Swedish household debt biggest threat to financial stability

Apr. 05, 2017

Longer interest rate periods are needed to stabilize household debts and the market needs a push if we want to change it, argued Martin Flodén at the seminar “Do households and banks take too big risks when they fund mortgages” on April 4.

Martin Flodén, vice Governor of the Riksbank started the seminar with a presentation of the report “Structural liquidity risks within leading Swedish banks” recently released by the Riksbank. He discussed the Swedish situation with high household debts, covered mainly by secured bonds with an average term of three years. One quarter of the financing is made in foreign currencies and there is a risk that banks could get into trouble refinancing the loans if the housing market suddenly falls, according to the report.

– Interest rates must be tied long enough to change the size of the mortgage, either by amortization of by inflation, and that means considerably longer terms. Nobody has designed the Swedish market for mortgages – it seems to have designed itself. One must ask if we should just let the market create the system like this. If not, what can we do about it? Why is there no market for long-term secured bonds? And why does the market for long-term mortgages work so badly? The market needs a push if we want to change it, concluded Martin Flodén.

Peter Englund, professor at the Swedish House of Finance, agreed that the market for long-term mortgages is an important factor to look at. Compared with the US, where the lender can choose to pay off their loan or move it to another bank even with a long-term mortgage, Swedish households are much more restricted in their choices and this probably pushes more people into short-term contracts.

– I think the main reason that short-term mortgages are so popular is that people value flexibility and liquidity. I am surprised that the banks have managed to keep the housing market to themselves. It is a relatively simple product with high margins. The insurance companies are big investors in secure bonds and it should be tempting for them to keep a small portfolio of direct housing loans to moderate risk and better margins, said Peter Englund.

Peder Hagberg, Head of Group Treasury SEB said that liquidity risks at the bank were low. SEB is in a good position to renegotiate interest rates to reflect higher costs continuously as term periods run out. The contract time for loans with variable interest rate is two years, after which the customer, and the bank, can change the terms, to reflect changes in the borrowing costs, argued Peder Hagberg.

Henrik Braconier, Chief Economist at the Swedish Financial Supervisory Authority agreed with Peder Hagberg.

– We notice a tendency that fewer households are vulnerable to increasing interest rates today than a few years ago, partly due to tougher credit demands from banks. Relative to most countries, Sweden have large buffers of capital within the system, thanks to purposeful work the last 6 – 8 years. But a situation with increased interest rates without a boom in the economy could cause big problems. I think households must realize that the interest rates are very low and can increase. And with large debts and small margins, longer interest rate periods are needed to build resistance, said Henrik Braconier.