Sweden FSA Proposes Higher Mortgage Risk Weights for Banks

   By Gustav Sandstrom 
 

STOCKHOLM--Sweden's Financial Supervisory Authority on Monday said it plans to force banks to set aside a minimum amount of money for mortgage loans in order to better cope with potential losses on mortgage customers.

"Swedish banks are substantially exposed to risks in Swedish mortgages," the financial regulator said. "The forthcoming requirements will bring about a more stable financial system which will in turn generate positive effects on the economy," it added.

House prices in Sweden have so far remained stable at high levels, even as house prices in many other countries have slumped in the wake of the financial crisis. The FSA's planned new requirements will mean slightly higher costs for banks but it will also make them more resilient, and this means the banks will be able to fund themselves on more favorable terms and make the wider financial system more stable, it said.

The FSA intends to introduce a risk weight floor of 15% for Swedish mortgages, which means banks will have to set aside an estimated 20 billion Swedish kronor ($3.02 billion) of additional common equity Tier 1 capital, which can be used to absorb potential losses.

Banks need to hold a certain amount of equity on their balance sheets for all the loans they issue. Different borrowers are given varying risk weightings depending on the likelihood of default which are then applied to the banks' overall capital requirement to determine how much money is needed to be set aside. The higher the risk weight, the more capital is needed for the bank to be allowed to issue that loan.

Sweden's major banks have so far applied much lower mortgage risk weights than other European banks, of around 5%-10% compared with an EU average of around 20%-25% because banks there have historically suffered very small credit losses on mortgages.

Before the FSA implements the new measures, it will give affected parties the opportunity to submit opinions on the proposal, it said.

Write to Gustav Sandstrom at [e-mail]

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