Banks in Sweden Told to Reduce Market Reliance for Mortgages

Swedish Finance Minister Anders Borg said he wants banks in the largest Nordic economy to rely more on traditional deposits than on wholesale debt markets to finance their mortgage lending.

“In the long-term, I think we can find financing models for mortgages that focus more on deposits and less on expensive funding,” Borg said in a Nov. 8 interview in Stockholm. “That way Sweden should end up with lower costs for mortgage funding in the long-term in the same way that we’re seeing in our neighboring countries.”

Borg, whose warnings in the past have frequently led to regulatory adjustments, has long urged banks in Sweden to cut their reliance on short-term foreign currency funding. He’s now broadening that criticism to include mortgage finance, which lenders mostly do through covered bonds, much of it in dollars and euros.

“Banks also in the long-term ought to abandon this expensive financing model where they’re dependent on market financing and currency-based market financing and focus more on getting funding from households through deposits,” Borg said.

Fueling Overheating

According to the Financial Supervisory Authority, Swedish banks rely on covered bonds to bridge a gap in lending and deposits born of a customer preference for placing savings in stocks and bonds rather than in accounts that accrue little interest. The annual market funding requirement for banks is more than half Sweden’s gross domestic product, the regulator estimates.

That represents a risk Borg says banks need to reduce. He wants the coalition government that his party leads to assess every “two to three quarters” whether bank rules need to be tightened again. Doing so will “make the system more stable, safer and less risky,” he said.

Yet there are some signs that continued tightening of Sweden’s bank rules, among the world’s strictest, is fueling an overheated housing market. Sweden’s four biggest banks, which boast some of Europe’s highest capital buffers, have seen their funding costs drop as investors reward them for having large buffers that shield them from losses. That’s allowed lenders to pass their lower borrowing costs on to households, sustaining demand for credit and bloating record debt loads.

Average Funding

Measures to stem household debt increases the likelihood that the Swedish central bank will be able to cut interest rates from 1 percent next year without fueling credit demand, Svenska Handelsbanken AB said in a note to clients today.

The average funding cost for three-month mortgages at Swedbank AB, Sweden’s biggest mortgage bank, has declined every quarter since the end of 2011, falling to 1.98 percent in the third quarter as the Swedish the housing market continues to display signs of overheating.

At SEB AB, the equivalent rate was 1.56 percent. The bank today published a survey which showed that almost two in three Swedes see continued housing price increases in the next year compared with only 11 percent predicting falling prices.

Swedish apartment prices rose 14 percent in the 12 months through August after having more than doubled since 2000. Private debt burdens will rise to a record 177 percent of disposable incomes in the fourth quarter of 2015 after having more than doubled since the mid-1990s, according to the Swedish central bank. The development has limited the Riksbank’s ability to cut its main lending rate to fuel inflation that’s been below central bank’s 2 percent target since early last year.

Unintended Consequences

The government today said local authorities in Stockholm have agreed to double planned housing construction in exchange for an extended subway and car congestion charge zone. Swedbank AB, Sweden’s biggest mortgage lender, said the housing shortage will reduce Swedish economic growth by 21 billion kronor a year for the next twenty years because of lower employment.

Meanwhile, the Swedish banking industry is warning that some of the government’s measures, designed to reduce risk, are having unintended consequences.

“My hope is that we, through a more nuanced discussion, can achieve a more sober view of banks and that we together are clearer about the importance of having a profitable and stable banking sector,” Annika Falkengren, chief executive officer at SEB, said in a Nov. 7 speech.

Borg, who together with Prime Minister Fredrik Reinfeldt faces an election next year, says his measures will help drive down funding and borrowing costs even further.

“It’s very central that we use good profitability in the banking sector and a recovery of the economy to use the opportunity to tighten the system,” Borg said.

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