Sweden May Shelve Tougher Bank Rules If Recovery Is at Risk

Photographer: Andrew Harrer/Bloomberg
Earlier this year, Finance Minister Anders Borg criticized lenders for paying what he characterized as excessive dividends, arguing the cash will be needed to comply with even tougher reserve rules in future.

Sweden’s government signaled it won’t push for stricter bank rules than those already agreed on if there are signs that doing so would put an economic recovery at risk.

“What you constantly need to take into the equation is not to hurt the growth that’s about to accelerate, but to find a suitable balance,” Financial Markets Minister Peter Norman said yesterday in an interview in Stockholm. “This is an economic experiment” and “a delicate balance,” he said.

The comments mark a change in tone after Sweden forced through some of the world’s strictest bank capital standards. Earlier this year, Finance MinisterAnders Borgcriticized lenders for paying what he characterized as excessive dividends, arguing the cash will be needed to comply with even tougher reserve rules in future. Swedish banks, including Nordea Bank AB (NDA), Swedbank AB (SWEDA) and SEB AB, have warned that setting capital requirements too high could jeopardize the recovery.

Norman said yesterday the government will watch to see how existing proposals affect the largest Nordic economy before considering new measures.

Deflationary Spiral

Sweden is grappling with signs of an overheated property market while consumer prices sink. Inflation will still be below the central bank’s 2 percent target five years from now, according to a survey of money market participants by TNS Sifo Prospera published today. Unemployment, adjusted for seasonal swings, rose to 8.2 percent in January, Statistics Sweden said Feb. 13. That’s the highest rate in Scandinavia.

The administration of Prime Minister Fredrik Reinfeldt, which is trailing behind the Social Democrat-led opposition in most polls ahead of September elections, will require Sweden’s biggest banks to hold at least 12 percent core Tier 1 capital relative to risk-weighted assets from 2015. Though banks already exceed that requirement, both Borg and Norman have signaled that rules may be tightened further.

Nordea’s core Tier 1 ratio, excluding transition rules, rose to 14.9 percent of risk-weighted assets at the end of 2013. Svenska Handelsbanken AB (SHBA) and Swedbank have the highest ratios among major European banks, at 18.9 percent and 18.3 percent, respectively, under Basel III. SEB’s ratio is 15 percent.

Diluting Capital

To prevent banks from diluting capital levels, Swedish lenders may this year have to raise the risk weights they assign mortgage assets to 25 percent. That follows a requirement last year to triple risk weights to 15 percent. Lenders also face a countercyclical buffer, the size of which has yet to be decided, and are under pressure to create voluntary amortization programs to help bring down consumer debt burdens.

The government has argued the measures are needed to cap record private debt, now at more than 170 percent of disposable incomes.

Sweden, a stable AAA economy with its own currency, in 2013 set up a financial stability council which met for the first time last week to discuss potential measures to prevent debt from spiraling out of control. Besides Norman, the council comprises the heads of the central bank, the debt office and the financial regulator.

Stability Council

Norman said last week’s meeting covered a broad range of topics and that it is too early to predict whether measures already announced will be enough to stem private debt. The council meets again in May, when Norman has said the government will provide a road map for future steps to curb borrowing.

The central bank raised its forecast for household debt last week, predicting Swedes will owe their creditors more than 180 percent of disposable incomes in 2016. The ratio has almost doubled since the mid-1990s as home prices soared. Apartment prices alone rose 11 percent last year.

“We have to look at how things develop” and “if we’re seeing that things don’t change we must use new tools or tighten the old tools,” Norman said. “One is to tighten the mortgage cap, the other is amortization requirements, the third is risk weights on mortgages and the fourth is general capital” increases for banks, he said.

Phasing out rules that allow Swedes to deduct as much as 30 percent of their interest payments from taxes is not an option, Norman said. “There are no discussions underway whatsoever to make any changes to the interest cost deductions,” he said.

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net; Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net; Tasneem Brogger at tbrogger@bloomberg.net

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