Swedish regulators should consider raising risk weights on mortgage assets above the 15 percent proposed last year to help the industry pad itself against potential losses, Riksbank Governor Stefan Ingves said.
While existing plans to impose stricter bank rules have strengthened Sweden’s financial system, there remain “several areas that require further examination,” Ingves said today in a speech in Stockholm. These include banks’ ability to meet short-term liquidity needs, as well as whether lenders should cover costs incurred by the central bank to hold foreign reserves needed to shield the industry from currency risks, he said.
Sweden’s financial regulator last year proposed tripling risk weights applied to mortgage assets as part of a broader drive to stem imbalances in the housing market. In 2010, Sweden capped new mortgages at 85 percent of property values. Though the measures helped slow borrowing growth, property prices are still rising and household debt will hit a record 173 percent of disposable incomes this year, the central bank estimates.
“The Riksbank supports the proposal for a risk-weight floor of 15 percent -- we also believe that there are good reasons for analysing whether this floor needs to be raised even further,” said Ingves, who is also the chairman of the Basel Committee on Banking Supervision. “One important reason is that the public sector and non-financial companies would have to bear a large part of the risk if the debt-servicing ability of the households were to weaken. Banks’ risk weights are very low.”
Raising risk weights to 15 percent would require Sweden’s largest banks to set aside an additional 20 billion kronor ($3.1 billion) in capital, led by 7.2 billion kronor at Swedbank AB and 5.5 billion kronor for Svenska Handelsbanken AB, the regulator said Nov. 26. Risk weights in Sweden “dropped sharply” after 2007, when banks were allowed to use internal models based on Basel II, the watchdog said then.
Raising Swedish risk weights to 15 percent from as low as 5 percent previously would still leave smaller mortgage asset buffers than in Germany, Italy and Spain, as well as parts of eastern Europe, according to the Riksbank.
In neighbouring Norway, the Finance Ministry in December proposed raising risk weights to 35 percent. Home prices in western Europe’s biggest oil exporter rose an annual 8.5 percent last month, according to the Norwegian Association of Real Estate Agents. Household debt will grow to more than 200 percent of disposable incomes this year, the central bank estimates.
While slowing credit growth in Sweden suggests the nation has come further than Norway in addressing signs of overheating in its housing market, regulators have signaled further steps may be needed.
A report this month from the Financial Supervisory Authority in Stockholm showed that the average Swedish household needs 140 years to pay down its mortgage debt, at the current pace of amortization. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay back their loans, the report showed. Sweden needs to do more to improve amortization rates, Ingves said.
Before regulators force banks to impose amortization requirements, “it may be worth reviewing other aspects of the provision of loans,” Ingves said. Such aspects would include demands on borrowers to “have the financial scope to amortize their loans at a certain rate,” said Ingves.
“Mortgages were amortized to a greater extent a few decades ago, at the same time as inflation automatically reduced the real debt ratio,” Ingves said. “I believe that more amortization may be needed, especially in the current situation with low and stable inflation.”