As Sweden’s households continue to add to their record debt burdens, the central bank and the financial regulator are marking out their territories.
The Riksbank, the world’s oldest central bank, argues it’s time to broaden its powers to monitor system-wide bank risks. The nation’s financial watchdog says it’s already doing that.
Riksbank Governor Stefan Ingves, who is also the chairman of the Basel Committee on Banking Supervision, has repeatedly warned that household credit growth is too fast. Yet the bank, which targets price stability, says its policy interest rate is too blunt a tool to steer such risks. Ingves’s deputy, Kerstin af Jochnick, said last month the solution is the creation of a “functioning framework for macro-prudential policy.” No need, says the regulator.
“Macro-prudential policy is often presented as a future question, but it’s not a new field for the future,” Martin Andersson, head of the Financial Supervisory Authority, said in an interview in Stockholm. “It’s a very central part of our supervision.”
Similar feuds are playing out across Europe as central bankers try to stem asset bubbles they say they lack the tools to tackle. At the same time, regulators from Europe to the U.S. are defending their roles amid criticism they failed to identify many of the symptoms that led to the crisis. Yet merging bank oversight with monetary policy may create new risks, according Roger Josefsson, chief economist at Danske Bank A/S in Stockholm.
“The Riksbank has a really important policy area, stabilization policy, to stabilize economic cycles and the inflation target,” Josefsson said by phone. “That’s a sufficiently large area for an undemocratic institution.”
Josefsson argues that macro-prudential policy should come under an elected legislature. “Leave it to the FSA, which answers to the government,” he said.
Still, central banks are succeeding in extending their reach. In Germany, the Bundesbank says it will assume the lead role in the country’s Financial Stability Board. The creation of a single European bank supervisor inside the European Central Bank has also fueled debate in the region. Sweden’s government has been a particularly outspoken critic.
Sweden, a AAA rated nation with a government debt load that’s less than half the average in the euro area, has managed to steer clear of the region’s fiscal turmoil. Policy makers are now trying to ensure low interest rates born of the global crisis don’t fuel an asset bubble in their backyard. It’s a dilemma that’s also playing out in other rich nations.
Switzerland this year ordered its banks to hold 1 percent additional capital against risks posed by the biggest property boom in two decades. Norway in December proposed tripling the risk weights banks apply to mortgage assets to 35 percent and is moving toward a cyclical buffer framework with the central bank as an adviser.
Sweden’s FSA in 2010 introduced a cap on mortgage lending that limits loans to 85 percent of a property’s value. The regulator last year proposed tripling risk weights on mortgage assets to 15 percent. Sweden’s biggest banks, including Nordea Bank AB, will need to set aside 12 percent core Tier 1 capital by 2015. Basel III rules set a 7 percent minimum by 2019.
Andersson in the Feb. 13 interview said he’s ready to do more should the caps introduced to date prove inadequate.
“Several of the measures we’ve introduced in the past few years have been the use of what today is often called macro-tools,” Andersson said.
While those steps slowed the pace of household borrowing, indebtedness in the largest Nordic economy has continued to swell, reaching 173 percent of disposable incomes last year, the central bank estimates. That compares with a peak of 135 percent during Sweden’s 1990s banking crisis.
Though the real estate market has cooled in the past two years, property prices have soared about 25 percent since 2006. Apartment prices jumped an annual 12 percent in the three months through January, according to data from Maeklarstatistik.
“In the absence of a clear framework for macro-prudential policy, we have discussed the risks linked to the high level of household debt in Sweden at our monetary policy meetings,” af Jochnick said. “This is because we have wanted to avoid the consequences that many other countries have experienced as a result of high indebtedness and falls in house prices.”
Af Jochnick argues Sweden should either hand responsibility for macro-prudential policy to the central bank, or allow the central bank to have a supervisory role over a number of institutions. Such a system, based on the German model, would give the Riksbank a veto right over any decisions made, or the power to select a chairman.
Andersson at the FSA disagrees and in a subsequent speech responded that micro and macro policies can’t be separated and need to be addressed from within the same entity.
“What we need for the future is to strengthen and develop the way we cooperate around macro-prudential risks, but it would be unfortunate if many authorities and other parties should apply these tools from different perspectives,” he said. “In the end, it’s about regulating individual companies, and there we already have a system.”