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Sweden FSA Proposes Tripling Risk Weights on Mortgage Loans

Sweden’s financial watchdog proposed tripling the money that banks have to set aside to protect against housing loan losses as debt burdens grow in the largest Nordic economy.

Lenders including Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB need to have a mortgage risk-weight floor of 15 percent, the Stockholm-based Financial Supervisory Authority said in a statement today. The largest banks currently have risk weights on mortgages as low as 5 percent, the FSA said. The regulator had previously indicated it may boost the weights to between 10 percent and 20 percent.

“The requirements bring about slightly higher costs for the banks, which in turn affects interest rates for non-financial corporations and households,” the FSA said. “At the same time, the stricter requirements will lead to the banks being viewed as stable and resilient, which gives cheaper funding and partly counteracts the effect of higher costs.”

The proposed requirements, which are now subject to public review, would mean the largest banks would need to set aside an additional 20 billion kronor ($3 billion), including 7.2 billion kronor for Swedbank and 5.5 billion kronor for Handelsbanken, the regulator estimated. Risk weights in Sweden have “dropped sharply” since 2007, when banks were allowed to use internal models based on Basel II, the FSA said. The weights in Sweden are among the lowest in Europe and compare with an average of more than 15 percent in Germany, according to the central bank.

Consumer Debt

Sweden’s central bank has warned against rising consumer debt levels, which have grown to about 170 percent of disposable incomes. Household debt by that measure mustn’t exceed 200 percent, Governor Stefan Ingves said this month. The bank predicts the level will remain largely unchanged at about 170 percent through 2015, after having risen from 90 percent in 1996, provided it doesn’t cut rates further.

While household lending growth has slowed in Sweden since a cap on mortgages was introduced in 2010, mortgage lending growth still stood at an annual 4.6 percent in the third quarter. While that’s the slowest since at least 2002, the pace is exceeding the euro-area where growth was close to zero, according to the Swedish FSA.

Swedish regulators are also tightening capital ratio requirements. The banks already have ratios that exceed the 12 percent core Tier 1 capital they need to hold by 2015, and next year’s 10 percent target. Handelsbanken and Swedbank had core Tier 1 capital ratios of 17.9 percent and 17.3 percent, respectively, at the end of September. SEB’s core Tier 1 ratio stood at 16.5 percent, while Nordea’s was 12.2 percent.

The new rules would lower Swedbank’s core capital ratio by 1.5 percentage points and Handelsbanken’s by 1.1 percentage points, the FSA said. Nordea would need to set aside 3.4 billion kronor and SEB 2.3 billion kronor, cutting their ratios by 0.2 percentage point and 0.4 percentage point, respectively. The calculations haven’t been adjusted for the effects of Basel III.

“This is approximately what we had expected,” Peter Borsos, a spokesman for Swedbank, said by telephone. “We have the capital we need, as we had set this aside already. Setting aside more capital will marginally lead to higher costs for the banks, which affects the rates for households.”

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