Swedish Banks Need to Double Mortgage Risk Weights, IMF Says

Sweden should consider gradually raising risk-weights on mortgages to 35 percent from 15 percent to prevent a housing bubble and consumer debt from spiraling out of control, the International Monetary Fund said.

The Nordic country should also consider imposing minimum amortization rules, paring tax deductions for mortgages and promote policies that boost housing supply, the IMF said in a statement published on the Swedish central bank’s website today.

It should also think about “increasing residential property taxation over the medium term to lower incentives towards the build-up of excessive household debt,” the Washington-based group said.

Sweden this month tripled its mortgage risk-weights to 15 percent to limit house price gains and a build-up in debt, which has swelled to a record 174 percent of disposable incomes this year from about 90 percent in the 1990s, the central bank estimates. Risk-weights determine how much capital banks must set aside for mortgage lending.

The country is pushing through stricter capital requirements for than elsewhere in Europe to protect the $500 billion economy from financial instability. Its four largest banks, Nordea Bank AB, SEB AB, Svenska Handelsbanken AB and Swedbank AB, must have 12 percent core Tier 1 capital by 2015.

Bank Fee

Sweden should also charge banks a fee based on their foreign funding to cover some of the costs of maintaining the central bank’s currency reserves, the IMF said. There’s also a need for improved coordination of macroprudential policy between the central bank and financial regulator, it said.

“With strong macroprudential policies in place, the need of the Riksbank in the future to resort to unconventional monetary policy will be minimized,” the IMF said. “At the same time, the Riksbank would be free to pursue its inflation target without being concerned about the long-term macroeconomic implications of its interest rate policy.”

Riksbank Deputy Governor Per Jansson last week said the central bank’s main lending rate could have been lower had it not been for the bank’s concern of household debt. The Riksbank kept rates unchanged at 1 percent for a second meeting in April.

A 20 percent slump in house prices over three years would result in combined losses of 21 billion kronor ($3.2 billion) for the four banks, Sweden’s central bank said this week.

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