MNI INTERVIEW: Low Rates Fuel Risk:Swedish Regulator Economist

By David Robinson

     LONDON (MNI) - Signals from central banks that policy rates are likely to

stay low for even longer have fuelled increased risk-taking, Henrik Braconier,

the top economist at Sweden's financial sector regulator told MNI.

     As recently as six months ago, policy rates were widely expected to rise,

"leading to more subdued risk-taking in the financial sector in general," but

"we have a scenario now which is low for even longer," Braconier, chief

economist at Finansinspektionen, said in an interview.

     While he cautioned that the relationship between risk-taking and changing

rate expectations was not necessarily linear, risk-taking has clearly risen,

Braconier said, noting for example how risk premiums on Swedish corporate bonds,

have decreased markedly since last autumn.

     At its April meeting, the Riksbank Executive Board pushed back the likely

timing of the next hike in the repo rate, currently -0.25%, saying that it was

only likely to be raised again "towards the end of the year or at the beginning

of next year."

     FI has already sounded the alarm over Swedish corporate real estate,

forcing banks to hold more capital against loans to the sector.

     "Banks have too high incentives to give loans to these firms," Braconier

said.

     But, while the Riksbank has raised concerns about high household debt,

particularly if interest rates do rise, Braconier said any resulting risk to

financial stability was limited.

     "Our view has been for quite some time household indebtedness has mainly

been a macro-economic risk," he said.

     However, he defended FI's policy of forcing homeowners to pay down

mortgages, which has come under fire from former Riksbank Deputy Governor and

internationally-known economist Lars Svensson.

     "The stress tests we have been doing on Swedish mortgages ... show that

borrowers will be able to repay interest and amortization. But what we have been

concerned about is the fact that in order to do that they will probably cut back

a lot on consumption which, for example, is what we saw in the UK during the

financial crisis," he said.

     Svensson said in a paper published in May that mandatory amortisation

causes distortions such as making it more difficult for first-time buyers

without high income or wealth to enter the housing market.

     Braconier admitted that "all kinds of regulation have negative side

effects," but insisted Sweden's housing market remained relatively accessible.

     "Even though we have a dysfunctional rental market it seems like young

Swedes find it easier to get into the housing market than virtually any other

Europeans," he said.

     In Denmark, where, before the financial crisis, banks ended mandatory

amortisation with the aim of helping the young, borrowing rose across the board

while the age and social distribution of home ownership was unchanged.

     "Everyone could borrow more, everyone could have more leverage and, of

course, that meant that when they came into the financial crisis many households

were over leveraged and hit quite badly by the crisis," Braconier said.

     "I think the Danish experience before the financial crisis actually shows

why it is important that we have these measures in place," he added.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MT$$$$,MX$$$$]