Sweden’s financial watchdog said its budget must grow by a third if it is to police the country’s banks more effectively after the regulator imposed a cap on mortgage lending to avert a housing bubble.
The Financial Supervisory Authority is asking for 10 percent more a year over three years on top of its 300 million-krona ($41 million) budget to monitor the plan, Director-General Martin Andersson said in an interview in Stockholm. The FSA said on Feb. 16 it wants to cap the amount banks can lend to homebuyers to between 75 percent and 90 percent of the value of the property starting July 1.
“We’re clearly worried; we are a small supervisory authority and we need to become bigger,” Andersson said. “We’re once again facing big changes to the regulatory framework and that demands that we have a strong supervisory authority that has the resources to monitor even when there is a lot of work.”
Sweden’s banks, which the Riksbank estimates will lose $3.7 billion this year from their operations in the crisis-stricken Baltic region, now face imbalances in the housing market. Record- low central bank rates have encouraged more Swedes to take on mortgages even as unemployment has risen. House prices rose 5 percent on average last quarter after returning to pre-crisis peaks in parts of the country, including the capital.
The Riksbank this month said it could raise the benchmark interest rate from a record low 0.25 percent as early as summer instead of autumn, as it previously forecast. Many households face difficulties with repayments when interest rates start to rise, the watchdog said last week, after investigating 7,000 mortgages granted by lenders including Nordea Bank AB, Svenska Handelsbanken AB, SEB AB and Swedbank AB.
Housing Risks
It’s important that lending to households flattens out “over time,” Riksbank Governor Stefan Ingves said after appointing a commission on Feb. 9 to investigate what risks exist in the housing market. The risk of a housing bubble is “definitely a question that we need to keep our eyes on,” Finance Minister Anders Borg said on Feb. 3.
“Unemployment is rising, GDP is falling dramatically and households’ mortgages are increasing quite significantly,” Andersson said. A cap may constrain rising house prices and stop banks from competing to lend the most in relation to property values, he said.
“We need to become better at judging the macroeconomic situation and understanding the big developments in the markets and the risks associated with them,” Andersson said. Existing risks to the housing market mean Sweden’s banks need “more and improved capital quality” and higher liquidity requirements. If international regulations take too long to materialize, we are prepared to take the lead on liquidity rules.”
Functioning
So far, “mortgage lending is functioning in a good way,” Andersson said. Banks “have good margins, they test for significant rate increases. We don’t see any stability problems with this.”
Sweden’s banks in the Baltic states of Latvia, Lithuania and Estonia were caught off guard after a strategy to tap into economic growth rates as high as 12 percent backfired when the region’s property boom turned to bust. The Baltics last year suffered the EU’s deepest recession, which left Latvia relying on an International Monetary Fund bailout and triggered losses in the Swedish krona.
Stockholm-based Swedbank, the largest lender in the Baltic region, reported a 10.5 billion-krona net loss last year after bad debt in the Baltics soared. SEB, the second-largest lender in the region, saw an 89 percent slump in 2009 profit to 1.11 billion kronor on higher credit impairments.
‘More Proactive’
“Looking back, the FSA has focused very much on formal solvency, and one of the lessons from the Baltics is that maybe we shouldn’t just look at the risk that banks make such big losses that they’ll go bust, we also have to look at what risks are building up,” Andersson said. “We have to be more proactive, act earlier, and we can’t reject all that looks a bit strange on the grounds that the banks will survive it.”
Johan Carlstrom and Niklas Magnusson
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