Swedish Banks Face Extra Buffer Requirement as Debt Hits Record
Bloomberg: Sweden’s financial watchdog said banks in the largest Nordic economy will probably need to hold extra capital to reflect households’ record debt burdens.
That means a countercyclical buffer that’s yet to be calculated for Nordea Bank AB, Swedbank AB (SWEDA), SEB AB and Svenska Handelsbanken AB (SHBA) may stay above zero for “several years,” said Martin Andersson, director general of the Swedish Financial Supervisory Authority.
“It has been seen as another fine-tuning instrument for the economic cycle, but that’s never been the intention and that wouldn’t be a good way to use it,” Andersson said yesterday in an interview in Stockholm. “It’s about dealing with a credit cycle that’s much longer.” The FSA isn’t planning to adjust the buffer “particularly often,” he said.
Sweden’s government last month unveiled the biggest clampdown on banks since November 2011, when it told lenders to target some of the world’s toughest capital standards. Banks now face an even higher core Tier 1 minimum capital requirement than the 12 percent of risk-weighted assets due to take effect in 2015 as Sweden plans to expand its use of countercyclical buffers to ensure there’s no upper limit to capital levels.
The nation is stepping up efforts to rein in its financial industry even after banks built up some ofEurope’s biggest capital buffers. Financial Markets Minister Peter Norman has argued the measures are needed to protect taxpayers from an industry that’s grown to four times the size of Sweden’s $540 billion economy.
Starting Point
The drive to ensure banks have adequate capital follows continued growth in household debt. The central bank estimates private debt will reach 177 percent of disposable incomes by 2015, the highest level ever in Sweden.
“If one is worried that growth in household debt is too high, then it’s reasonable that the starting point” for a countercyclical buffer “won’t be zero,” Andersson said.
Sweden’s FSA in October 2010 capped mortgages at 85 percent of a property’s value. While that measure helped slow credit growth to 4.5 percent last year from above 10 percent between 2004 and 2008, the pace of borrowing has started to accelerate again. Household credit grew 4.8 percent in July versus 4.7 percent in June and May. It was 4.6 percent in April.
Andersson said earlier this week the FSA will consider forcing households to amortize their mortgages if the pace of borrowing becomes unsustainable.
140 Years
An FSA report in March showed it takes Swedes 140 years on average to repay their home loans. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay down their debt, according to the report.
For now, Swedish household credit growth is still “at a level that’s fairly well balanced in relation to the development of disposable incomes,” Andersson said.
Should private debt continue to rise, the most logical step for the FSA would be to set a threshold “a bit below 75 percent” of a property’s value, forcing households to amortize all debt that exceeds that level, Andersson said.
The Swedish Bankers’ Association already recommends that lenders force mortgage holders to amortize debt above 75 percent of a property’s value. Banks have done well in following the association’s advice, Andersson said.
This year, the Swedish FSA started requiring banks to raise risk weights on their mortgage assets to 15 percent from as low as 5 percent previously.
Stefan Ingves, governor of the central bank and chairman of the Basel Committee on Banking Supervision, said yesterday banks in Sweden remain “highly leveraged” even though capital ratios relative to risk-weighted assets are high. He’s argued in favor of raising risk weights as high as 20 percent to help guard against losses.
Sweden should consider introducing a leverage ratio -- a measure of capital relative to total assets -- before international standards are set, Ingves said yesterday.
reporter on this story: Johan Carlstrom in Stockholm