Banks in Sweden Beat Regulator With Plan to Cut Record Debt Load

By Niklas Magnusson and Johan Carlstrom

Sweden’s financial regulator may not push ahead with formal rules on amortization after the country’s banks presented a proposal targeting a reduction in mortgage debt.
A plan by the Swedish Bankers’ Association to require borrowers to pay down new loans to 50 percent of property values may be enough, Martin Andersson, head of the Swedish Financial Supervisory Authority, said yesterday in a phone interview. If banks “present a proposal that’s very similar to what we ourselves think is a very good proposal it’s absolutely a conceivable alternative,” he said.
Banks can implement such a plan quicker and it provides “the flexibility needed for particularly vulnerable households that for a period of time are unemployed, or sick, or whatever it may be that makes it hard to amortize,” Andersson said.
Sweden is trying to stem an increase in
private debt that has soared to record levels while protecting the most vulnerable households from new requirements. Finance Minister Magdalena Andersson, Riksbank Deputy Governor Cecilia Skingsley and Klas Danielsson, chief executive officer of state-owned bank SBAB, have urged policy makers to exempt some demographic groups from amortization requirements.
The Bankers’ Association this week proposed new guidelines that would force homeowners to pay down their mortgage debt to 50 percent of property values after lowering it to 70 percent from 75 percent in March. The group said it hopes the measure aimed at fostering a better amortization culture will prevent the regulator from introducing formal legislation.

‘Blunt’ Tool

Regulation would be a “blunt” tool to address debt burdens as it may not allow for flexibility to exclude the sick and unemployed from having to pay down their debt, Thomas Oestros, head of the association, said yesterday.
Andersson welcomed the group’s proposal, saying “it’s good that they share the worry we have for household debt.”
A loan-to-value ratio of 50 percent “is a level it’s important to come down to at some point,” he said.
The regulator will communicate how fast it thinks households should amortize mortgage debt down to 50 percent of property values before a scheduled meeting of the financial stability council on Nov. 11, Andersson said. The watchdog will make such an announcement “in the near future,” he said.
“Households with a loan-to-value ratio of more than 50 percent have a tendency to become nervous in a situation when the economy is exposed to various types of shocks and therefore cut their consumption and worsen the development of the economy,” he said.
Sweden must move carefully with measures in order not to hurt economic growth.
“You have to remember that what’s driving growth today to a large extent is private consumption,” Andersson said. “It’s therefore important that we proceed carefully but that we gradually establish these safeguards both for households and Sweden.”