Banks, Direct Speech, Economics, EU – Baltic States, Financial Services, Lithuania, Real Estate

LETA/BNS: What is the situation right now in Sweden's housing market and is it in trouble and in a bubble?

Stefan Ingves: We never use the word bubble because it is so hard to define what a bubble is and usually people argue afterwards whether it was a bubble or not if and when prices go down. But in our view our housing market is seriously out of equilibrium and it has been so for quite a while. Because for various reasons and number of them structural, house prices has been going up for long time and at the same time house owned debt has been increasing for too long. So, things are not going well in our housing market and that is a well-known position of the central bank. We need to do more in order to avoid problems in the future.

Lithuania and Sweden are interconnected through the banking sector which here is almost all Swedish. What risks the Sweden's housing market poses for Lithuania?

S.I.: There is a risk in an indirect way because If our banks were to run into trouble than they would end up with a problem everywhere. (…) If they had problems at home then it would be more difficult to expand in Lithuania and in other places. That is the interconnection. They would have less capital. If they had losses it would make it more difficult for them to expand in Sweden and in Lithuania and other places as well because you then would have to spend more time trying to fix the problem and you can’t provide credit the way you did before.

Should the Lithuanian banking sector worry about Sweden's housing market?

S.I.: They have good reason to keep track of what is going in this housing market. We do have some problems in our housing market and for that reason given that Swedish banks are also very dominant in Lithuania it pays to keep of what we are doing or try to do.

Does it pay to do something proactively in Lithuania?

S.I.: Well there is nothing much that they can do. All the decision making powers in this field rest domestically with Sweden but it is certainly worthwhile to keep track.

What can the central banks do in order to mitigate these risks?

S.I.: Our job is to talk about these risks and explain to people again and again what happens when things go wrong and how difficult it is to deal with these things and how long it takes to fix them. How both individual households and the general macroeconomic picture becomes a problem and people get hurt and at the macro level you are going to end up with low growth for a number of years. One would like as much as possible to avoid that.

What are the main tools that Swedish and Lithuanian central banks and governments can use to avoid these risks?

S.I.: You can do things on a supervisory side when it comes to how much capital banks need to hold. You can do things on the macro prudential side by making it more difficult to borrow in one way or another. For example by having a loan to value ratio. You can put in place a debt to income restriction in one form or the other and all these measures make it more difficult and more costly to borrow in one way or the other. Another version of doing these things is to do it on fiscal side by for example increasing the property tax or dealing with interest rate deductibility for tax purposes for mortgages which I don't think you have here but which is a very huge issue in a number of other countries. The issue is not the lack of tools when you do these things but the willingness to use those tools.

Is the real estate market of Sweden the biggest financial risk right now in your country?

S.I.: Yes. Given that in broad terms the economy is doing well, unemployment is fairly low, we are running a large current account surplus, inflation has lately been moving in the right direction and growth is likely to be above trend for the coming years. So, at the overall macro level things are okay but the price we pay presently is given that interest rates are low and they are low all over the world then we are building up risks in the housing market and that certainly increases risks in the system as whole going forward. In that sense it is a major issues.

What is Sweden doing in order to mitigate this risk?

S.I.: We definitely need to do more. We have a loan to value ratio already. We have introduced an amortization requirement recently but it is very weak. In my view we need to introduce a debt to income ratio and we should also do away with interest rate deductibility for tax purposes. That is an example of some measures that we need to take.

At the same time we also have all sorts of rigidities in the housing market. It takes a very long time to increase the supply of housing when you have to get all sorts of permits from the local municipalities. So, people are borrowing too much and you need to make it more costly to borrow. Well at the same time there are all sorts of impediments on the supply side when it comes to increasing the supply of housing and that means that the housing supply is not increasing at a pace that we would like to see. That of course exacerbates the disequilibrium because if there is not enough housing around and it is cheap to borrow, prices can go only one way and it is up, up, up. That increases the risks in the system.

Are the risks expanding, getting smaller or staying at the same level?

S.I.: They are getting bigger.

Do you have a tipping point in mind?

S.I.: That you can never now. I am just saying that the risks are going up and they have been going for many years. In a good scenario it settles down by itself and in a bad scenario it does not because when the whole thing tips over and goes in another direction. So, essentially what this is all about is trying to manage risks.

