Swedes Face Forced Deleveraging as Debt Swells to Record

Sweden is looking into the option of forcing households to start amortizing their mortgages in an effort to prevent debt loads rising from a record.

“We want to make clear that the next step, should we judge that we have to take it, rather is amortization than something else,” Martin Andersson, director-general at the Swedish Financial Supervisory Authority, told reporters yesterday after a parliament hearing in Stockholm. “If household debt accelerates, as we’ve seen before, well, then we must do something.”

Swedish apartment prices have more than doubled since 2000, sparking concern a housing bubble may be brewing after private debt hit a record last year. A report in March from the Financial Supervisory Authority showed that, at the current pace of amortization, it takes Swedish households 140 years on average to repay their home loans. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay down their debt, according to the report.

The government and central bank say the development has left households vulnerable to financial shocks. Sweden is already pursuing stricter regulatory standards for Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB than those set elsewhere in an effort to protect the economy from a bank industry that’s four times its size.

Credit Growth

The central bank has sought to tame debt growth by keeping its main lending rate higher than the rate of inflation alone would warrant. The bank estimates private debt will swell to a record 177 percent of disposable incomes in 2015. Governor Stefan Ingves said yesterday the Riksbank should continue to monitor household debt when deciding monetary policy.

Since the global financial crisis started more than five years ago, Sweden’s FSA has taken multiple steps to try to curb financial industry risks, in part after credit growth exceeded levels the government said were safe.

In October 2010, the regulator capped mortgages at 85 percent of a property’s value and this year it raised risk weights on mortgage assets to 15 percent from as low as 5 percent. Ingves has argued they should be raised to 20 percent.

While the mortgage cap helped slow credit growth to 4.5 percent last year from above 10 percent between 2004 and 2008, the pace of borrowing has started to accelerate again. Household credit grew 4.8 percent in July versus 4.7 percent in June and May. It was 4.6 percent in April.

‘Completely Right’

Forcing households to amortize “is completely the right thing because it addresses the problems on the housing market more directly than the capital buffers,” said Roger Josefsson, chief analyst at Danske Bank A/S in Stockholm. The FSA has “become clearer that it’s a problem,” he said.

The Riksbank and the financial regulator have clashed openly over which body should have the main responsibility for limiting systemic risk in Sweden. The government’s proposal last month to hand macro-prudential oversight to the FSA marks a defeat for Ingves, who had argued that the central bank is best suited to handle such supervision.

“The Riksbank’s mandate remains unchanged,” Ingves, who is also chairman of the Basel Committee on Banking Supervision, said yesterday. “This means that the Riksbank still has responsibility for safeguarding financial stability. It is now fairly urgent to ensure a Swedish toolbox is in place to be able to manage various risks to financial stability.”

‘Vulnerable’ Swedes

The government last month unveiled plans to raise capital requirements for Sweden’s biggest banks from levels that already exceed standards elsewhere. The measures are needed to protect Swedes left “vulnerable” to financial shocks because of the country’s large banking system, Financial Markets Minister Peter Norman said yesterday.

Both Ingves and Andersson said yesterday Swedish banks will probably need to add a countercyclical buffer to existing requirements. Swedish bank core Tier 1 capital must be at least 12 percent of risk-weighted assets by 2015, a requirement the country’s four biggest lenders already exceed.

The countercyclical buffer should be “probably significantly higher than zero,” irrespective of the economic cycle, Ingves said.

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