Sweden Ready to Force Debt Curbs If Loan Growth Doesn’t SlowJohan Carlstrom and Niklas Magnusson
Sweden will introduce new measures to stop the nation’s record household debt burden from growing further should steps already taken prove inadequate, Financial Markets Minister Peter Norman said.
Should debt continue to rise “we will of course take new measures to make sure we get it under control,” he said in a Dec. 5 interview in Stockholm. “We can’t afford to wait with an absolute evaluation of measures taken; we must move on with new measures to solve this.”
AAA-rated Sweden, which boasts a public debt load that’s less than half Europe’s average, is grappling with a private debt burden that the central bank and government warn poses a threat to financial stability in Scandinavia’s largest economy. While the government has tripled mortgage risk weights and imposed some of the world’s toughest capital requirements on banks, those measures haven’t translated into higher mortgage rates for consumers, and household debt has continued to grow.
The average funding cost for three-month loans at the largest mortgage lender, Swedbank AB, fell to 1.98 percent in the third quarter from 3.25 percent at end of 2011. That drove its three-month home loan rates to the lowest since November 2010. The outcome is the opposite of what the government had predicted.
It was a “reasonable conclusion” that the cost of raising risk weights would “result in more expensive mortgages,” Norman said. It was also reasonable to assume that a cap on mortgage lending, introduced in 2010, would curtail lending and that higher capital requirements would “be distributed between the customers and the shareholders,” he said. Yet recent credit data show the measures aren’t working.
Mortgage lending growth accelerated to 5.1 percent in the third quarter, picking up for a third straight quarter from 4.6 percent at the end of last year, according to a Dec. 5 report from the Financial Supervisory Authority. Swedes owe more than 170 percent of their disposable incomes to their creditors, leaving them more indebted than ever before, the central bank estimates.
Household debt growth, which slowed to a 20-year low of 4.5 percent last year as the effect of Sweden’s mortgage cap initially filtered through, has since started to accelerate again and was 4.9 percent in October. Apartment prices soared 14 percent in the 12 months through October, while house prices rose 5 percent, according to monthly data from Svensk Maeklarstatistik.
“That’s not quite the kind development we would like to see,” Martin Andersson, director-general at the FSA, said on Dec. 3. “We will have to see how things develop, but we’re prepared. We’re on our toes.”
The country tripled the risk weights banks must apply to their mortgage assets to 15 percent in May this year and then warned last month it would raise them to 25 percent should debt continue to grow.
Sweden’s four biggest banks must hold at least 12 percent core Tier 1 reserves of their risk-weighted assets by 2015. The lenders already exceed that with ratios as high as 19.3 percent.
The FSA concluded in a Dec. 5 report that the stricter requirements have had a limited effect on lending rates.
“The higher requirements contribute to a more stable financial system, which has positive effects on the economy,” it said. Still, the “effects of the higher requirements on lending rates to firms and households are small.”
One hurdle the government faces is that its efforts to curb debt and house prices are coinciding with a drive to improve competition in a market dominated by Nordea Bank AB, Svenska Handelsbanken AB, Swedbank and SEB AB. The four banks have a combined market share of about 70 percent of lending and deposits, according to the Riksbank.
Swedbank shares rose 0.4 percent to 166.9 kronor as of 11:49 a.m. in Stockholm. Handelsbanken stock gained 0.3 percent, Nordea rose 0.4 percent and SEB climbed 0.2 percent.
“These aims work against each other to an extent,” Norman said. “Suppose we get a dramatically increased competition in the banking market -- which would be great for a lot of different reasons -- then our authorities must tighten even harder to cool the mortgage market.”
Trying to promote competition among banks while targeting slower lending growth is unlikely to work, according to Jan Haeggstroem, chief economist at Svenska Handelsbanken AB.
Swedbank tried to raise mortgage rates on Nov. 15 -- the day after the regulator said it planned to raise risk-weights again next year. As no banks followed, the lender was quickly forced to back-track as its clients started to look for cheaper mortgages elsewhere. It has since instead cut its rates.
“As long as we’re in a competitive environment where banks would like increased market shares it’s not at all certain that risk weights on mortgages will have an effect,” he said. “Where mortgage rates end up isn’t decided by the Swedish Financial Supervisory Authority and they may have to do quite a lot.”