Sweden’s central bank can’t use harsher regulation as an opportunity to ease policy in the long run because raising capital requirements probably won’t drive up borrowing costs, Deputy Governor Martin Floden said.
“In the long-term, it’s not at all apparent that” stricter bank rules “will have tightening effects” on the economy through higher interest rates, Floden said in an Oct. 29 interview in Bjuv, Sweden. “Part of the rationale is to make them have more equity, which is perceived to be less risky and that they therefore may not need as high returns.”
Sweden, which already sets some of the world’s strictest bank capital standards, has said it may need to add to those requirements next year to avoid fueling a credit-driven housing bubble that risks destabilizing the economy. Finance Minister Anders Borg has told Sweden’s biggest banks to gird for continual tightening as he seeks to protect taxpayers from an industry that’s grown to four times the size of the $540 billion economy.
Sweden’s four biggest banks must hold at least 12 percent of their risk-weighted assets by 2015 and may face additional capital requirements already next year. The risk weights banks apply to their mortgage assets were tripled this year as the government and regulators work to ensure banks don’t dilute their capital levels through the backdoor.
The Riksbank has argued risk weights should be raised even further, to 35 percent from 15 percent, to safeguard the housing market. Households are also under pressure to repay their debts faster after the financial regulator said it may introduce an amortization requirement.
Economists at Citigroup Inc. and Royal Bank of Scotland Group Plc have speculated the tougher regulatory environment will free the central bank to focus on inflation, which has hovered below its 2 percent target since the beginning of 2012.
“That it’s moving in that direction is clear, but then, quantitatively, how important that is, we haven’t reached a conclusion on yet,” Floden said. “It will take more analysis of how banks are really affected by such regulatory changes.”
Governor Stefan Ingves said in an interview last week tougher bank rules are benefiting lenders as the extra layer of safety draws in debt investors at lower rates.
Nordea Bank AB (NDA), Svenska Handelsbanken AB (SHBA), Swedbank AB (SWEDA) and SEB AB already exceed Sweden’s 12 percent requirement. Handelsbanken, which is Europe’s best-capitalized bank, reported a capital ratio of 19.3 percent for the end of September.
That’s driven down credit derivatives on the banks. Five-year credit-default swaps on senior unsecured notes sold by Handelsbanken traded at 60 basis points this week, according to data compiled by Bloomberg. That’s about the same level as the government of France.
Meanwhile, the housing market continues to display signs of overheating. Apartment prices rose 14 percent in the 12 months through August after having more than doubled since 2000. Private debt burdens will rise to a record 177 percent of disposable incomes in the fourth quarter of 2015 after having more than doubled since the mid-1990s, the Riksbank estimates.
The Riksbank’s board said this month it took household debt into account when deciding against cutting the main lending rate from 1 percent.
Floden, together with Deputy Governor Karolina Ekholm, had argued for a reduction to 0.75 percent and for tightening to be pushed back until the fourth quarter next year. Such a policy would help the bank boost inflation toward the target, the two said.
Floden argues that failing to cut now will ultimately tie the bank’s hands later and delay the tightening needed to steer the economy.
Preliminary estimates “suggest that a rate cut of 25 basis points for four quarters has a small effect of a few percentage points” on household debt as a share of disposable incomes during the same period, Floden said.
Also, a failure to cut rates now increases the likelihood that the Riksbank will have to postpone its forecast to start raising rates late next year, he said. “My view to raise the rate in the fourth quarter 2014 is based on a rate cut.”
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