Negative Rates Trigger Swedish Debt Warning Amid Policy Backlash

  • Sweden's FSA says households `extremely' exposed to NIRP
  • Regulator wants mandate to enlarge macroprudential toolbox

While the jury is still out on the power of negative rates to revive inflation, there seems to be little doubt as to what the policy is doing to private debt burdens.

In Sweden, where the central bank this month cut the benchmark repo rate to minus 0.5 percent, the financial regulator is warning that rarely before have households been so exposed to shifts in borrowing costs.

“Monetary policy is extremely potent now,” Erik Thedeen, director-general of the Financial Supervisory Authority in Stockholm, said in an interview on Thursday. “The smallest rate hike will hit sharply against households.”

Though the fallout ultimately depends on the point in the economic cycle at which rates are raised, the figures now available show that households are “very sensitive,” Thedeen said.

Policy Dilemma

The comments get to the heart of the dilemma facing Sweden’s central bank. After years of warning that excessively low rates risked creating debt bubbles, Riksbank Governor Stefan Ingves in mid-2014 bit the bullet and made reviving inflation his sole focus. But while house prices look inflated, consumer prices have failed to grow at the central bank’s 2 percent target for the better part of half a decade. For much of 2014, Sweden was caught in a period of persistent deflation.

In its latest monetary policy statement, the Riksbank warned that extremely low rates come with risks to the mortgage market. It urged parliament and the regulator to look for ways to counter the effect of negative rates on credit growth and “reduce the incentives for household to take on debt.” Swedish households owe their creditors about 180 percent of their disposable incomes, the highest level in the country’s history.

“If no measures are taken, this, in combination with the low interest rate level, will further increase the risks,” the central bank said on Feb. 11, after cutting its main rate by 15 basis points.

More Tools

The regulator now says it needs more tools if it is to keep risks at bay. In a speech on Thursday, Thedeen said having the mandate to propose a debt-to-income ratio might be one such tool. Efforts to introduce an amortization requirement were initially hampered after the courts blocked a proposal to force household debt payments. A revised plan will now be introduced in June, almost two years after the industry first called for the measure.

The need for curbs on debt growth has “increased compared to a few months ago,” Thedeen told Bloomberg. “Household debt continues to increase and the development is going in the wrong direction.”

Financial Markets Minister Per Bolund says the government wants to “give the FSA the tools they need.” His ministry is planning talks with the opposition to help empower the regulator. “We are worried about the development in household debt,” he said in an interview on Friday.

In a separate report this week, the Swedish regulator said banks using internal models to calculate risk weights were in some cases underestimating the probability of potential losses. The Stockholm-based FSA sets some of Europe’s highest capital requirements.

Bank Risk

Nordea Bank AB, Scandinavia’s biggest lender, is required to hold a minimum of 20.1 percent in regulatory capital relative to its risk-weighted assets. The bank reported 21.6 percent at the end of last year. The highest requirement is borne by Swedbank AB -- Sweden’s biggest mortgage bank -- at a minimum of 24.8 percent of risk-weighted assets.

Over the past year, the FSA has observed “deficiencies” in the way Sweden’s banks design their internal models with a view to gauging risks, the regulator said.

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