1. When assessing the appropriateness of the risk weights referred to in Article 124(2), first subparagraph, of Regulation (EU) No 575/2013, the authorities designated in accordance with Article 124(1a) of that Regulation shall determine all of the following:
(a)
the loss experience as the ratio of the following:
(i)
in the case of exposures secured by mortgages on residential property as referred to Article 124(2), first subparagraph, of Regulation (EU) No 575/2013, the losses reported in accordance with Article 430a(1), point (a), of that Regulation and the exposure value reported in accordance with Article 430a(1), point (c), of that Regulation;
(ii)
in the case of exposures secured by mortgages on commercial immovable property as referred to in Article 124(2), first subparagraph, of Regulation (EU) No 575/2013, the losses reported in accordance with Article 430a(1), point (d), of that Regulation and the exposure value reported in accordance with Article 430a(1), point (f), of that Regulation;
(b)
the loss expectation as the best estimate of losses to be realised during a forward-looking horizon of at least one year, and, if so determined by that authority, up to three years.
For the purposes of point (b), the loss expectation shall be determined as the average of the estimated losses for each year during the chosen forward-looking horizon.
2. The authorities designated in accordance with Article 124(1a) of Regulation (EU) No 575/2013 shall determine the loss expectation referred to in paragraph 1, point (b), in either of the following ways:
(a)
by adjusting the loss experience referred to in paragraph 1, point (a), upwards or downwards;
(b)
by keeping the loss experience unchanged.
When determining the loss expectation referred to in paragraph 1, point (b), the authorities shall reflect the forward-looking immovable property market developments referred to in Article 124(2), first subparagraph, point (b), of Regulation (EU) No 575/2013 during a forward-looking horizon of at least one year and, if so determined by that authority, up to three years.
3. The loss expectation referred to in paragraph 1, point (b), and determined in accordance with paragraph 2, shall be based on all of the following:
(a)
the historical evolution and cyclical characteristics of the immovable property market as reflected in immovable property market transactions and prices, and in the volatility of those prices, as evidenced by the relevant data indicators or qualitative information;
(b)
the past and present structural characteristics of the immovable property market, and the future evolution of those structural characteristics related to the size of the immovable property market, the specificities of real estate financing, national taxation systems and the national regulatory provisions for buying, holding or letting immovable property;
(c)
the fundamental drivers of demand and supply in the immovable property market, as evidenced by any relevant data indicators or qualitative information, including lending standards, construction activity, vacancy rates, or transaction activity;
(d)
the riskiness of the exposures secured by immovable property, as measured by all of the following:
(i)
indicators relevant for the property segments of the Member State and, where relevant, for parts of the territory of that Member State, having regard to Section 6 of the EBA Guidelines on subsets of exposures in the application of a Systemic Risk Buffer ( 3 ) , issued in accordance with Article 133(6) of Directive 2013/36/EU of the European Parliament and of the Council ( 4 ) ;
(ii)
the lending standard indicators specified in the recommendation of the European Systemic Risk Board on closing real estate data gaps ( 5 ) ;
(e)
the expected evolution in immovable property market prices and the expected volatility in those prices, including an assessment of the uncertainty around such expectations;
(f)
the expected evolution in meaningful macroeconomic key variables that could affect the solvency of borrowers, including an assessment of the uncertainty around such expectations;
(g)
the time horizon over which the forward-looking property market developments are expected to materialise;
(h)
national specificities related exclusively to the real estate market and its financing, including public and private guarantee schemes, tax deductibility, and public support in the form of recourse regimes and social safety nets;
(i)
any other data indicators and sources which provide insight into forward-looking property market developments which affect the loss expectation referred to in paragraph 1, point (b), or support the data quality of the loss experience referred to in paragraph 1, point (a).
4. Where there is a lot of uncertainty as to the factors referred to in paragraph 3, point (e), the authorities designated in accordance with Article 124 (1a) of Regulation (EU) No 575/2013 shall consider a margin of prudence when determining the loss expectation in accordance with paragraph 2 of this Article.
5. For the purposes of paragraph 1, the authorities designated in accordance with Article 124 (1a) of Regulation (EU) No 575/2013 shall have regard to other macroprudential measures in force that already address the identified systemic risks affecting the appropriateness of the risk weights referred to in Article 124(2), first subparagraph, of that Regulation, including the following measures in national law designed to enhance the resilience of the financial system:
(a)
loan-to-value (LTV) limits;
(b)
debt-to-income limits;
(c)
debt-service-to-income limits;
(d)
other instruments addressing lending standards.