Swedish banks should expect no let-up in pressure to boost capital levels and need to prepare for more competition, said the front-runner to become finance minister after September elections.
“I’m absolutely open to raising capital requirements further,” Magdalena Andersson, economic spokeswoman for Sweden’s largest opposition party, the Social Democrats, said in a March 20 interview at her office in Stockholm. “It’s something we will have to track continuously.”
Sweden’s banks already face some of the world’s toughest capital standards as the government has acted to protect the largest Nordic economy against financial instability. Prime Minister Fredrik Reinfeldt is corralling an industry that has grown to more than four times the size of the economy. The government is now putting together a “road map” for even tighter rules to be presented in the spring.
Andersson, 47, said there’s broad political agreement on the risks of having such a large bank industry, even as she emphasized its importance for Stockholm as a financial hub and for the $550 billion economy, home to mobile network maker Ericsson AB. She said she will try to redirect state-owned lender SBAB to become a “blow torch” for competition.
“Given the high profits that we’re seeing at the banks one can wonder a little whether competition is really functioning,” said Andersson, who has a master’s degree from the Stockholm School of Economics and has also studied at Harvard University. “We should look at whether we can use SBAB more effectively, more aggressively than what we’re doing today, but it has to be done in a responsible way.”
Sweden’s four biggest banks, Nordea Bank AB (NDA), SEB AB, Svenska Handelsbanken AB (SHBA) and Swedbank AB (SWEDA), reported a combined profit of about 70 billion kronor ($11 billion) last year, an increase of more than 3 percent from a year earlier. The banks paid out an average 66 percent of their profit as dividends, led by Swedbank, which distributed 75 percent to shareholders.
Nordea slid 0.1 percent to 89.55 kronor today in Stockholm, Handelsbanken fell 0.4 percent and Swedbank slid 0.5 percent while SEB rose 0.2 percent as of 10 a.m.
The Social Democrats are looking to regain power after eight years in opposition. The party and its partners, the Greens and the Left Party, were backed by 50.5 percent of voters, compared with 39 percent for the four-party government, according to a Sifo poll published March 16 in Svenska Dagbladet. The Social Democrats were supported by 34 percent.
The government has boosted capital requirements, raised risk weights on mortgage loans and set guidelines for tighter loan value limits, arguing the measures are needed to combat record private debt levels. Apartment prices, which have more than doubled since 2000, rose 11 percent last year.
The banks are required to hold at least 12 percent core Tier 1 capital relative to risk-weighted assets by 2015. They may this year have to raise the risk weights on home loans to 25 percent from 15 percent and also face a countercyclical buffer. The Swedish Bankers’ Association on March 19 told banks to force households to amortize on all mortgages that exceed 70 percent of their property’s value, from a previous 75 percent.
Anderson said she feels a “certain worry” over household debt, blaming the government for abolishing property taxes without enacting countermeasures to stem a build-up. The central bank forecasts household debt will grow to an average 180 percent of disposable incomes in 2016 after having almost doubled since the mid-1990s.
“What’s most urgent and what would solve a lot of problems in parallel -- the housing shortage but also the high indebtedness -- is to get construction going,” she said.
She would also consider forcing households to amortize more on their mortgages and rejected doing away with tax deductions on mortgage payments.
The Social Democrats oppose the government’s ambition to sell state-owned SBAB, as well as a stake in TeliaSonera AB (TLSN), to reduce public debt, Andersson said. The next government should find other ways to cut state debt, she said.
Sweden has government debt at 41.5 percent of gross domestic product compared with 73 percent after its financial crisis in the early 1990s.
While the current government has managed to steer the nation largely unscathed through Europe’s debt crisis, it estimated last month that further income tax cuts and stimulus will push the deficit to 1.9 percent of GDP this year, the widest in 18 years. It also predicted it won’t return Sweden to its budget surplus target of 1 percent until 2018, a forecast that Andersson called a “fantasy.”
The economy, home to companies such as Hennes & Mauritz AB (HMB), grew just 1 percent last year, weighed down by slack demand from recession-wracked Europe. The government last month predicted unemployment will be at 7.7 percent this year, compared with 8.0 percent last year. It will fall to 7.3 percent next year.
Economic growth will be 2.5 percent this year and 3.5 percent next year, according to the government.
The election has now become a contest in fiscal responsibility, with the government pledging tax increases to pay for more education initiatives. The Social Democrats also have pledged to boost education and also to lower Scandinavia’s highest unemployment rate.
Still, they will also seek to further bring down state debt, Andersson said.
“It’s not obvious that 40 percent is some kind of a low point for where public debt should be,” she said. Returning to surplus “must happen in steps” as “you must adapt fiscal policies to the economic cycle,” she said.
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