Johan Ahlander -
Sweden’s four largest banks are using a calculation of the risk to their loan portfolio’s that critics say is flawed and leaves them vulnerable to any correction in the booming housing market.
Swedish house prices took a small dip during the crisis but have more than tripled in the last 20 years, driven by low interest rates, tax breaks on debt and low building. Swedish households are now among the most indebted in Europe
Encouraged by the surging prices, banks have stocked up on property loans. They now account for close to 65 per cent of the loan portfolios of the big four, according to the Swedish Financial Supervisory Authority (FSA).
While they have built up their home lending, the lenders’ capital positions also appear to have improved.
But critics including Sweden’s central bank and the International Monetary Fund say this is because since 2007 the banks were allowed to use a model where they self asses the risk of their portfolios based historic loan losses.
With the housing sector making up such a large chunk of Swedish loans, losses have been low for a long time. This means the amount of capital banks need to reserve against future shortfalls has also been set very low, so they have not built buffers big enough to compensate for bigger losses, they say.
“They haven’t (increased their capital). They have reduced the risk-weights and it is quite different because the leverage ratio has been almost constant,” Swedish central bank governor Stefan Ingves said in December.
Since 2010, Swedish banks have doubled their core tier 1 capital ratio, a measure of how much money a bank has in relation to risk-weighted assets, to around 24 per cent, above the EU average of around 13 per cent.
But the leverage ratio, the relationship between the banks capital and its total assets regardless of what risk you assign to them, have remained virtually unchanged at a average of around 4 per cent.
Banks put a lower risk weighting on loans that are less likely to fail and set aside less money against losses of those loans. The idea is that this serves as an incentive to reduce the risks in the loan portfolios.
Spokesmen for Swedbank, SEB and Handelsbanken declined to comment on the risk weightings.
Nordea’s head of investor relations, Rodney Alven, said: “What makes us favour risk-adjusted models is that it has taught us a lot about how to manage, minimise and properly price risk. We think that these models have genuinely reduced the risks in the banking system.”
“We feel we are very well capitalised in every way you measure it,” he added.
Swedish banks often bemoan a heavier regulatory capital burden than counterparts in Europe. Sweden has tried to adopt a gold-standard approach to capital buffers to preserve the banks’ reputations as solid institutions and because of the importance of the financial sector to the economy.
Only Switzerland and the Netherlands have a larger financial sector than Sweden in the European Union relative to the size of the economy.
Self-assessed risk-weightings are widely used in Europe but Sweden’s are among the lowest, according to the IMF in a 2016 report.
Ingves, who was assigned to clean up the Swedish banking system after the 1990s crisis, says it is time to rein the banks in. He has called for a leverage ratio requirement to balance out creative internal models.
“It has been proved since the system was launched that banks have had too large degrees of freedom to decide their risk weights and that needs be to revised,” Ingves said. — Reuters
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