It is not often you hear banks pleading for tougher regulations, but in Sweden some of the industry’s top executives are demanding government action to head off a potential asset price bubble that threatens the Nordic country’s AAA-rated economy.
Sweden has negative interest rates to tackle the risk of deflation. But with the economy growing strongly, this is fuelling household debt, property prices and the stock market to levels many economists think could become dangerous.
“It is clear that the risks of an unsustainable development in various asset classes is increasing with each day in the absence of powerful political reforms,” Swedbank Chief Executive Michael Wolf told reporters last week.
While most Swedish banks have already tightened lending practices, they fear doing more could hurt their ability to compete if the rules don’t apply to all.
So they are calling on politicians to step in by, for example, making it mandatory for borrowers to pay down the principal of their mortgages and encouraging house building.
“It is quite obvious that if we keep this up for long, there is a clear risk that we run up bubbles and someone has to take care of that,” Handelsbanken CEO Frank Vang-Jensen said this week, worried about the effects of ultra-low interest rates.
However, politicians are wary of placing potentially unpopular restrictions and costs on consumers.
That is despite memories of a crash in the early 1990s that sparked a three-year recession, forcing the government to rescue failing banks and labour through a decade of fiscal austerity amid soaring unemployment.
“It is incredibly cowardly and incredibly strange that the politicians cannot reach across the aisle and take a decision,” said Roger Josefsson, chief economist at Danske Bank in Sweden.
“If there is any time when there should be acceptance (for new regulation) it is now.”
While Swedish banks are currently among the most profitable and well capitalised in Europe, a housing market crash would hit them hard. In addition to lower economic activity and increased loan losses, it could disrupt the mortgage-backed bond market they rely on for funding.
Mortgage lending makes up an average of 50 percent of total loans at Nordea, SEB, Handelsbanken and Swedbank, above the 36 percent European Union average. The four banks account for 80 percent of Sweden’s mortgage market.
Sweden’s economic predicament highlights the limited control relatively small countries have over their own policymaking.
While the country’s economy is growing healthily, the central bank has slashed its key interest rate three times this year to an unprecedented -0.35 percent.
That’s due to fears of deflation, with a fall in energy prices across the world weighing on prices. It is also in response to ultra-low interest rates in the euro zone: if Sweden did not follow suit, its currency would soar against the euro. That would damage exports and add to deflationary pressures. Sweden’s central bank has a strict focus on price stability.
“There is no logic to negative interest rates in Sweden, but because the ECB (European Central Bank) has negative rates Sweden must have it too,” Nordea CEO Christian Clausen told Reuters.
Generous tax rebates on mortgages, the abolition of a property tax and subdued construction have seen Swedish house prices more than triple in the last 20 years. And now the record low interest rates are pouring fuel on the fire.
With a loan-to-disposable income ratio well over 170 percent, Swedes are among the most indebted citizens in Europe. Lending to households hit its the fastest pace in four years in May, while house prices leapt 14.4 percent in the year to June. The stock market is also up around 20 percent over the past year as investors chase returns amid rock bottom interest rates.
Roughly 70 percent of Swedes have interest-only mortgages, meaning they are heavily exposed to falling house prices, although some banks are now demanding new customers pay down their loans to 75 percent of market value.
The central bank and the financial watchdog have called for measures to dampen borrowing, but legal obstacles and political reluctance to introduce unpopular rules have meant a proposal forcing homeowners to pay down their loans has been postponed twice and left decreasing tax breaks a non-starter.
In November, Sweden’s competition watchdog blocked a joint proposal from banks for mandatory repayment of mortgages, deeming it illegal collaboration.
Financial Markets Minister Per Bolund was not available for comment. He told Reuters in a June interview that mandatory loan repayment would be introduced in 2016 but that other measures would have to wait.
In the meantime house prices could go even higher.
“In the short term I don’t think there’s a bubble,” Nordea’s Clausen said. “But it is coming eventually.”