Sweden Proposes Boosting Regulator's Power to Cool Debt Growth

Sweden’s government proposed giving the financial watchdog broader powers to safeguard financial stability as negative interest rates have driven household indebtedness to records.

The proposal will give the Financial Supervisory Authority more power to enact direct measures to cap household debt and speed up enforcement, Financial Markets Minister Per Bolund said in an interview in Stockholm.

“The watchdog needs a clear mandate to take the measures needed to maintain financial stability,” Bolund said. “Quick measures could urgently be needed and this proposal paves the way for a much more effective process.”

The plan builds on a broad political agreement from October, the government said. But any direct measures would need government approval since they could affect both the economy and individual households. The law, which will apply from Feb. 1 next year, will be sent on referral today to institutions which will have until April 18 to give feedback.

Sweden has been slow to address record-high household debt amid an unclear legal mandate for the watchdog, including delays to the introduction of a faster mortgage repayment requirement. The central bank has repeatedly warned that more needs to get done to halt a build up in debt. Policy makers have cut rates deep below zero in a effort to spark inflation, which has evaded its 2 percent target for more than five years.

The regulator has said potential measures could include a debt-to-income ceiling should Swedes continue to expand their balance sheets. Director-General Erik Thedeen also said the watchdog is analyzing the effects of requiring a certain portion of mortgages to be taken with fixed interest rates. The vast majority of new loans are taken with floating rates.

But Bolund warned of doing too much too quickly.

It’s “a good strategy” to take one step at a time and evaluate effects before doing more, he said. Too much at the same time could make people scared of “making big economic decisions,” he said.

Since tighter repayment rules went into effect in June, borrowing growth has slowed to an annual 7.2 percent from 7.8 percent and home prices have only seen modest gains.

“The amortization requirement seems to have had a bigger effect than what many had expected,” Bolund said. “We’ve now returned to a more normal amortization culture, which I think is really good.”

Industry data compiled by the Riksbank last year show that households with mortgages on average owe their banks 343 percent of their incomes. That reflects a 37 percent jump in indebtedness since 2010, with the lion share of that in mortgages. Over the same period, disposable incomes rose 25 percent. According to Svensk Maklarstatistik, house prices have almost doubled and apartment prices almost tripled since 2005.

Bolund said the government’s aim is to build an efficient financial system that promotes investments in the real economy.

“But at the same time we have to manage the economy so that we don’t build up risks overtime that can lead to financial instability,” he said. “That’s the tough question that the FSA has to work with every day and I, as minister of financial markets, in the end have to see to it that the calibration is kept in a good way.”

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