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Sweden’s Banks Conceal Mortgage Risks Borg Pledges to Lay Bare

August 16, 2012

Swedish Finance Minister Anders Borg

Anders Borg, Sweden's finance minister. Photographer: Andrew Harrer/Bloomberg

Sweden’s banks, Europe’s safest on paper, have been hiding mortgage-asset risk behind rules the government now says are out of date and too lax.

Finance Minister Anders Borg said yesterday he wants banks to raise the risk weights on their mortgage assets as a next step to enforcing some of the world’s highest capital ratios. Stricter risk-weight requirements could add as much as 2.5 percentage points to reserve requirements, the central bank estimates.

After enforcing higher capital ratios through 2015, “eventually, we ought to adjust risk weights,” Borg said in response to questions in Stockholm yesterday. “We have an exposed banking sector that we need to deal with.”

Low risk weights have fueled house price growth and borrowing in Sweden, where residential property prices are now 20 percent overvalued, according to the National Housing Credit Guarantee Board, or BKN. Sweden, which already requires Nordea Bank AB (NDA), Svenska Handelsbanken AB (SHBA), SEB AB (SEBA) and Swedbank AB to target bigger capital buffers than those set by the Basel Committee on Banking Supervision, says the industry is still understating potential losses.

“The risks are much higher today than the historical data indicate,” Bengt Hansson, head of research at BKN, which advises the government on housing finance, said in an interview. “With that in mind, banks should have bigger reserves on mortgages.”

‘The Problem’

The Financial Supervisory Authority says that a habit of basing calculations for potential losses on historic data doesn’t reflect the risks banks may face in the future.

“The problem with that reasoning is that’s always the way it is before things go wrong,” Par Magnusson, chief economist at Royal Bank of Scotland Group Plc in Stockholm, said in an interview. “As an example, until 2006, U.S. house prices had never fallen and credit losses in the U.S. had never exceeded 2.5 percent.”

Risk weights on Swedish housing loans are among the lowest in Europe, averaging about 6 percent, according to the central bank. That compares with an average of more than 15 percent in Germany. Sweden’s FSA wants to increase risk weights -- which determine how much capital a bank must set aside to guard against potential losses -- to as high as 20 percent.

Banks in the largest Nordic economy have been basing their loss estimates on housing market data going back as far as the 1990s. Since then, household indebtedness has swelled, leaving Swedes more vulnerable to declines in property prices, Magnusson said. Household debt reached 170 percent of disposable incomes in 2010, compared with 90 percent in the mid-1990s, according to central bank data.

Housing Bubble

Bank lending to households rose 50 percent to 2.65 trillion kronor ($396 billion) in 2011 from 2006, driven by an 86 percent increase in mortgage lending to 2.12 trillion kronor, according to Statistics Sweden.

“We have a housing bubble in Sweden and one of the biggest risk factors in the Swedish economy is household indebtedness,” Hansson said. “If prices were to fall by 20 percent, there would be credit losses on mortgages for the banks, as we have seen elsewhere in the world. It is good to have large reserves so that a bank crisis stays at bank loan losses and doesn’t spill over too much to the state.”

Raising Swedish risk weights to 20 percent would reduce the capital ratio at Swedbank, Sweden’s biggest mortgage lender, to 12.3 percent from its current 14.8 percent, according to central bank estimates based on Basel III requirements. Handelsbanken, the second-biggest home-loan provider, would see its 14.6 percent ratio drop to 12.4 percent.

Basel Rules

Nordea, the Nordic region’s largest lender, and SEB would see their common equity Tier 1 ratios drop to 10.2 percent from 10.5 percent, and to 11 percent from 11.6 percent, respectively, the central bank estimates.

Swedish banks need to target capital ratios of at least 10 percent from January and 12 percent from 2015. That compares with the 7 percent minimum requirement set by the Basel Committee from 2019 on.

The banks themselves, which suffered a housing bubble and financial crisis that laid the industry to waste in the early 1990s, say there may be a need to rethink risk calculations.

“We agree that the current risk weights are too low and don’t reflect the risks in terms of household indebtedness,” Goran Bronner, chief financial officer at Swedbank, said in an interview. “It’s like when you’re driving a car -- you cannot only look in the back-mirror, you also have to look ahead.”

Somewhat Inflated

Bronner said an average risk weight of about 15 percent on mortgages would be “adequate.” That means reported capital ratios are “somewhat inflated,” though “Sweden’s banking system is still very well-capitalized,” he said.

The FSA, which in June delayed plans to push for higher risk weights as it awaits a Europe-wide agreement on bank regulation, now wants to have its proposal ready to coincide with implementation of the higher capital ratios, said Aino Bunge, executive director of economic analysis at the Stockholm- based watchdog.

The new model is “preventive” and will make “risk weights on mortgages more adequate for the future,” Bunge said in an interview.

According to Hansson at BKN, the danger is that the authorities will do too little too late as imbalances continue to grow in Sweden’s mortgage market.

“Valuations are stretched and there will be an adjustment ahead of us,” he said.

To contact the reporters on this story: Niklas Magnusson in Hamburg at Johan Carlstrom in Stockholm at

To contact the editor responsible for this story: Frank Connelly at

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