Sweden’s banks would suffer less from a slump in house prices than the nation’s economy, according to Stefan Ingves, governor of the Riksbank and head of the Basel Committee on Banking Supervision.
“The banks’ ability to generate income is good enough that at least for the foreseeable future” a property market decline on that scale “won’t, for example, affect banks too much,” he said yesterday in an interview in Stockholm. “They would be able to deal with it. It’s more likely the initial effect will rather be on consumption or the general economic activity.”
Sweden has forced its biggest banks to hold more capital than their rivals elsewhere in Europe, making them resilient to losses amid concern the nation’s housing market may be overheated. Ingves has repeatedly voiced concerns that Swedish consumers are building unsustainable debt burdens that will leave them vulnerable to a sudden decline in house prices. Private debt has now reached a record 174 percent of disposable incomes, according to the central bank.
Finance Minister Anders Borg last week said banks should gird for higher capital standards and bigger risk weights on mortgages. The government has argued the measures are needed to protect taxpayers against financial industry losses. Sweden’s four biggest banks have assets that are four times the size of the $500 billion economy.
Stress tests released yesterday by the central bank suggest stricter regulatory requirements are paying off. A 20 percent slump in house prices over three years would result in combined losses of just 21 billion kronor ($3.2 billion) for Nordea Bank AB (NDA), SEB AB, Svenska Handelsbanken AB (SHBA) and Swedbank (SWEDA) AB, the tests showed.
As properties are typically the asset Swedes tend to sell last if in financial hardship, it’s the economy that will bear the brunt of a house price slump as households rein in spending to keep their homes. In a scenario where prices slump by that amount, mortgage loan losses would only make up 7.9 percent of total losses at the banks, setting Sweden apart from other nations such as the U.K., Denmark and the U.S.
“If lending starts to accelerate again, not the least if it were to accelerate significantly, then we will have to think about whether we will have to do more,” Ingves said. “We’ve seen in a number of other countries where they’ve ended up with trouble that it takes a pretty long time before households cut the borrowing that they’ve accumulated, and during all of that time they’ve had problems in one way or another.”
To reduce risk, Swedes should pay off their mortgages more than twice as quickly as today in 30 to 60 years compared with a current average of 140 years, Ingves said.
“It would be good if” household debt “at least is flat or even fell a bit over a long time period,” he said.
Danske Bank A/S (DANSKE), Denmark’s largest lender, reported loan impairment charges of 10 billion kroner ($1.74 billion) at its Danish retail unit in 2009. Of those, 23 percent were charges against facilities to retail customers, a number that rose to 27 percent in 2010. In Ireland, losses in a stress test by the central bank projected mortgage losses for the bailed-out banks at 9.49 billion euros in 2011 to 2013, equivalent to about a third of the 27.7 billion euros in credit losses in those years.
Borg and the country’s central bank have warned against the rising consumer debt level, which has grown to 174 percent of disposable incomes and is estimated by the Riksbank to reach 177 percent in early 2015. While household borrowing growth has slowed in Sweden since a cap on mortgages was introduced in 2010, growth still stood at an annual 4.6 percent in March.
Swedish households had the sixth-highest household debt burden among 18 developed countries at the end of 2011, according to the Riksbank report, beaten by Denmark, the Netherlands, Ireland, Norway and Switzerland.
Sweden’s banks have built buffers that exceed Sweden’s requirement of a core Tier 1 capital ratio above 10 percent this year and 12 percent by 2015, making them the best-capitalized major lenders in the European Union. Investors have awarded them, resulting in lower funding costs, access to markets that many of their European peers have been shut out of. Handelsbanken boasts credit default swaps that trade about 10 basis points below the government of Japan’s, at about 60 basis points, according to data compiled by Bloomberg.
In the Riksbank’s worst-case test for the three years through 2015, Swedish banks would suffer total loan losses of 267 billion kronor, of which only 21 billion kronor would stem from mortgage loans in Sweden and abroad. The lion share of losses would come from “lending to Swedish non-financial companies and lending in the Baltic countries as these groups of borrowers are hit hardest by the weakening of economic activity,” the Riksbank said.
The test includes a scenario where the $500 billion Swedish economy contracts 2.5 percent in 2014 and 2.7 percent in 2015, while economic output in the Baltic nations slumps 6.6 percent and 6.2 percent, respectively. Output in the other Nordic countries drops 3.9 percent in 2014 and 1.9 percent in 2015. House prices in the test plunge 20 percent in all markets where the banks operate, including the Nordic and Baltic countries.
In the stress test, all Sweden’s largest banks would post losses in 2013, 2014 and 2015 apart from Swedbank, which would have a profit and the lowest total credit losses.
While Nordea is forecast to post a 6.7 billion-krona loss in 2014, Swedbank would report a 700 million-krona profit, according to the report. Under Basel II rules, all banks apart from Nordea would still fulfill the requirement of a 12 percent core Tier 1 capital ratio by 2015.
“We will probably have to tighten the regulatory framework continuously in the years ahead but we also don’t want to trigger a house price crash,” Borg told reporters yesterday. House prices should ideally not rise more than disposable incomes going forward, he said.