Annika Falkengren, the chairman of the Swedish Bankers’ Association, is in talks with her members to target reducing mortgage debt.
Falkengren, who is also chief executive officer of SEB AB (SEBA), is working on an industry-wide amortization plan to address growing indebtedness, she said yesterday in an interview. The goal is to set a standard that requires borrowers to cut mortgage debt to less than the 70 percent threshold of home values Swedish banks currently target, she said.
“What we’re discussing at the bankers’ association is that we probably should have some kind of joint guidelines,” she said at SEB’s headquarters in Stockholm. “What we’re discussing now is very much amortization further down than 70 percent.”
A joint approach will help ensure that banks don’t lose clients to competitors when taking a tougher stance on lending, Falkengren said. Her warning follows the experiences of Sweden’s 2009 banking crisis in the Baltics, where a housing crash led to Europe’s steepest economic collapse. Back then, the lack of industry coordination aggravated the situation, Falkengren said.
SEB’s decision years earlier to scale back in Latvia, Lithuania and Estonia initially resulted in lost market share as other banks continued to grow. Though SEB ultimately suffered smaller losses than Swedbank AB (SWEDA), the biggest Baltic lender, both firms incurred a surge in impairments.
“We just lost a lot of market share -- all clients went to other banks,” Falkengren said. “What we learned from the Baltic experience is that there’s no point in one bank starting to do something because this market is highly competitive and it’s easy to move your loan.”
At stake now is Sweden’s financial health. Household borrowing is at a record high with homeowners weighed down by debt equivalent to 370 percent of disposable incomes, the central bank estimates. Policy makers this month cut the benchmark repo rate by half a percentage point to 0.25 percent to fight back the threat of deflation, making credit even cheaper. The latest borrowing data show credit growth accelerated to an annual pace of 5.3 percent in May.
The industry needs to synchronize its moves because that’s how “you implement a new culture,” Falkengren said. “One participant doesn’t really change the way customers act.”
SEB has already taken steps to limit client debt burdens. Customers are urged to pay off their home loans within 50 years and total borrowing is capped at five times household income. Only 4 percent of SEB’s mortgages exceed 70 percent of home values, Falkengren said. The Swedish financial regulator estimates that 32 percent of homeowners nationwide had loans worth more than 75 percent of their properties in 2013.
While Swedish policy makers have already agreed on several measures, including capping mortgages at 85 percent of property values, raising risk weights on mortgages and introducing some of the world’s strictest capital rules, Finance Minister Anders Borg has warned that further steps could be needed. Those may include forcing households to amortize home loans faster.
The International Monetary Fund on June 13 warned Sweden it needs to do more to stem household debt growth, including contemplating binding maximum amortization periods for new home loans, a debt-service-to-income limit as well as a reduction in the loan-to-value cap to 75 percent from 85 percent. The government should also gradually reduce tax deductions on mortgage interest and reform property taxes, it said.
“To stem the increase in already high levels of household debt, moving beyond credit supply measures to directly contain mortgage demand is a priority,” the IMF said in the report.
If Falkengren is successful in her pursuit of a joint amortization approach for Sweden’s largest banks, regulation may not be necessary. The Swedish Bankers’ Association in March lowered its mortgage amortization guideline to 70 percent from 75 percent.
The goal is finding “something that we all think is a good way to take care of our clients,” she said.
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