Plans for a possible increase a risk weight floor for residential mortgages from 15% to 25% that were floated by Sweden’s FSA on 14 November would be credit positive for Swedish banks and their covered bonds as it would improve their loss absorption capacity, Moody’s said yesterday (Thursday).

Swedish banks would face one of the highest residential mortgage risk weights in Europe should the proposal be implemented, said Moody’s, which noted that the average in Europe is 15%.

Moody’s vice president and senior analyst Alexander Zeidler said that the new policy addresses the belief of the Swedish FSA (Finansinspektionen) that high household indebtedness remains a risk to financial stability.

“According to Eurostat, Swedish households are the fourth most indebted in the European Union, driven by house prices that have risen faster than wages over the past decade and interest-only lending accounting for around half of mortgage loans,” he said. “Moreover, households are sensitive to higher interest rates because around half of mortgage lending is variable rate.

“Higher capital requirements, if reflected in banks’ lending activity, should reduce these risks.”

He said the proposal also reflects the regulator’s desire to control loan growth in the context of a 25% increase in the Swedish residential mortgage book since the beginning of 2010, citing Statistics Sweden figures.

“More controlled loan growth would benefit Swedish banks because it would help curb continued house price appreciation, thereby reducing the risk of creating an overheated housing market and a sudden price decline,” said Zeidler.

He noted that the Swedish move mirrors steps taken by the Norwegian regulator earlier this year to address a similar household debt situation.

“Norwegian and Swedish regulators have become increasingly vocal in the past year about the need to impose new measures on banks if household debt continues to rise,” said Zeidler. “So far this year, Finansinspektionen has raised the residential mortgage risk weight floor to 15%, a move we regard as credit positive because it helps to maintain the quality of mortgage assets on banks’ balance sheets and in the cover pools of Swedish covered bonds.”