Sweden's excessive household lending growth carries risks for the wider economy: Moody's

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Monday, 23 June 2014 02:39 | Author: Moody’s

Sweden’s excessive household lending growth carries risks for the wider economy: Moody’s

MOODY’S: On 12 June, Sweden’s financial supervisory authority, Finansinspektionen, proposed that a 1.0% countercyclical capital buffer apply to domestic credit exposures. We expect the countercyclical capital buffer to moderate the risks associated with a protracted period of excessive household lending growth, a credit positive.

Over the past 15 years, household lending growth in Sweden has exceeded nominal GDP growth (see exhibit), and with the ratio of household debt to disposable income reaching 147% as of 2012, Swedish households have become the fifth most indebted in Europe, according to Eurostat. We believe that there are several key underlying factors that have contributed to this trend. Mortgage loans constitute 84% of household debt, and more than two thirds of Swedish mortgage loans with loan-to-value (LTV) ratios of 75% or below are non-amortising. Other factors are housing supply shortages in large cities and increased home ownership rates, which we believe have resulted in house price increases and thereby larger mortgage loans being written.

Finansinspektionen has taken several measures to curb household lending growth over the past four years, and these have reduced the pace of growth since the 2007-09 global financial crisis. In 2010, Finansinspektionen introduced an 85% LTV cap on mortgage lending and in May 2013 established a 15% floor on the risk weights that banks apply to calculate capitalisation requirements for mortgages. In May this year, Finansinspektionen proposed implementing a 25% risk weight floor starting in August.

Although Swedish mortgages are inherently low risk, the excessive household lending growth of the past two decades carries risks for the wider economy. If property prices decline, households are likely to lower consumption, which in itself can contribute to an economic downturn. We believe that small and midsize enterprises, which, according to the Organisation for Economic Co-operation and Development, account for the vast majority of domestic corporate lending, are particularly vulnerable to such a downturn, given their domestic focus. That said, we currently believe the risk of a severe house price downturn in Sweden is muted by strong economic growth prospects. By introducing a 1.0% countercyclical capital buffer, Finansinspektionen is helping to moderate these risks. We expect it will weaken loan demand as banks transfer the increase in costs of capital to borrowers, thereby reducing the pace of house-price appreciation. In addition, it adds to banks’ loss-absorption capacity.

Of the 10 largest credit institutions in Sweden, Finansinspektionen identified the four whose capital requirement will rise the most.: Lansforsakringar Bank AB (A3 stable, C-/baa1 stable1), Kommuninvest i Sverige Aktiebolag (Aaa stable), Landshypotek (unrated), and SBAB Bank AB (A2 negative).

Finansinspektionen expects to release a final communication on the countercyclical capital buffer in early September and apply the buffer starting 13 September 2015. Finansinspektionen also will review the buffer each quarter.

Last Updated (Monday, 23 June 2014 02:43)

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