Sweden's Soaring Housing Prices Raise Alerts Across Baltic Seaby
Swedish bank buffers `not very conservative': Estonia official
Baltic regulators have 'tight' cooperation on Swedish banks
Baltic regulators are joining in the chorus of sounding the alarm on Sweden’s red-hot housing market.
Estonia’s financial regulator says that a potential property crash in the largest Nordic economy could impact capital levels at the local units of the Swedish banks that dominate its banking market. Regulators and the government in Sweden have done too little to contain imbalances, according to the watchdog.
Sweden “hasn’t been very conservative in terms of its buffers and macro-prudential requirements,” Kilvar Kessler, chairman of the Estonian Financial Supervision Authority’s management board, said in an interview in Tallinn on Nov. 13.
Swedish policy makers are struggling to stem soaring property prices and household debt levels amid record-low borrowing costs and a housing shortage. Concern is also increasing abroad. The International Monetary Fund and the OECD are among groups who have called on authorities to take further action to cool the housing market.
Kessler’s comments echo views of Estonian central bank Governor Ardo Hansson, who said Oct. 28 that Sweden needs to do more to cool the market. Even Sweden’s central bank tightened collateral demands on mortgage bonds last month, citing risks.
“Even though we have very high capital adequacy ratios in banking, including Swedish ones, will it remain so if problems arise in Swedish property market?” Kessler said. “What if someone will want to resolve Swedish problems at the expense of potential Estonian buffers?”
Swedish policy makers so far have been slow in pushing regulations to cool lending as legislation on faster mortgage pay downs may take effect next year. They are reluctant to do away with tax deductions on home loans since that would be costly for many consumers and politically difficult.
Banking in Estonia, Latvia and Lithuania is dominated by Nordic lenders including Stockholm-based Swedbank AB and SEB AB, whose local units were brought under the European Central Bank’s supervision last November. While both banks reported soaring loan losses and needed capital injections following a 2008 collapse of the Baltic property bubble, local financial watchdogs have gained better oversight of region-wide risks as they cooperate under the ECB’s coordination, Kessler said.
“Cooperation with Latvian and Lithuanian colleagues regarding Swedish banks in the region has become very tight, thanks to SSM,” Kessler said, referring to ECB’s Single Supervisory Mechanism. “Joint Supervisory Teams are good for exchanging views and coordinating methods.”
Swedbank’s units in Latvia and Estonia had common equity Tier 1 ratios of more than 30 percent of their risk-weighted assets under an adverse scenario in the European Central Bank’s stress test last year. SEB’s units had 23 percent and 12 percent, respectively, compared with the 5.5 percent ratio needed to pass.
Swedbank’s Lithuanian unit had 23 percent, while SEB’s unit in the largest Baltic country had 13 percent in the adverse scenario of the European Banking Authority’s examination of EU banks, which was topped by Swedish lenders.