If something happens to the housing market in Sweden is it going to be a problem in the whole EU?

S.I.: No, it is going to be a Swedish problem. The Swedish economy is not that big in a European context in that respect if things would turn sour in Sweden it would affect our neighbors but that is about it.

I am sorry for asking a personal question but when people are having serious problems in their lives they can’t sleep at night. So, is the housing market for you as the governor of Sweden’s central bank that kind of a problem and you lose sleep over it?

S.I.: I always sleep at night but our housing market is and remains a headache because we have mismanaged our housing market for long time and that means that risks are going up in the system by the day and that is not good. Our housing markets needs to be fixed.

For a long time the Baltic banking sector for Swedish banks was thought as a home market. Does that still stand?

S.I.: It is still a home market in the sense that you look at the Swedish banking – more and more Swedish banking is cross border in the Nordic-Baltic region. In that sense and given the size of our banks they have kind of outgrown the domestic market so it is not surprising that many of them are all over the Nordic and Baltic countries. With free capital flows that is kind of an evolution over time.

As we mentioned before Lithuanian banking sector is dominated by Swedish banks. What advantages do you see in this dominance for Lithuanians?

S.I.: I think if you take 20-30 year perspective the advantage has been that you very rapidly kind of borrowed the whole financial sector from Sweden and that was probably a good thing in terms of engineering growth domestically. The alternative - 30 years ago would have been to sort of start some kind of a small banking sector on your own. Now you could lean on available knowledge from abroad and that has probably over the pasts decades served you very well.

And the disadvantages?

S.I.: We saw what happened during the financial crisis in 2007-2009 in a sense that Swedish banks there not able to control the things and they have moved too fast. In fairness that was not only the fault of the Swedish banks it was also the fault of what was going in the countries themselves but the collective result was of course a problem because you had a serious recession. Same thing in Latvia and Estonia.

The banks in the Baltic countries are the most profitable in the whole eu and the euro zone while the ECB is saying that the profit margins of euro zone banks are too small. Why do you the banks in Baltics can be more profitable?

S.I.: I think that holds not only about Baltic countries but I would say it is about the whole Nordic-Baltic region and one reason for that is that banks have a much lower cost base in this part of Europe compared to the south. I think you find many banks in other parts of Europe that have a cost to income ratio which is around 90-95. If you take the Swedish banks and also when including the Swedish banks being active in the Baltic countries, they have a cost to income ratio around 40-45. So, that means that in terms of the cost base the banks up here in our corner of the world are much more efficient than many other banks in Europe. That is because they have fewer people employed per services they provide, they are probably much more computerized than other banks and generally speaking in a countries of our type the general public broadly speaking is an early adapter of new technology. So, we probably have more Internet banking than in many parts of Europe, we are probably much faster than it comes to using new means of payments. We are probably ahead compared to other parts in Europe than it comes to let's say sending money from one cellphone to another and things like that. (…) In addition to that and I think this is important as well is that part of the banking business in our part of the world is more fee based than just lending to household and corporates.

As the governor of Sweden's central bank do you hear any complaint form Swedish banks about the difficulties of operating in Lithuania?

S.I.: No. You should ask that the bankers. At least they do not complain to me.

What is your opinion of the euro and the euro zone right now?

S.I.: Well it is not really for me to think about the euro. We have our own currency. The ECB is really doing its best to get inflation up according to their inflation target – 2% or slightly below. That is a good thing for Europe and for us as well.

While Sweden has an obligation to adopt euro at some point when it meets all the criteria it has found a loophole for not entering it and the swedes themselves still do not want to adopt the currency. Why?

S.I.: Part of it is sovereignty and part of it is dealing with where Europe ended up because in the early days when we have not been managed as Swedish economy very well our argument was to join the euro thinking that the euro zone would be more stable than the Swedish economy. We had a lot economic issues in the past. But now the way the things have evolved over the past 10 years roughly the Swedish economy ended up being more stable than the euro zone. If you add that to the perceived issue of sovereignty it means that politically the issues of joining the euro today is just completely dead.

It is not going to happen ever?

S.I.: Ever? That I don't know but absolutely not in the near future.