Swedish Banks Face 25% Risk Weights as Watchdog Fights Debt

Estate Agent Window in Stockholm
Sweden, which is grappling with record household debt levels and soaring house prices, has taken numerous steps to try to cool its property market. Photographer: Casper Hedberg/Bloomberg

Sweden may raise risk weights further after tripling requirements this year as the regulator warns more steps may be needed to avert a housing bubble.

The Financial Supervisory Authority in Stockholm said risk weights on mortgages may be raised to 25 percent from 15 percent if household debt continues to grow, according to a statement today. The FSA urged banks to limit dividends and use surplus cash to pad buffers as risks in the real estate market grow.

“The high level of debt among Swedish households poses a risk to individual households and, in the long run, also to financial stability,” the FSA said. “Major Swedish banks have sufficient resilience to a sharp downturn in the economy, but their considerable dependence on market funding continues to be a risk.”

Sweden’s largest banks are already subject to some of the world’s strictest reserve rules and must hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015. While Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB already exceed that level, the government had warned of stricter requirements to protect taxpayers from financial industry losses.

Sweden, which is grappling with record household debt levels and soaring house prices, has taken numerous steps to try to cool its property market. Measures have included capping mortgages at 85 percent of property values and earlier tripling mortgage risk weights.

Housing Market

While the lending cap helped slow loan growth, borrowing has started to accelerate again and house prices are still climbing. That’s left Swedes with debt equivalent to more than 170 percent of disposable incomes, the highest level on record.

Apartment prices, which more than doubled since 2000, increased 14 percent in the 12 months through October, according to Svensk Maeklarstatistik, which publishes monthly data. The price of single-family houses rose 5 percent since October last year, it said. State-owned mortgage bank SBAB warned on Oct. 18 that prices are likely to continue rising and that there is a risk of overheating.

Dividend Restraint

“Household debt consists mainly of mortgages and is very high both from a historical and an international perspective,” the FSA said. “If the debt growth rate continues to be high, measures such as a targeted capital requirement in the form of a higher risk-weight floor on mortgages and the implementation of a countercyclical buffer may become relevant.”

Still, the FSA said that raising the risk-weight floor on mortgages to 25 percent would reduce “the need to fully utilize the countercyclical capital buffer.”

The new risk-weight floor could be in place by the middle of 2014, with the counter-cyclical buffer likely to be somewhere between zero and 2.5 percent, Martin Andersson, the director-general of the regulator, said today in an interview. While that buffer probably won’t need to exceed 2.5 percent, that’s still a possibility, he said.

SEB welcomed the targeted approach of raising risk weights.

“It’s positive that this measure is directed so that it focuses on mortgages and doesn’t raise overall requirements,” Anna Helsen, a spokeswoman for SEB, said. “It’s good that measures are put in place where they should be put in place.”

Stress Tests

Henrik Westman, a spokesman for Handelsbanken, and Erik Durhan, a spokesman for Nordea, both said the banks would adjust to any new regulations. Swedbank wasn’t immediately available for a comment.

Stress tests released today also show “that the banks’ margins above the buffer requirements are small,” the FSA said. “Since the capital requirements could be raised in the future as a result of new measures, the FSA believes that the banks in the long run should be cautious when distributing profits to shareholders and buying back shares.”

The stress test found that the four big banks would face total credit losses of 260 billion kronor ($39 billion) in 2014, 2015 and 2016. That would be less than was lost during Sweden’s banking crisis of the early 1990s or in the Baltics during the global financial crisis, the FSA said.

Loss Scenarios

Nordea and SEB would face the highest impairments in the stressed scenario, with losses equivalent to 1.34 percent of total lending at Nordea in both 2014 and 2015 and 1.23 percent and 1.22 percent at SEB. That would lower their ratios to such an extent that the banks would have to use the capital conservation buffer, which would result in limits on dividends and bonuses, the FSA said.

Handelsbanken and Swedbank would post profits in a stressed scenario in the 2014-2016 period, with total net income of 376 million kronor at Handelsbanken and profit of 7.02 billion kronor at Swedbank. Nordea would post a loss of 3.87 billion kronor while SEB’s loss would be 2.13 billion kronor, according to the test.

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