reduce the level of this risk for both newly granted loans and already existing loan portfolios.
“(…) taking into account the currently more likely scenario of a further increase in interest rates than their decline, in order to minimize systemic risk, banks should without undue delay correct their actions in accordance with the recommendations of the supervisory authority indicated below,” announced in a press release.
The UKNF Office recalled that the level of interest rate change provided for in Recommendation S and taken into account for the purposes of assessing creditworthiness is indicated as minimal. The elements of the policy of managing mortgage-secured credit exposures on residential real estate in terms of identifying, measuring and assessing the risk of mortgage-secured credit exposures should include, in particular, apart from the rules for setting maximum DStI levels, also the rules for assessing customer creditworthiness.
“These rules should include, inter alia, a description of the credit application approval process and a description of the method of taking into account the interest rate risk in the assessment of creditworthiness, or of setting and accepting the assumptions and parameters adopted in the assessment process, such as the percentage decrease in the income buffer in relation to its current level, and in the case of mortgage-secured credit exposures with a variable interest rate and a periodically fixed interest rate – also the change in the level of interest rates higher by no less than 250 basis points than the current level,” announced in a press release.
As emphasized, the level of the adopted change indicated in the Recommendation should be treated as minimal. This level should be redefined by the bank in a changing market situation. Different actions of banks should be perceived as non-compliance with the provisions of the Recommendation.
In this context, taking into account the current conditions on the mortgage market and in the light of the identified practices of applying Recommendation S by banks in the discussed scope, the supervisory authority recommends that in the process of assessing creditworthiness all banks adopt a minimum change in the interest rate level by 5 percentage points. Recommendation this falls within the spectrum of solutions provided for in the Recommendation.
The UKNF Office also recommends that when assessing the creditworthiness of the household, the cost of living should be used at a level higher than the subsistence minimum announced by an independent source, taking into account the differentiation according to the place of residence and professional activity.
“In addition, the bank should consider adjusting the cost parameter using a multiplier specified by the bank and greater than 1, providing an additional buffer that will be adequate, in particular, to the level of inflation expectations and the length of the loan period,” it announced.
Recommendation S adopts the overriding principle of the bank’s authorities’ responsibility for risk management and the consequence of this approach is the construction of determining the DStI parameter – the bank’s special caution is required at the level of 40% – with lower income and 50% – with higher income.
The PFSA Office indicated that banks should provide for specific monitoring of the portfolio in their risk management strategies, in which the DStI level indicated by the supervision was exceeded, and in the context of the results of this monitoring – immediately modify the bank’s policy in this respect.
In the face of significant changes in external factors, the supervisory authority recalls the above principles and expects them to be strictly implemented. The supervisory intention is for banks to make their best efforts to effectively make the offer of loans with a periodically fixed interest rate more attractive and to promote them, and ultimately to introduce into their offer a loan with a fixed interest rate for the entire loan period. It is also important that this offer should be a real alternative for customers interested in a mortgage, i.e. that they would be willing to include it as an effective, cost-effective security against an increase in the loan interest rate, it announced.
The Office emphasized that an important issue in the current conditions of high uncertainty as to the future level of interest rates interest on the market is for banks to remind their customers who already have a mortgage about their right to convert a floating-interest loan into a loan with a fixed or periodically fixed interest rate, as well as not to apply any barriers to such conversion.
The solution supporting the above-mentioned activities should be active informing of borrowers about the possibility of using the instruments specified in the Act on support for borrowers who have taken out a housing loan and are in a difficult financial situation.
The UKNF Office expects the banks to comply with the above-mentioned recommendations without undue delay and no later than the end of March 2022, and informing the supervisory authority about actions taken in this regard by 04/04/2022.
Regardless of this, the manner in which individual banks have complied with the above recommendations will be subject to particular assessment during supervisory activities, completed.
Source: UKNF and ISBnews
