Swedish watchdog may raise banks' reserves to cool housing market

By Reuters

Apr 21, 2015 09:04 AM EDT

Sweden's financial watchdog may increase the amount of capital the country's banks must set aside as reserves in a bid to cool a red-hot housing market, it said on Tuesday.

Swedish banks are already among the best capitalized in Europe, but the Financial Supervisory Authority is concerned they could face problems from rising levels of household debt and surging house prices.

On top of banks' normal capital requirements, Sweden imposes a counter-cyclical reserve that kicks in during times of economic strength.

The watchdog has set that buffer at 1 percent of banks' risk-weighted assets, effective from September 2015, a relatively modest level because it did not want to choke off credit supply to businesses while the economy was recovering.

It said it would decide in June whether the buffer needed raising further. Any higher level would come into force a year after that.

"Now we can see that credit supply to companies has normalized and so we think it is reasonable to look at whether we need to build up bigger buffers in the banks to deal with the high level of credit supply in the housing sector," FSA chief economist Henrik Braconier said.


The counter-cyclical buffer can be set at between zero and 2.5 percent.

"It's not going to be dramatic, my guess it they tweak it by half a percentage point," said Nick Anderson, banking analyst at Berenberg. "The banks can easily absorb it."

Ultra-low interest rates have helped stoke mortgage demand in Sweden and tighter regulations - such as a borrowing cap of 85 percent of a property's value - have failed to put a brake on lending, which rose 6.2 percent year-on-year in February.

Swedish households are already among the most indebted in Europe, making the economy vulnerable should house prices crash, and in August the FSA will introduce mandatory rules to force borrowers to pay down part of their mortgage debt.

The International Monetary Fund warned in 2013 that house prices in Sweden were over-valued by around 15 percent, since when base rates have tumbled to -0.25 percent.

Meanwhile real estate prices have soared, rising nearly 14 percent in the 12 months to February.

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