Sweden’s financial regulator will disregard central bank calls to assign higher risk weights to mortgage assets and opt instead for tougher stress tests to ensure lenders have enough capital to guard against losses.
The Stockholm-based Financial Supervisory Authority will require banks to prove they can withstand bigger shocks than those tested for to date to prevent lenders from growing complacent, said Martin Andersson, the regulator’s director- general. He says adjusting the so-called Pillar 1, which concerns minimum capital requirements including risk weightings, is too backward looking and wants Sweden instead to focus on Pillar 2, which allows regulators to assess risk based on possible future losses.
“Pillar 1 is inherently pro-cyclical. You try to change some parameters here and there but the risk is that it becomes patchwork,” Andersson said in an interview. Sweden needs to use Pillar 2 “more actively,” he said.
Andersson’s comments brush aside proposals by central bank Governor Stefan Ingves, who in a March 1 speech proposed requiring banks to increase risk weightings on mortgage assets to reflect rising household indebtedness. Sweden, home to four of the six largest Nordic banks and with a financial sector four times the size of its economy, should target some of the world’s toughest regulatory standards, Finance Minister Anders Borg said in February.
Svenska Handelsbanken AB (SHBA) shares were the biggest gainer on the OMX Index of Sweden’s 30 most-traded companies, rising as much as 2 percent. The stock rose 0.9 percent to 215.8 kronor at 10:07 a.m. in Stockholm. Nordea Bank AB (NDA) rose as much as 0.8 and was little changed at 71.90 kronor. SEB AB gained 0.3 percent to 59.2 kronor, while Swedbank AB (SWEDA) rose 0.4 percent to 115 kronor.
Though the FSA says it will make stress tests more rigorous, its decision not to focus on risk weightings may come as a relief to banks in Sweden, home to Europe’s fifth-largest mortgage-backed covered-bond market. Still, it also gives the FSA more freedom to dictate standards rather than creating a fixed set of parameters, analysts said.
“If they use Pillar 2 then it becomes more discretionary from a regulator viewpoint,” Chintan Joshi, an analyst at Nomura International Plc in London, said in an e-mail. “I’m not sure if I can say it will be more positive as it can become subjective and potentially more onerous depending on how strict the regulator wants to be.”
`Too Much Capital'
European regulators will use a tougher measure of capital on 90 lenders in this year’s stress tests following criticism that last year’s tests weren’t stringent enough, the European Banking Authority said on April 8.
The Independent Commission on Banking recommended the U.K.’s biggest banks should hold core Tier 1 capital levels of about 10 percent, the group said in a report published today.
Raising risk weightings, with higher rates reflecting that an asset class may be more prone to losses, could force banks to keep “too much capital in the system,” Jan Wolter, a Deutsche Bank AG analyst based in Stockholm, said in a March 29 note.
Swedish banks have enjoyed the lowest residential-mortgage risk weightings in Europe over the past decade, according to a March 22 note by Stockholm-based lender SEB. Risk weights have remained low even as Ingves cautions that the country’s property market may face credit-driven imbalances.
The central bank, whose main mandate is to defend a 2 percent inflation target, says its five interest-rate increases since July were in part needed to help offset housing-market risks as property prices exceed a pre-crisis peak. According to one of the bank’s six board members, those risks may be abating.
“Lending is slowing down” and “the rate increases we’ve done have obviously had an effect. I’m pretty calm at the moment,” Riksbank Deputy Governor Lars Nyberg said in an April 1 interview.
Swedish banks, including the country’s biggest mortgage lenders Handelsbanken and Swedbank, on average assign a 6 percent to 7 percent risk weight to their mortgage assets, according to Matti Ahokas, a financial analyst at Handelsbanken in Helsinki. Banks had feared the rate might be sent as high as 15 percent, said Joshi.
“Of course this is backward looking,” Andersson said. “If you wanted to be forward looking, you could increase that to 10-20 percent, but raising the numbers won’t affect the interest rate for households that much. Pillar 2 framework is much simpler and more straightforward.”
`Beneficial' for Banks
Sweden’s largest banks will be required to have a core Tier 1 capital ratio of at least 10 percent to 12 percent and total capital of at least 15 percent in a few years, Andersson said.
The Nordic region’s largest lender, Stockholm-based Nordea, has railed against proposals for tighter capital requirements that Chief Executive Officer Christian Clausen calls “a bit strange” and “not realistic.”
“There seems to be a notion out there that if we have 10 percent capital that is fine and that is where we will be, to which we’ve said: no we don’t think so,” Andersson said.
Andersson said he expects European regulation broadly to harmonize with Sweden’s 10 percent to 12 percent capital goal.
“One of the things we learned from the crisis is I don’t believe there is a great advantage for any banks to be in a regime or national context where there are low capital requirements,” he said. “Strong regulation, strong supervision will be beneficial for the banking sector in their ability to participate in the global financial markets.”