Swedish Banks Told Years of Capital Add-Ons Ahead: Nordic Credit

Sweden’s Finance Minister Anders Borg told the country’s biggest banks to prepare for years of regulatory tightening as the government tries to protect the economy from an industry that’s grown to four times its size.

“I think the level of household indebtedness is worrying and that the size of the banking sector is worrying and that foreign exposure is worrying,” Borg said in response to questions in Stockholm. “That indicates that we during quite a lot of years will need to sharpen the regulation for financial stability and that we will continue to do so from time to time.”

Sweden’s government is clamping down on an industry it says risks destabilizing the $540 billion economy. Sweden has already introduced some of the world’s strictest capital rules, tripled risk weights on mortgage assets and capped home loans at 85 percent of a property’s value in an effort to prevent banks fueling record private debt loads. Borg and Financial Markets Minister Peter Norman say those measures don’t go far enough.

Investors have rewarded lenders with the most capital, responding to increased buffers against losses with lower funding costs. It costs about 68 basis points to protect against a default of senior unsecured debt sold by Nordea Bank AB, Sweden’s biggest by market capitalization, using five-year credit default swaps, according to data compiled by Bloomberg. Similar contracts on Deutsche Bank AG cost 97 basis points. Investors hedging against losses on Barclays Plc bonds need to pay 120 basis points.

Capital Talks

The Riksbank, the Swedish Financial Supervisory Authority and the government are in talks on the potential “need to adjust risk weights on mortgages or the capital requirements” from existing targets, Borg said.

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, according to Norman.

Nordea Bank, Swedbank AB, Svenska Handelsbanken AB and SEB AB must hold at least 12 percent core Tier 1 capital by 2015, compared with a 7 percent minimum and a 2019 deadline set by the Basel Committee on Banking Supervision. All four banks already exceed Sweden’s capital requirements.

Monetary Easing

Sweden, like Norway and Switzerland, has struggled to keep its mortgage market in check as unprecedented monetary easing across the globe spurs imbalances in some of the world’s richest economies.

Swedish household debt will rise to 177 percent of disposable incomes in 2015 after having almost doubled since the mid-1990s. Swedes take 140 years on average to pay down their mortgages, according to central bank figures.

“We should have a slow development in house prices and a downward trend for debt levels,” Borg said. “That means that we probably have to sharpen the regulation gradually, but one has to do that in a way that doesn’t lead to a tightening that results in unemployment, so this will take time and should take place at a pace that the economy permits.”

While the FSA said on Sept. 10 it is looking into potentially forcing households to amortize debt above a given level, Borg said such an approach isn’t the government’s priority. Sweden “will tighten the system gradually and carefully during the coming year and it won’t firstly be about a stricter amortization requirement,” he said.

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