Debt Bubble Born of Easy Cash Prompts Swedish Rule Review

Sweden’s financial regulator says it’s ready to tighten restrictions on mortgage lending to stop banks feeding household debt loads after a cap imposed during the crisis failed to stem credit growth.

“Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Martin Andersson, the director general of the Financial Supervisory Authority, said in an interview in Stockholm. “If that would happen, we can utilize the two tools we do have again, or look at other alternatives.”

The FSA is ready to enforce a cap limiting home loans relative to property values to less than the 85 percent allowed today, Andersson said. Banks may also be told to raise risk weights on mortgage assets higher than the regulator’s most recent proposal, he said. The watchdog has other measures up its sleeve should these two prove inadequate, he said.

As most of the rest of Europe grapples with austerity and recession, the region’s richer nations, including Sweden, Norway and Switzerland, have been battling credit-fueled housing booms. And with southern Europe sinking into a state of deeper economic decline, the prospect of monetary tightening remains remote. That’s adding to pressure on Swiss and Scandinavian regulators to counter the effect of low interest rates on their markets.

Switzerland this month ordered its banks to hold 1 percent additional capital against risks posed by the country’s biggest property boom in two decades. Norway in December proposed tripling the risk weights banks must use on mortgage assets to 35 percent.

Crisis Prevention

Sweden has already pushed through stricter lending rules as policy makers try to avoid a repeat of the nation’s 1990s real estate and banking crises. The FSA in October 2010 introduced its 85 percent loan-to-value limit, a move that helped slow borrowing growth from more than 10 percent between 2004 and 2008, to 4.5 percent in December. That’s still too fast a pace, according to Finance Minister Anders Borg, who argues credit growth shouldn’t exceed 3 percent to 4 percent.

The regulator last year also proposed tripling the risk weights banks apply to mortgage assets to 15 percent. While the pace of credit growth has eased, household debt still reached a record 173 percent of disposable incomes last year, the central bank estimates.

That far exceeds the 135 percent peak reached at the height of Sweden’s banking crisis two decades ago. Back then, the state nationalized two of the country’s biggest banks after bad loans wiped out their equity. Nordea Bank AB is the product of a series of state-engineered mergers born of that crisis.

‘A Proxy’

This time, some of the banks themselves are withholding credit out of concern debt levels are too high. The turmoil in the 1990s “gives you at least a proxy for what might be sustainable,” Michael Wolf, chief executive officer of Sweden’s largest mortgage lender, Swedbank AB, said in December. He anticipates “some sort of adjustment” to the housing market, he said then.

Five-year credit-default swaps on Swedish debt rose to their highest since November today, gaining as much as three basis points to 22 basis points. A higher swap rate signals investors are less confident in the credit quality of an issuer.

Though FSA measures to tighten lending have helped cool the real estate market over the past two years, property prices have soared about 25 percent since 2006.

1990s Crisis

“What we saw in the 1990s crisis was that if you bought a home with a 90 percent debt ratio in 1991, it took about six or seven years until you were back at a level where you had a property that was worth more than your mortgage,” Andersson said in the Feb. 13 interview. “That is a very long time.”

Riksbank Governor Stefan Ingves, who is also the head of the Basel Committee on Banking Supervision, has warned against keeping interest rates low for too long.

Though his bank held its main rate at 1 percent on Feb. 13, policy makers cautioned that “household debt as a percentage of income is still high and the risks this entails for the economy in the long run still remain.”

The FSA is also battling the consequences of low rates in Sweden’s life insurance industry. The regulator today extended by six months a deadline for removing a floor on discount rates, meaning pension funds and life insurers will be protected from declines in yields that inflate the value of their liabilities, until the end of the year. From then on, Sweden will move to so-called Solvency II rules.

Debt Repayment

Ingves has discussed forcing homeowners to amortize their mortgages as an alternative to interest-only loans. Andersson declined to say whether the FSA would resort to such a measure.

Sweden’s National Housing Board argues the country is already in the grip of a housing bubble. Residential property prices, adjusted for inflation, are about 20 percent overvalued, housing board analyst Bengt Hansson estimates. House prices could fall as much as 10 percent over the next 18 to 24 months, according to Jens Hallen, director for financial institutions at Fitch Ratings. Hallen said in a Feb. 5 interview he wouldn’t characterize such an adjustment as the result of a bubble.

“One should be prepared for a downturn,” Andersson at the FSA said. “House prices cannot just continue upwards in eternity.”