Sweden’s Banks Find Ally in FSA Warning on Risk-Weight Race

Sweden’s financial watchdog cautioned against a central bank proposal to consider raising risk weights from levels announced less than half a year ago.

Riksbank Governor Stefan Ingves said earlier this week Sweden should consider increasing risk weights on mortgage assets to more than the 15 percent proposed by the regulator in November. The Financial Supervisory Authority’s target, which is three times existing levels, is due to become effective later this year.

“We don’t today see any reason to immediately touch these,” Martin Andersson, director-general at the FSA, said in an interview in Stockholm. “To make lots of changes and then make changes to the changes before anyone has had a chance to evaluate them and before we’ve even had time to implement these I think is to run a bit too fast.”

The watchdog, which has argued against proposals to hand over macro-prudential supervision to the central bank, has defended stricter capital standards than those set elsewhere as Sweden tries to shield taxpayers from the risk of losses. The biggest Swedish banks, whose combined assets are four times the size of the economy, must set aside at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015.

Loan Cap

Swedbank AB, Sweden’s largest mortgage lender, rose 1 percent to 148.7 kronor as of 1:18 p.m. in Stockholm. The bank was the second-best performer in the 40-member Bloomberg index of European financial stocks. Shares in Svenska Handelsbanken AB, the nation’s second-biggest mortgage lender, gained 0.5 percent to 275.5 kronor.

The FSA in 2010 reacted to signs of excessive credit growth by imposing an 85 percent cap on loan-to-value ratios. The regulator has also warned it is ready to do more should the need arise. Measures to date have started to work and credit growth slowed to 4.5 percent in January, compared with a peak of 13.2 percent in March 2006.

“There is no reason right now, I think, to say that something has happened that suggests an increased worry about” a housing bubble, Prime Minister Fredrik Reinfeldt said today in an interview in Stockholm. “Rather on the contrary, the tendency has been that prices have stabilized.”

Basel Chairman

Yet Ingves, who is also the chairman of the Basel Committee on Banking Supervision, says Sweden’s housing market is showing signs of overheating as his bank estimates household debt will reach a 173 percent of disposable incomes this year.

“The Riksbank supports the proposal for a risk-weight floor of 15 percent,” Ingves said in a March 20 speech. “We also believe that there are good reasons for analyzing whether this floor needs to be raised even further.”

Raising risk weights to 15 percent “is a reasonable measure” and “we want to stop there right now,” Andersson said. “This is not a whacky level and we have nothing that suggests otherwise at the moment.”

Though the real estate market has cooled in the past two years, property prices have soared about 25 percent since 2006.

That has fanned speculation the market may be overstretched, making households vulnerable to interest rate increases. Ingves signaled last month his bank may start raising rates next year. Swedish home prices could fall by as much as 10 percent in the next 18 to 24 months, Jens Hallen, director for financial institutions at Fitch Ratings, said last month.

Ingves has also discussed introducing other measures to cool the housing market, including requiring borrowers to amortize their mortgages. A March report by the FSA showed that the average Swedish household needs 140 years to pay down its home loan.

‘Very Skeptical’

As Sweden’s mortgage market shows signs of possible overheating, the Riksbank has argued it needs to take on more regulatory tasks.

First Deputy Governor Kerstin af Jochnick in January proposed a “functioning framework for macro-prudential policy” that would either hand responsibility for oversight to the central bank, or allow the bank to have a supervisory role over a number of institutions. Such a system, based on the German model, would give the Riksbank a veto right or the power to select a chairman.

Andersson has criticized talk of splitting financial oversight with the central bank, arguing such a step would weaken the FSA.

“I’m very skeptical to the idea that we pick out certain aspects of the capital requirement regulatory framework and give that to someone else and say that they get to handle that part because then we can no longer have a discussion with the banks about their collective capital,” Andersson said. “We have our tools. The Riksbank has its tools.”

Foreign Funding

The government has identified additional areas in banking it says require further measures to rein in risk.

Finance Minister Anders Borg in an interview last month said he wants to introduce “fairly quickly” rules that would force banks to pay a fee or set aside reserves to cover the central bank’s costs associated with holding foreign currency. Here the regulator and the central bank agree.

The Riksbank is raising its currency reserve by the equivalent of 100 billion kronor ($15.4 billion) to about 400 billion kronor to provide banks with extra liquidity should the crisis in debt-stricken Europe deepen further.

Of the total securities issued by Swedish banks as of the end of December, including certificates and bonds, 76 percent were in foreign currencies, according to Statistics Sweden.

“When you’re talking about increasing something that’s costing money to create protection for the banks, it’s not unreasonable that they pay in the same way, that it’s the banks and not the taxpayers that are actually paying for supervision,” Andersson said.