Swedish Finance Minister Anders Borg called for risk weights on banks’ mortgage loans to be raised in response to rising household indebtedness as the government also pushes ahead with stricter capital rules than elsewhere.
“One can of course continue to discuss what needs to be done but I would then rather prefer that we perhaps should look at risk-weights and which liquidity requirements we have on the banks in their financing,” Borg told reporters at a press conference in Stockholm today. “That’s perhaps what I can see in the foreseeable future we have reason to consider.”
Borg is pushing through tougher capital rules than the Basel Committee on Banking Supervision and the European Banking Authority, requiring Swedish lenders to target 10 percent core Tier 1 buffers of their risk-weighted assets from January and 12 percent from 2015. At the same time, risk weights on mortgages in Sweden are among the lowest in Europe, standing at less than 10 percent, compared with about 35 percent in Spain and above 15 percent in Germany, according to a June 1 report from the central bank.
While the low Swedish risk weights are due to historically low loan losses on mortgages, they have “recently been called into question as they do not take into account the increased indebtedness among households,” the Riksbank said in the report. As a result, the Swedish Financial Supervisory Authority is looking at possibilities to increase the capital adequacy requirement for mortgages in Sweden, which will probably lead to higher risk weights for Swedish mortgages, said the Riksbank.
“According to the Riksbank’s calculations, an increase in the average risk weight for mortgage lending in Sweden to a level of 10 to 20 percent would lead to the major banks’ common equity Tier 1 capital ratios falling by up to 2.5 percentage points, all else being equal,” the central bank said.
Sweden’s FSA said in June it delayed a proposal for new risk weightings on mortgages that was originally planned to be put forward this summer as negotiations in the European Union on new capital requirements for banks dragged on.
The stricter capital rules for Swedish lenders, including Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB, compare with the Basel Committee’s core capital target of at least 7 percent, while the European Banking Authority has set a temporary 9 percent target for some banks.
“It’s necessary for us to proceed with tougher capital requirements as our banks have large foreign funding, we have indebted households and we have a big exposure to the Baltic states,” Borg said today. The stricter rules “result in a more responsible lending; it cuts liquidity risks and it also means that we become more resistant to potential problems in the Baltic states even if we don’t see any such right now.”