Sweden Watchdog Raises Banks’ Mortgage Risk-Weight Floor to 15%

Sweden’s financial watchdog decided to triple the risk-weight floor for mortgages, or the money Swedish banks need to set aside to protect against housing loan losses, after household debt burdens continue to swell.

Swedish banks including Svenska Handelsbanken AB, Swedbank AB, SEB AB and Nordea Bank AB need to have a mortgage risk-weight floor of 15 percent, the Stockholm-based Financial Supervisory Authority said in a statement yesterday. The largest banks currently have risk weights on mortgages as low as 5 percent, the FSA has said. The decision was in line with the regulator’s proposal late last year to raise risk-weights.

The financial watchdog “is implementing a risk-weight floor of 15 percent for Swedish mortgages,” the regulator, known as FI in Sweden, said. “The new risk-weights, which entail a change in FI’s supervisory practices, will go into effect immediately as part of FI’s supervisory measures.”

Swedish Finance Minister Anders Borg and the country’s central bank have repeatedly warned against the rising consumer debt level, which has grown to 173 percent of disposable incomes and is estimated by the Riksbank to reach 177 percent in early 2015. While household borrowing growth has slowed in Sweden since a cap on mortgages was introduced in 2010, household lending growth still stood at an annual 4.6 percent in March.

Largest Banks

When announcing the proposal on Nov. 26, the FSA said the new rule would mean the largest banks would need to set aside an additional 20 billion kronor ($3 billion), including 7.2 billion kronor for Swedbank and 5.5 billion kronor for Handelsbanken, Sweden’s two largest mortgage lenders.

Sweden is also tightening capital requirements. Its four biggest banks need to hold at least 10 percent core Tier 1 capital of their risk-weighted assets this year, and 12 percent by 2015. That compares with Basel III’s 7 percent requirement by 2019 and a 9 percent minimum standard for some European banks.

The lenders already exceed the stricter rules, even those applying from 2015. Nordea reported a 13.2 percent core Tier 1 ratio of risk-weighted assets for the first quarter, under Basel II rules. At Swedbank, the ratio was 17.3 percent while SEB had 15.3 percent, by that measure. Under Basel III regulation, Handelsbanken had a 17.5 percent ratio while Swedbank’s and SEB’s stood at 16.4 percent and 13.4 percent.

Neighboring Norway is also introducing stricter rules for its banks and has gone further than Sweden in its risk-weight requirements as it tries to cool down the housing market. The Finance Ministry in Oslo in December proposed tripling the risk-weights banks need to hold on mortgage assets to 35 percent.

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