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Regulation: Sweden’s unfinished finish

The country’s financial regulators are playing hardball on minimum regulatory capital requirements, mostly because of mortgage risk weights. Analysts argue that the Riksbank is using the wrong tool for the job and might even be damaging the economy as a result.

Hans Lindblad-envelope
Hans Lindblad, director general of the Swedish National Debt Office 

Forget gold plating. Armour plating might be a better way to describe Sweden’s rules on bank capital and liquidity.

Spooked about rising household debt, the Swedish regulator hiked the floor on banks’ mortgage risk weights from 15% to 25% in May. The result is that Sweden’s systemically important banks now have minimum regulatory capital requirements ranging from 14.5% to over 19%. By some calculations, that makes Swedbank – which has a 25% share of Sweden’s mortgage market – the most strongly capitalized bank in Europe. Handelsbanken is not far behind.

There’s no guarantee that Swedish regulatory capital requirements have yet reached their maximum altitude. The Riksbank reportedly argued last year that the floor on mortgage-risk weights should have been hiked to 35%. Sweden’s financial services authority countered that there are other tools that could and should be used to deal with elevated household debt before risk weightings need to be revisited.

“Taking into account the risks that real estate can pose to the banks, as well as the risks that banks can create for the real economy, we think that 25% is an appropriate floor,” says Uldis Cerps, executive director for banking at Sweden’s FSA.

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