Nordics Need Tighter Lending Rules to Fortify Banks, IMF Says

The Nordic region should continue tightening mortgage lending to ensure banks have enough funds to withstand losses, the International Monetary Fund said.

Sweden, Norway, Denmark and Finland should raise risk weights for mortgages “to ensure adequate capital buffers for banks while providing sufficient liquidity in the system,” the Washington-based organization said in a report published today.

“The mix of large and integrated banks, high household debt and elevated property prices creates shared regional risks,” the IMF said. There would be “merit in deeper regional cooperation and greater clarity on common bank resolution procedures, even as the European financial architecture continues to evolve.”

Sweden should restrict the availability of interest-only mortgages while Finland should make its loan-to-value recommendation on home loans binding, the IMF said. In Norway, where housing prices have doubled over the past decade, the IMF recommended addressing an overheating property market with tighter regulations.

Rising household debt has become a preoccupation for policy makers in the region, with credit ratios rising to about 200 percent of disposable income in Norway, about 170 percent in Sweden and 117 percent in Finland. Danes bear the world’s highest private debt burden, at 310 percent of disposable incomes, the Organization for Economic Cooperation and Development estimates.

‘On Track’

“Norway is on track to implement a counter-cyclical capital buffer in mid-2014 and Sweden moved to increase capital and liquidity buffers and introduced a risk-weight floor for mortgages,” the IMF said. Sweden, the region’s largest economy, should continue with accommodative monetary policy, “assuming household credit growth remains contained.”

Swedish banks must hold at least 10 percent core Tier 1 capital of risk-weighted assets this year, with the minimum requirement rising to 12 percent in 2015. Risk weights determine how much capital banks must set aside for mortgage lending. Norway plans to impose higher core capital requirements on banks than those set by international regulators. It’s targeting core capital requirements of 10 percent of risk-weighted assets by July next year, up from 9 percent. For systemically important banks, the target will rise to 11 percent in 2015 and 12 percent in 2016.

The Riksbank today kept its main lending rate unchanged at 1 percent for a fourth consecutive meeting. It has sought to balance policy to address accumulating debt without stifling an economic recovery. Sweden’s economy will expand 1.1 percent this year and 2.3 percent in 2014, while Norway’s mainland economy, which excludes oil and gas production and shipping, will grow 2.8 percent in both years, according to the IMF.

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