IMF supports Norwegian moves, Riksbank calls for long term resilience

The International Monetary Fund has voiced its support for regulatory initiatives underway in Norway such as plans for higher risk weights for mortgages and closer scrutiny of covered bond issuance. Meanwhile, the Riksbank said Sweden’s banks need to be more resilient in the long run.

In a concluding statement following its latest mission to Norway, the IMF on Friday said that it welcomes proposals to reassess risk weights for housing.

“Norway’s risk weights on residential mortgages are relatively low, creating incentives to shift lending toward households rather than corporates, which generally have higher risk weights,” said the international body.

The Norwegian government and FSA (Finanstilsynet) are planning higher risk weights for residential mortgages.

Last week the Swedish FSA (Finansinspektionen) confirmed it is implementing a risk weight floor of 15% for mortgages.

The IMF also cited concerns about the impact of covered bond issuance in Norway.

“The rapid rise of covered bonds for mortgage finance may create similar incentives and increase risks to unsecured creditors and depositors,” it said. “The use of covered bonds should be monitored closely and limits on issuance should be considered for individual banks or the banking system if the issuance of covered bonds leaves too few high quality assets on banks’ balance sheets.”

The IMF’s recommendations coincide with the approach being taken in Norway, where the regulatory authorities are taking a case by case approach to banks’ covered bond issuance.

The IMF completes its annual visit to Sweden today (Thursday) and will publish its statement on the Swedish economy tomorrow (Friday).

Sweden’s Riksbank published its latest Financial Stability Report on Monday, declaring that the major Swedish banks are financially strong, but warning that more resilience is needed in the long run.

“The major banks are highly resilient to a weaker economic climate in the short term, but there are vulnerabilities in the structure of the Swedish banking system that may have a negative impact on financial stability in the longer term,” said the central bank.

“The Riksbank therefore recommends that the major banks continue to ensure they have adequate capital and liquidity, and that they improve their public liquidity reporting.”

It noted that the Swedish banking system is large in relation to the Swedish economy — with the total assets (domestic and international) of the four largest banks being roughly four times the size of Swedish GDP — and strongly interlinked, meaning that a financial crisis could also require government intervention and thus become costly for taxpayers.

“The Riksbank recommends that the major banks continue to reduce their structural liquidity risks and ensure that they have enough capital to cope with potential future losses and disruptions on the financial markets,” it said. “The Riksbank also recommends that the major banks improve their public liquidity reporting by providing an account of their structural liquidity risks in accordance with the definition in the Basel III Accord.”

It also noted Swedish banks’ relatively large dependence on market funding, which constitutes around half of all funding.

The central bank said that the Swedish economy will continue to be affected by the weak economic development of the euro area.

“A long recession in the euro area accompanied by unease on the financial markets may lead to an increase in loan losses for the major Swedish banks and to a decline in their earnings,” it said. “Moreover, the banks may experience greater difficulty in obtaining access to market funding. Swedish housing prices may also fall if Sweden is hit by a prolonged economic slowdown.

“The high level of household debt could then lead to a decline in consumption, which could have a negative impact on growth, as well as macroeconomic and financial stability. Companies could then experience problems with paying their day-to-day expenses, which risks leading to increased loan losses for the banks.”

However, the Riksbank said that according to its stress tests the major Swedish banks have strong resilience to increased loan losses.