Swedish FSA proposes raising mortgage risk weight floor to 25%

The Swedish FSA suggested increasing the risk weight floor for mortgages from 15% to 25% upon releasing its latest report on risks in the financial system today (Thursday), citing a very high level of household debt in Swedish households.

The FSA (Finansinspektionen, or FI) said that with the level of debt posing a risk to individual households and, in the long run, to financial stability, measures such as a targeted capital requirement in the form of a higher risk weight floor for mortgages and the implementation of a countercyclical buffer may become relevant.

“However, it is important that these measures are carefully weighed against one another,” it said. “FI currently believes that raising the risk weight floor to 25% would be a sound decision. This decreases the need to fully utilise the countercyclical capital buffer.”

The FSA implemented a floor of 15% as recently as May.

In a table summarising risks in the financial system, the FSA also highlighted Swedish banks’ market funding as being “high risk”. Although the regulator said that the situation for the entities it regulates had improved during the year, with Swedish banks having “solid” access to funding, it said that their increasing dependence on financial markets for funding is a concern.

“The major Swedish banks are heavily dependent on market funding and are exposed to a structural liquidity risk, which makes them sensitive to disruptions on the financial markets,” it said. “Market funding occurs in both Swedish kronor and foreign currency.

“At the same time, the maturities of loans raised by the major Swedish banks are relatively short, which means that the banks must frequently borrow new funds. This represents a risk, particularly since the banks issue loans with much longer maturities.”

Earlier in the week Swedish Finance Minister Anders Borg was reported in a Bloomberg article to have reiterated his concern that banks are too reliant on wholesale funding and should focus more on deposits.

The FSA also called for restraint from banks when paying dividends to shareholders, noting that although banks meet current capital requirements — which it acknowledged are high in Sweden — its stress tests show that two of the four biggest banks need to maintain capital levels to be able to cope with any sharp downturn in the economy. And it noted that capital requirements may rise further still as a result of macroprudential measures.

“This means that the major banks need to be conservative in their capital planning and in the long run exercise caution with regard to measures that reduce their resilience, for example share buy-back programmes and dividends,” said the FSA.

Further measures to address the growth in mortgage lending could also be forthcoming, it said. It noted that even though the implementation of a mortgage cap has broken a trend of rising LTV ratios and households are amortising loans, the growth rate continues to be high.

“There are risks associated with this high growth rate, and prudence indicates that there is good cause to consider additional measures relatively quickly if the increase in the rate of growth continues to be high,” said the regulator. “FI is carefully following the developments on the Swedish mortgage market and is basically not excluding any measures, whether the implementation of new measures or adjustments to existing measures.”