Banks Face Tougher Risk Weights as Borg Seeks Swedish Probe

Finance Minister Anders Borg
Finance Minister Anders Borg argues Sweden needs stricter rules for its banks than those set by Basel because a financial industry that’s four times the size of the economy makes taxpayers vulnerable to banking system shocks. Photographer: Andrew Harrer/Bloomberg

Swedish Finance Minister Anders Borg said the financial regulator needs to look into raising risk weights on banks’ mortgage assets as he suggested levels may still be too low after being tripled this year.

“This is something the Financial Supervisory Authority should evaluate,” Borg said yesterday in an interview in Stockholm. “One should really assess whether they need to be increased.”

Borg, who says he’ll only back a European banking union if Sweden is free to pursue its own regulatory targets, has championed the nation’s drive to impose some of the world’s strictest capital rules. Though Sweden’s four biggest banks already exceed national reserve requirements, Borg argues lenders may need to do more to guard against property market risks and record household indebtedness.

“One should really make a new assessment,” he said.

Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB have spent the past few years building bigger reserves than their competitors elsewhere. Handelsbanken is now the best-capitalized major bank in the European Union under Basel III rules, with a core Tier 1 capital ratio of risk-weighted assets of 17.8 percent at the end of June.

Bank Shares

Shares in Swedbank, Sweden’s biggest mortgage lender and the bank whose capital requirement would increase most if risk weights on home loans are raised, fell today while an index of European financial stocks gained. Swedbank lost as much as 1.1 while Bloomberg’s 44-member index of European banks gained 0.9 percent.

The FSA has taken multiple steps to try to limit financial industry risks, in part after credit growth exceeded levels the government said were safe. In October 2010, the regulator capped mortgages at 85 percent of a property’s value and this year raised risk weights on mortgage assets to 15 percent from as low as 5 percent.

While the mortgage cap helped slow credit growth to 4.5 percent last year -- the lowest level since the mid-1990s -- from levels above 10 percent between 2004 and 2008, the pace of borrowing has started to accelerate again. Household credit growth was 4.7 percent in June.

“Swedish household borrowing shows signs of accelerating” and “the rise in house prices suggests that this trend will continue throughout the year,” SEB said July 15. Growing household indebtedness “underscores the need for further macro-prudential measures.” SEB estimates credit growth will be as high as 5.5 percent by the end of the year.

Basel Study

Sweden’s four biggest banks need to hold at least 10 percent core Tier 1 capital of their risk-weighted assets this year, with the minimum requirement rising to 12 percent in 2015. That compares with a Basel Committee on Banking Supervision minimum target of 7 percent effective from 2019.

Central bank Governor Stefan Ingves, who is also the Basel committee chairman, has backed Borg in his call for higher risk weights. The Basel committee, which sets global banking standards, is taking a closer look at risk weights after finding wide variations in a study of 32 lenders, Ingves said in July.

Borg argues Sweden needs stricter rules for its banks than those set by Basel because a financial industry that’s four times the size of the economy makes taxpayers vulnerable to banking system shocks. Swedes owe their banks almost twice their disposable incomes, the central bank estimates. That’s the most on record.

‘Still Challenging’

“The indebtedness from the household side in Sweden is on the high side and we also have, on a relative basis, a large banking system, so the financial stability issues are very important,” Borg said. “We’ve seen an easing of house prices and think we should expect that to continue in the years to come. House prices should not increase very much in Sweden moving ahead.”

Sweden’s $550 billion economy, home to Hennes & Mauritz AB and Ikea, will grow 1.3 percent this year and expand 2.1 percent in 2014, the government said last month. Policy makers are trying to revive domestic demand as the export-reliant economy struggles to adjust to a shrinking market in the euro area, which the European Commission estimates will see its economy shrink 0.4 percent this year.

“There’s still a challenging situation for the Swedish economy,” Borg told reporters yesterday. “We must try to protect the economy and inject more energy.”

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