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Mortgage Risk Under Fire in Nordics as Bubbles Fought

House prices in Norway have doubled since 2002 to reach a record, according to the Norwegian Association of Real Estate Agents. Photographer: Tomm W. Christiansen/Bloomberg
House prices in Norway have doubled since 2002 to reach a record, according to the Norwegian Association of Real Estate Agents. Photographer: Tomm W. Christiansen/Bloomberg

Dec. 18 (Bloomberg) -- Sweden and Norway say their banks have underestimated the risk in their mortgage portfolios and will need to set aside more capital to guard against losses as the two nations move to stop debt bubbles forming.

Norway’s government said yesterday it wants to triple the risk weights assigned to mortgage assets, bringing the minimum requirement to 35 percent. That followed a similar decision in neighboring Sweden, where the regulator on Nov. 26 set the minimum risk-weight requirement at 15 percent, almost three times existing levels.

As central banks respond to the crisis in Europe with interest rate cuts, households are amassing record amounts of debt. In Norway, the world’s fourth-richest nation per capita, private debt will swell to more than 200 percent of disposable incomes next year, while Sweden’s debt load hit a record 173 percent this year, the countries’ central banks estimate. That’s putting pressure on regulators to ensure banks have buffers that can withstand sudden adjustments in asset prices.

“There is a substantial risk that there is a housing bubble” in Norway, Harald Magnus Andreassen, chief economist at Swedbank First Securities in Oslo, said in a phone interview. “If you look at a graph, you would be quite confident that something could be wrong.”

Overvalued Assets

House prices in Norway have doubled since 2002 to reach a record, according to the Norwegian Association of Real Estate Agents. Sweden’s National Housing Board has warned that the property market in the largest Nordic economy is in the grip of a bubble. Bengt Hansson, an analyst at the board, estimates Swedish house prices are 20 percent overvalued, adjusting for the effect of inflation.

“This is based on an optimism regarding rising prices in the future and low interest rates in combination with very generous lending policies,” Hansson said by phone yesterday.

Yet banks argue that stricter capital and risk-weight rules will put them at a competitive disadvantage relative to their rivals elsewhere in Europe.

In Sweden, Nordea Bank AB, Swedbank AB, SEB AB and Svenska Handelsbanken AB already need to meet a minimum core Tier 1 capital requirement of 10 percent next year, rising to 12 percent in 2015. That compares with the 7 percent set by the Basel Committee on Banking Supervision.

Extra Capital

Risk weights, as defined by Basel II regulations, on mortgage loans in Norway are now 11 percent, compared with 15 percent in Germany and as high as 35 percent in Spain, according to data provided by Sweden’s central bank. Norway’s proposed 35 percent floor would be the highest in the Nordic region.

Raising risk weights to 15 percent in Sweden would force the largest banks there to set aside an additional 20 billion kronor ($3 billion) in capital, the FSA estimates. Norway’s regulator hasn’t provided estimates for the cost to its banks.

Handelsbanken and Swedbank had core Tier 1 capital ratios at 17.9 percent and 17.3 percent, respectively, of their risk-weighted assets at the end of September. SEB’s core Tier 1 ratio stood at 16.5 percent at the end of the third quarter, while Nordea’s was 12.2 percent.

DNB’s common equity Tier 1 capital ratio was 11.4 percent of risk-weighted assets last quarter, not including so-called transitional rules. The bank’s shares slipped 1.1 percent yesterday, and lost a further 0.3 percent to trade at 70.05 kroner as of 9:50 a.m. in Oslo.

Customer Pays

Lenders will respond by raising customer rates, Jan Digranes, head of the banking and capital markets department at Finance Norway, which represents about 180 financial institutions, said by phone from Oslo. “Banks have to increase interest rates to increase net earnings and they will have to discuss whether it will be necessary to issue more capital to comply with the new requirements.”

DNB ASA, Norway’s biggest bank, hasn’t changed its financial targets based on yesterday’s announcement. The government’s proposal, which the regulator is due to follow up on in March, sets risk weights “too high,” DNB spokesman Thomas Midteide said in an e-mailed reply to questions.

Both Sweden and Norway are pushing stricter regulatory requirements after enduring a banking meltdown in the 1990s. That credit event required the Swedish government to step in and take control of toxic property loans. Nordea, Scandinavia’s biggest bank, is the product of a series of state-engineered mergers following that crisis.

Housing Adjustment

Household debt levels now are even higher than they were at their peak back then, according to Michael Wolf, chief executive officer of Sweden’s largest mortgage lender Swedbank AB. Wolf said in a Dec. 4 interview that Sweden’s housing market probably faces “some sort of adjustment.”

Household debt levels in Norway and Sweden have continued to rise even after both countries introduced an 85 percent cap on loans relative to property values. That’s spurred discussion among central bankers on the extent to which monetary policy should be deployed to curb housing-market imbalances. Swedish central bank Governor Stefan Ingves, who is also the chairman of the Basel Committee, has argued in favor of using policy interest rates to stem the threat of housing bubbles.

Yet Ingves, like his counterparts elsewhere in Europe, is finding his freedom to raise rates curtailed by the fallout of the debt crisis further south. His bank cut its main rate today by a quarter point to 1 percent.

Policy makers in Norway and Sweden need to decide whether the imbalances in their housing markets are temporary or long term. That could guide them to the right response, according to Andreassen at Swedbank.

“Risk weighting is more a structural argument, in the sense that if it is too cheap for banks to extend credit to housing then you have a risk at all times to have too much debt,” he said. “Usually you would think of the interest rate as a business cycle adjustment.”

To contact the reporter on this story: Josiane Kremer in Oslo at

To contact the editor responsible for this story: Jonas Bergman at

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