It takes Swedes 140 years on average to repay their home loans. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay down their debt

Sweden’s Banks Face Extra Buffer as Private Debt Hits Record

Sweden’s financial watchdog said banks in the largest Nordic economy will probably need to hold extra capital to reflect households’ record debt burdens. That means a countercyclical buffer that’s yet to be calculated for Nordea Bank AB, Swedbank AB (SWEDA), SEB AB (SEBA) and Svenska Handelsbanken AB (SHBA) may stay above zero for “several years,” said Martin Andersson, director general of the Swedish Financial Supervisory Authority. “It has been seen as another fine-tuning instrument for the economic cycle, but that’s never been the intention and that wouldn’t be a good way to use it,” Andersson said yesterday in an interview in Stockholm. “It’s about dealing with a credit cycle that’s much longer.” The FSA isn’t planning to adjust the buffer “particularly often,” he said.Sweden’s government last month unveiled the biggest clampdown on banks since November 2011, when it told lenders to target some of the world’s toughest capital standards. Banks now face an even higher core Tier 1 minimum capital requirement than the 12 percent of risk-weighted assets due to take effect in 2015 as Sweden plans to expand its use of countercyclical buffers to ensure there’s no upper limit to capital levels.

Protecting Taxpayers

The nation is stepping up efforts to rein in its financial industry even after banks built up some of Europe’s biggest capital buffers. Financial Markets Minister Peter Norman has argued the measures are needed to protect taxpayers from an industry that’s grown to four times the size of Sweden’s $540 billion economy.

Andersson said the FSA will try to keep the countercyclical buffer steady to help banks plan ahead.

“You can’t, from one month to another, change capital requirements for the banks,” he said. “It would be very difficult for them to operate in an environment where things bounce up and down. They may then position themselves a bit over” the current minimum capital requirement “and stay there and you will then have defeated the whole purpose of the countercyclical buffer.”

The FSA will work closely with a financial stability council, whose work the government last month proposed should be formalized, before deciding on the buffer, Andersson said. Apart from the FSA the council consists of the finance ministry, the debt office and the central bank.

Starting Point

The drive to ensure banks have adequate capital follows continued growth in household borrowing. The central bank estimates private debt will reach 177 percent of disposable incomes by 2015, the highest level ever in Sweden.

“If one is worried that growth in household debt is too high, then it’s reasonable that the starting point” for a countercyclical buffer “won’t be zero,” Andersson said.

Sweden’s FSA in October 2010 capped mortgages at 85 percent of a property’s value. While that measure helped slow credit growth to 4.5 percent last year from above 10 percent between 2004 and 2008, the pace of borrowing has started to accelerate again. Household credit growth picked up to 4.8 percent in July from 4.7 percent from June and May and 4.6 percent in April even as the economy slumped 0.2 percent in the second quarter.

Andersson said earlier this week the FSA will consider forcing households to amortize their mortgages if the pace of borrowing becomes unsustainable.

140 Years

An FSA report in March showed it takes Swedes 140 years on average to repay their home loans. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay down their debt, according to the report.

For now, Swedish household credit growth is still “at a level that’s fairly well balanced in relation to the development of disposable incomes,” Andersson said.

Should private debt continue to rise, the most logical step for the FSA would be to set a threshold “a bit below 75 percent” of a property’s value, forcing households to amortize all debt that exceeds that level, he said.

The Swedish Bankers’ Association already recommends that lenders force mortgage holders to amortize debt above 75 percent of a property’s value. Banks have done well in following the association’s advice, Andersson said.

This year, the Swedish FSA started requiring banks to raise risk weights on their mortgage assets to 15 percent from as low as 5 percent previously.

Stefan Ingves, governor of the central bank and chairman of the Basel Committee on Banking Supervision, said yesterday banks in Sweden remain “highly leveraged” even though capital relative to risk-weighted assets is high. Riksbank Deputy Governor Per Jansson the same day joined Ingves in urging banks to raise mortgage risk weights further.

Sweden should consider introducing a leverage ratio — a measure of capital relative to total assets — before international standards are set, Ingves said yesterday.

To contact the reporter on this story: Johan Carlstrom in Stockholm at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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