Michael McGrath (Cork South Central, Fianna Fail)
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206. To ask the Minister for Finance if a distinction is made between the different risk profile of the mortgage, for example, a low loan to value mortgage as opposed to a high loan to value mortgage in the context of the risk weighting that applies to mortgages issued by banks; and if he will make a statement on the matter. [45420/18]

Paschal Donohoe (Dublin Central, Fine Gael)
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The Central Bank has advised that the risk weights (RWs) assigned to a given exposure depends on the particular approach utilised by the credit institution to calculate RWs for credit risk purposes. These are determined by EU regulation – specifically Regulation (EU) 575/2013, the Capital Requirements Regulation (CRR). This regulation permits credit institutions to use either the Standardised approach or the Internal Rating Based (IRB) Approach for the purposes of allocation of RWs for credit risk purposes.

With regard to the use of the Standardised approach for credit risk, the allocation of the applicable RW will differ depending on whether the exposure in question is secured by residential or commercial real estate.

With respect to exposures secured by residential real estate (or mortgages), in line with the Competent Authority discretion under Article 124(2) CRR, a 35% risk weight is applied to a) owner-occupied housing and b) loans with an LTV of up to 75%. Where these conditions are not met (i.e., buy-to-let or LTV above 75%) loans may attract a 75% RW provided it satisfies the definition of ‘retail exposure’ under Article 123 CRR (otherwise a 100% RW will apply).

In contrast, credit institutions utilising the IRB approach must estimate a probability of default (PD) and a loss given default (LGD) for each mortgage. These parameters are then used to calculate the RW.

Statistical models are used to assign a PD and LGD to each mortgage. These models are essentially “rules” that assign specific PDs/LGDs to mortgages depending on the particular characteristics of each mortgage. Credit institutions analyse the behaviour of customers historically to determine which characteristics (also known as risk drivers) should be included in the model. Each individual credit institution decides which risk drivers to include in their PD and LGD models, which could include customer, mortgage performance and collateral information.

In summary, the relationship between the risk weighting applied to a mortgage and the underlying risk profile depends on whether a credit institution applies the Standardised approach or the IRB approach. The latter approach is more risk sensitive as it assigns risk weights with reference to the relevant underlying characteristics of a mortgage.

The Central Bank has also advised that while it cannot provide confidential information on the IRB models of Single Supervisory Mechanism regulated entities, credit institutions publish certain information on their models and the output of their models (as part of their annual pillar 3 disclosures and annual reports) including average PD, LGD, and RW.