The Swedish Financial Supervisory Authority (FSA) today proposed that the risk weight floor should be raised from today’s 15% to 25%, addressing the risks associated with household debts. This will reduce the need to fully utilise the countercyclical capital buffer according to the FSA.
Raised risk weight floor to 25% increases the buffers in the financial system and could lift mortgage rates by up to 0.3% point (0.2% point after interest rate deductions) according to the FSA. This is in line with our calculations. The FSA says that this is “a big step” and that the floor should remain at the new level over a longer period of time.
The timeframe for introduction of the new floor is unclear. The legal framework must be in place before the risk weights may be implemented. This could happen “some time into next year” according to the FSA.
At the press conference the Director General Martin Andersson says that he doesn’t rule out any additional measures to curb credit growth. Much suggests though that any further measures are not around the corner. The FSA emphasizes that macroprudential policy can’t fix all fundamental problems with the housing market and household debts.
As for the Riksbank, this increases pressure on monetary policy and allow the Riksbank to emphasis more on traditional factors such as resource utilisation and inflation.
However, the new measures will probably not affect credit demand in any marked way. Moreover, the risk weight floor will probably not be raised until well into 2014. Housing prices as well as credit growth will probably continue to rise going forward. Thus, the Riksbank will probably argue that household debt still is a risk for the economy, as it may have a negative impact on consumption, GDP growth and thus also for resource utilization and inflation.
All in all, the FSA’s proposal is in line with what we had expected. Because the implementation of new macroprudential tools will seemingly be gradual, so will their effect on monetary policy. Thus, household debt remains on the Riksbank’s radar. Today’s message doesn’t alter our view ahead of the Riksbank’s rate decision in December. We stick to our view that the Riksbank will stay on hold.
Nordea