Bank Capital Standards Raised in Sweden as Debt Mound Grows

Sweden, which already imposes some of the world’s strictest bank standards, will raise capital requirements further in an effort to contain record private debt and shield taxpayers from future financial crises.

The Swedish Financial Supervisory Authority will force banks to assign 25 percent risk weights to their mortgage assets, up from 15 percent, and activate a counter-cyclical buffer in the autumn, it said today in a statement. In addition, Sweden’s four biggest banks must set aside 3 percent of common equity Tier 1 capital as a systemic-risk buffer, and another 2 percent within Pillar 2, it said.

The rules mark “a clear tightening of capital requirements for Swedish banks, particularly the systemically important major banks,” the FSA said. “Because of the need for continuing adaptation, certain banks still need to be conservative in their capital planning and show restraint in measures that weaken their resilience, such as profit distribution and share buybacks.”

Sweden’s financial industry is one of the biggest in Europe relative to gross domestic product, with combined assets at home and abroad equivalent to four times the nation’s $560 billion economy. That’s left Swedes more vulnerable than most to bank crises and underscores the need to protect taxpayers through tighter rules, the FSA said.

Credit Growth

Scandinavia’s largest economy is struggling to contain consumer credit growth and house price gains that the central bank has warned may be unsustainable. The Riksbank said yesterday homeowners are more indebted than previously estimated, owing their banks 370 percent of their disposable incomes, according to a new study.

“Given the results of this analysis, and given that there are vulnerabilities in the Swedish financial system specifically linked to the banks’ mortgage lending, it is of the utmost importance to prioritize work on preventive measures,” Riksbank Deputy Governor Cecilia Skingsley said today. “We need to reduce the risks relating to indebtedness and strengthen the resilience of the banks.”

The tighter bank capital rules unveiled today will free the Riksbank to use interest rates to fight disinflation instead of tackling debt growth, according to Nykredit A/S.

Monetary Easing

“Today, the Riksbank was given another reason in favor of cutting,” Henrik Erikson, chief strategist, and Joel Hartman, a strategist at Nykredit, said in a note to clients. The higher risk weights set by the FSA will lift mortgage rates by 15 basis points to 20 basis points, according to Nykredit.

The central bank left its main rate at 0.75 percent in April. It will probably deliver a 0.25 percentage point cut in July, according to Nordea and SEB.

With the new capital rules, the regulator sees a common equity Tier 1 capital requirement of 15.6 percent for SEB AB, 17.4 percent for Svenska Handelsbanken AB, 14.5 percent for Nordea Bank AB and 19.3 percent for Swedbank AB, including a minimum common equity Tier 1 ratio of 4.5 percent, a 25 percent floor on mortgage risk-weights, a systemic risk buffer, a capital conservation buffer and a counter-cyclical buffer.

That compares with total capital ratios at the end of March of 15.7 percent for SEB, 19.5 percent for Handelsbanken, 14.6 percent for Nordea and 18.3 percent for Swedbank.

Mortgage Assets

Requirements are highest for Handelsbanken and Swedbank because the two have the largest proportion of mortgage assets, the FSA said. Swedbank, whose 75 percent dividend payout ratio is the highest among Sweden’s biggest banks, is the only lender of the four to fall short of its capital requirement. All the banks “will be able to meet” the new rules, the FSA said.

Swedbank fell as much as 0.8 percent to 166.8 kronor and 0.4 percent as of 11:43 a.m. in Stockholm trading. SEB rose 0.6 percent to 88.05 kronor, while Nordea added 1.4 percent to 92.95 kronor. Handelsbanken rose 0.5 percent to 322.7 kronor.

While most of the new requirements, including the 3 percent systemic risk-buffer, will apply from Jan. 1 next year, the 25 percent mortgage risk-weight floor and the 2 percent risk buffer under Pillar 2 apply from September, according to Karin Lundberg, a senior advisor at the financial regulator in Stockholm. Banks must conform with the counter-cyclical buffer within 12 months after its level has been set, she said.

Before it's here, it's on the Bloomberg Terminal.