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Sweden Parliament

How should Swedish and British banks react to regulatory comments on their ‘overexposure’ to household debt?

With regulators increasingly expressing alarm regarding the risks to banks of the growing household debt in both Sweden and the UK, Mapa has probed into the drivers of this demand and looked at how banks should evolve their marketing strategies to reduce their own risk.

SWEDEN: Riksbank

As an Englishman, it has been interesting to read recently of the Riksbank concern at the surge in property prices and mortgage lending in Sweden. Substitute Stockholm with Shoreditch in any conversation and we have been there, done that.

The main headline is the risk posed to the Swedish banking system from the high housing prices and high indebtedness. Two things in particular concern the regulator; one is the acceleration of property prices, and the other is the variable mortgage rate products being taken on by the majority of borrowers. The latter are exposed to any upward base rate change.

Currently the household percentage of disposable income is estimated to be around 180% – not far off the all-time high of 191%.

Recognising that the impact of current low rates will continue to drive demand for debt, the bank postulates that one approach it may use is a debt-to-income limit to curtail demand. Whilst the regulatory action is not in place, the spectre of previous boom/bust scenarios playing itself out will not be lost on most banks.

Clearly the average Swede account holder is becoming more risky to banks; they will increasingly be so.

UK: Bank of England

In a different country, a different set of scenarios are fostering the same statistical impact. A binge on unsecured lending and credit card borrowing has led to a rise in the same metric. The latest minutes from the Bank of England confirm identical consumer indebtedness concerns to those expressed by the Riksbank. (On page 5 Points 15,16,17 the Bank looks at the surging personal debt issue within the UK.)

At 140%, UK household debt-to-income ratio is already high by historical standards. To compound this, in the twelve months to September 2016, total lending to the household sector has grown by 4.1%, close to its fastest rate since the global financial crisis. Mortgage lending had grown by 3.2% and consumer credit by 10.2%.

In Britain, the recent interest rate cut post Brexit had, in contrast to Sweden, been introduced to drive the earned side of the debt equation. The reality has not borne this out. Increases in unsecured debt have far outpaced the growth in household incomes.

As the with the Swedish Riksbank concern, the Bank of England comments on the artificially low rates suppressing the real cost of servicing the ballooning debt. In a different take to Sweden, the potential of rising unemployment is highlighted as a concern for reduced debt affordability – the focus being on reduced household income.

Regardless of that different emphasis, like the Swedes, the average British account holder is becoming more risky to banks, and will increasingly be so.

Bank de-risking – targeting winning segments

Banks in both markets being confronted by an increasingly risky core market will need to plan and review what options there might be to reduce this risk without affecting profitably.

For many banks, the temptation to follow the demand and change nothing in their supply model will be just too great to resist.

By contrast, strategic thinkers will change their model and invest in or build business in parallel/connected segments. Segments should be selected based on those that they can serve effectively.

There is already a move by some banks to shift resources into the connected areas of SME banking and HNWI segments as lower risk and higher return sectors.

The key is, regardless of whether you are in Sweden or Britain, whatever segment you choose should give you some market advantage. The rest is just implementation.

Several Swedish banks including Handelsbanken and Swedbank are monitored as part of Mapa’s global Mobile Banking and Desktop Banking dashboards. Contact us today to find out more.

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