Deposits Burning Hole in Swedish Banks Diverted Into Mortgages

Sweden’s banks may have found a way to stop losing money on deposits.

First, here’s why the industry doesn’t want them:

  • The central bank has since February last year charged lenders to deposit excess cash overnight
  • Banks aren’t passing on the cost of negative rates to retail savers for fear of losing them. The industry says the policy is costing it billions of kronor a year

But recent data suggest banks have started using those same deposits to help finance mortgages. As a result, the covered bonds that Swedes have traditionally relied on to fund home loans now make up a smaller portion of their debt.

Swedish banks are looking for ways to escape the cost of holding deposits amid negative rates

In the past four years, Swedish issuers added to the outstanding volume of covered bonds by 178 billion kronor ($22 billion), which is less than one-third the increase in lending backed by homes as collateral, according to data from Statistics Sweden and the Swedish Bankers’ Association. Covered bonds were only used to finance 76 percent of mortgages as of the end of last year, down from 88 percent at the end of 2011, according to the association.

“If you study the quarterly reports of the four big banks, it’s clear that deposits have become an increasingly important part of those banks’ funding,” Jonny Sylven, an economist at the bankers’ association, said in an e-mailed reply to questions.

Deposits made up 32 percent of assets at the four biggest banks at the end of last year, compared with 29 percent in 2011, according to the association. Though returns on deposits are negligible, Swedes have preferred them to the losses they face by placing their funds in the stock market. The OMX Stockholm 30 Index is down about 5 percent this year, and has lost almost 20 percent over the past 12 months.

“The increase in deposits at banks is in part reducing the need for market funding,” said Mats Hyden, an analyst at Nordea. Banks are also relying less on covered bonds as they step up issuance of unsecured notes, often in foreign currencies, he said.

Covered bonds made up 57 percent of outstanding bonds at the end of last year, compared with 60 percent in 2011, the bankers’ association estimates. The securities also suffered a blow after the Riksbank last year said it would tighten rules for collateral. The development in covered bond issuance may have broader implications for the entire Swedish debt market.

“The numbers are big -- more than four times the gross issuance of the government -- and uncertainty regarding bond supply makes investors more cautious, thus creating a ‘risk-premium’ in covered bonds,” Hyden said.

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