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The economy will benefit from stricter requirements on banks as Sweden Finansinspektionen (FSA) Proposes tougher requirements on Swedish banks mortgage lending requirement

Monday, 26 November 2012
The forthcoming tougher requirements on Swedish banks generate positive effects on the economy. This is the opinion of Finansinspektionen (FI) in its report on bank interest rates and lending for the third quarter. In order for banks to further bolster their resilience, FI today clarifies its view on how much capital the banks should have for their mortgage lending.

In a press release, FI notes that "Swedish banks have largely already adapted to forthcoming requirements regarding higher capital adequacy, better access to liquid funds and increased risk weights on mortgages."

On an isolated basis, according to FI’s calculations the requirements bring about slightly higher costs for the banks, which in turn affects interest rates for non-financial corporations and households. At the same time, the stricter requirements will lead to the banks being viewed as stable and resilient, which gives cheaper funding and partly counteracts the effect of higher costs. On the whole, the forthcoming requirements will bring about a more stable financial system which will in turn generate positive effects on the economy.

Swedish banks are substantially exposed to risks in Swedish mortgages. In order to reflect the risks in the banks’ mortgage lending, FI believes that they must maintain more capital for their mortgage lending than the levels derived from the risk weights calculated using internal models, so that the banks will be well equipped to face risky scenarios in the future. FI therefore intends to introduce a risk weight floor of 15 per cent for Swedish mortgages. The floor is being introduced as a part of FI’s overall capital assessment of the firms within the so-called Pillar 2.

In the third quarter, the banks’ margins on new mortgages continued to rise. The net margin, which in simplified terms can be described as the banks’ profit on new mortgages, was 0.59 percentage points in the third quarter. This is an increase of 0.08 percentage points from the second quarter.
News source: Press release from Finansinspektionen (FI)

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