Sweden’s financial regulator signaled it may enforce measures requiring banks to address their liquidity risks and hedge against a potential funding freeze.
“I have to make it very clear that the structural liquidity risk, as a problem, is something that concerns us” and which “it is likely that we will do something to address,” Uldis Cerps, executive director for banking at the Swedish Financial Supervisory Authority, said yesterday in an interview in Stockholm. “With respect to the short-term liquidity buffers, I think we in Sweden are happy with our reform agenda and its implementation.”
Moody’s Investors Services said last month Sweden’s banks “remain highly reliant” on market funding, with 58 percent of their total capital needs raised in the market. Covered bonds and short-term funding each account for 20 percent of the total, Moody’s estimates. Banks in the $540 billion economy generate 35 percent of their funding from deposits while the rest mostly comes from subordinated debt, according to Moody’s.
Global regulators are thrashing out the details of a structural liquidity rule, known as a net-stable funding ratio, that would set out minimum requirements for banks to finance long-term investments using sources that are unlikely to dry up in a crisis.
Nordea Bank AB (NDA), Swedbank AB (SWEDA), Svenska Handelsbanken AB (SHBA) and SEB AB in June had an average NSFR ratio of 83 percent, which the watchdog said last week is lower than for most European banks.
Sweden’s biggest banks have a “large reliance on market funding and that is a risk,” said Cerps, who also holds a seat on the Basel Committee for Banking Supervision. “Continuous reliance on market funding is one of the two biggest risks in the financial system.” The other is Sweden’s record-high household debt, he said. “Whether the NSFR will be the perfect answer we have to see.”
The annual market funding requirement for Sweden’s banks is more than half the country’s gross domestic product, or 2 trillion kronor ($302 billion), as the industry bridges a gap in lending and deposits born of a customer preference for placing savings in stocks and bonds rather than in accounts that accrue little interest, the regulator estimates. Banks must refinance 15 percent of their total assets every year.
The Basel committee is also working to settle the details of another planned bank requirement that would force lenders to limit their reliance on debt, Cerps said. The leverage ratio would require banks to have capital equivalent to 3 percent of their total assets.
After imposing some of the world’s highest capital requirements, Sweden now needs to ensure the leverage ratio is calibrated in a way that doesn’t prompt banks to shift mortgage assets off their balance sheets, Cerps said.
“We would not like, for instance, to implement regulatory measures whose effect might be to give up the model of ‘originate and hold’ for household mortgages,” Cerps said. “This model has served Sweden very well so we have to be mindful of that effect when we implement the leverage ratio” and “we have not said that banks are excessively leveraged,” he said.
The leverage ratio of Sweden’s four largest banks is 3.4 percent, compared with a global average of 3.8 percent, the Riksbank said in June.
Sweden’s FSA said last week it plans to tighten reserve rules further by increasing the risk weights banks apply to mortgage assets to 25 percent around the middle of next year. The regulator in May tripled risk weights to 15 percent to combat record household debt and soaring property prices. From next year, Sweden’s banks will also face a countercyclical capital buffer.
“It’s a fine balancing act how you combine those measures,” Cerps said. “It’s too early at this point to discuss any particular levels” of the counter-cyclical buffer. “Our message is to be very conservative in capital planning and not to take any measures that reduce the bank’s capital adequacy and also not to be excessive in capital actions.”
Besides stricter capital rules, the regulator has also limited mortgage lending to 85 percent of a property’s value. While the lending cap initially helped slow loan growth, borrowing has started to accelerate again and house prices are still climbing. That’s left Swedes with debt equivalent to more than 170 percent of disposable incomes, the highest level on record.
The government of Prime MinisterFredrik Reinfeldt, which faces elections next year, has sought to prevent a housing bubble by forcing banks to comply with ever stricter requirements and threatened forced mortgage amortization should homeowners refuse to start paying off more of their debt. Banks have argued the government should do more to address supply shortages in the housing market.
“The measures that have already been implemented or that have been pre-announced can be quite powerful and we want them to be powerful but it remains to be seen what kind of effect they will have,” Cerps said. “The question about other actors and other measures is topical when we come to the summer and decide on the formal activation of our tools. We have to see what happens with the market development and what will happen with household debt levels.”