How Swedish mortgage customers are paying for banks’ borrowing bills


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Wednesday, 13 July 2011
Swedish mortgage rates increase more than the banks' borrowing costs, even if one look at the repo rate. The difference is very glaring. New rules in recent years have led to banks' borrowing costs rising even more but that is no problem to the banks because customers can pay the bills passed to them by the banks.

According to Swedish daily, Dagens Nyeheter (DN) in a comparison of the leading mortgage institutions for a three-month mortgage borrowed out to customers and the average interest rates mortgages companies and banks pay when they borrow from each other - since January 2008,  the trend is clear: the margins are increasing.

Since January 2008, the average margin for the five banks compared increased from 0.66 to 1.50 percent today. The same applies to the repo rate. Average margin has increased from 1.32 to 2.06 percent. The five banks are SEB, Swedban, Handelsbanken, Nordea and SSAB.

“Some of the marginal adjustments are because the banks have begun to adjust its borrowing. It has to do with the new rules and thus the banks must reduce their risks as well as its costs,” said Tor Borg, fixed income analyst at SBAB to the daily DN.

But just to compare with the repo rates and the average rates banks pay when they borrow from each other is to make it too easy for themselves. Bank to bank borrowing interest rates is a short-term rate, and to borrow only at the short term loan market is considered too risky. Banks must also ensure its long-term financing, often by mortgage bonds, which runs over a couple of years.

After the financial crisis, there has bee increase in the banks borrowing requirements. In addition, the EU is now drawing up guidelines based on recommendations from the Basel Committee - Basel III that will force banks to increase their capital and impose additional requirements on buffers, even for liquidity risk.


Although the Basel III has not taken effect, the banks have already started to increase margins.

“I would think that banks have better margins on their mortgages than six months ago and that this is because they are doing so to prepare for Basel III,” said Tor Borg.

SEB is the only bank to open accounts for their borrowing costs. Right now, borrowing cost is 2.82 percent for three-month mortgage. The figure is based on the model of three months interbank rates plus a charge for liquidity.

“Before the financial crisis liquidity cost was low. Then it rose after the period of the Lehman crash, and has fluctuated since then. Now with the growing unrest in southern Europe the liquidity question has become a growing concern again. There is a risk that the price of money will go up,” says Mats Torstendahl, director of retail operations at SEB.

The Swedish FSA (Finansinspektionen) has looked into the banks' funding attitudes in a report issued at the end of May.

“Bank margins have increased when compared to inter bank borrowing interest rates. In a way, it is natural that margins will rise since it depends in particular on the FSA placeing greater demands on banks,” says Aino Bunge, Senior Analyst at the Swedish FSA Finansinspektionen.

All the above is caused by the excessive over valued Swedish house prices which have been decreasing some what recently. But they still costs just over a third of the lot, compared to other EU countries and to the Swedish household income growths.
By Team

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