Full interview transcript: Martin Andersson, head of Sweden's financial regulator

Which approach is better, one tool or a package of measures?

I don’t think there is just one tool that you can use, that’s the whole idea of macroprudential policy. It’s not like monetary policy where you have one tool. [Macro-prudential policies] address a broader and more loosely defined problem, and our approach has been to use different instruments and use them a bit at a time and to wait and see how well they work.

On the bank side, we’ve pushed up capital in the banks quite significantly, not only through increased risk weight for mortgages, but in other measures as well, and now lately with the counter-cyclical measures. So we have been trying to lock in capital in the banks. When we talk about risk-weights those measures change the supply (not sure what this means/could you clarify??) of mortgages as a higher risk weight makes it more expensive for banks to provide mortgages as opposed to a few years ago when it was virtually cost free.

On the demand side we have introduced the LTV regulation which has been effective at quickly slashing LTV-ratios for new mortgages. At the moment we haven’t pushed for a strong amortisation requirement, instead opting for a softer first step with amortization plans ... but we are putting plans in place if we should need them. The important thing for us is to act in a careful manner because it would be easy to trigger a dramatic drop in house prices if you introduce new measures to aggressively. This is a delicate problem that we are dealing with. We have a step-by-step approach where we use different tools, both on the demand side and on the supply side, and letting them have effect. We think that’s a better way to go, and then we can wait and see how things develop and see if there’s a need to do something more."

Which countries' macroprudential policies do you admire?

When we started with the LTVs they had been used in other countries. That was one of the reasons that Hong Kong did quite well in the Asian crisis because they used it for commercial property.

But at the same time it was difficult to draw general conclusions on the impact as there are a lot of institutional matters that differ between different countries. But we decided to do it and see what would happen.

Before the cap we’d seen many years of steadily increasing LTVs in the mortgage sector. After we introduced a ceiling, we dampened this trend. Now we have been working to change the amortisation culture because in most countries there is some type of amortisation and it has almost got lost in this country.

But I think everything has been tested one way or another. Both the good and the bad. Most countries had higher risk weights on mortgages than we have in Sweden when we started. Now we have higher, but you can see what’s happening in other countries. At the same time you see examples of countries doing to much - the Netherlands is often cited as a country which took dramatic moves, which actually might have hurt the economy quite significantly. When I participated in a G10 study some years ago in my previous job as a central banker, we were looking at examples around the globe where you’d used various kinds of policy to tackle bubbles brewing. And we could see that there was a lot of bad experiences when countries came in too late and did too much, and I think that has been the valuable lesson that we have tried to carry with us here. It’s better to follow a step by step approach, using different measures, than pulling too hard on one lever and risking creating the one problem that we’ve tried to avoid from the start.

This is uncertain territory, and faced with that truth you can have three approaches. You can say this is uncertain, this is untested so we don’t want to do anything. I think that’s bad policy because it creates problems now or means you run into problems later. It was this old Greenspan Put era that left bubbles in place and policymakers have been trying to pick up the pieces since. I don’t think anyone really believes in this any longer.

And then you can say that now is the time for tough measures, and try to fix the problem once and for all. This I think is potentially very risky. Some people think that we can reduce LTVs very quickly or as they have done in the Netherlands, introduce rules from one day to the next that mortgages should be paid down completely in 30 years. These types of measures are very dramatic and risk creating the very problem you’re trying so hard to avoid. I think it might be a more sensible approach to use different tools on the demand side and on the supply side, evaluate the effect and then try to move on later on."

Are the policies working?

On the LTV side we’ve seen a clear change in the pattern. Today only one in ten take a new mortgage with a LTV above 85pc. If we look at household indebtedness, on the credit growth side, you can see that the rate of growth has slowed since 2010.

When we first introduced the LTV ratios, to be honest, no-one thought that we did the right thing because all the experts and media thought that we were creating a problem that didn’t exist. But after six months, taking the vibrant discussion in the media into account where we showed the analysis and took the debate, a lot of people thought that we should do more, because this was now seen as a serious problem. We’ve seen that the discussion changed the game and actually made household indebtedness an issue that that everyone needs to take seriously. That was actually one of the big achievements, to get the problem on the agenda, and what we need to do is continue to work on these different measures to make sure we change people’s behaviour. If we look at households' debt to income, it has been more or less stable since the end of 2009. Debt is still growing, but it’s growing more or less by the same magnitude as disposable income and we will see what happens as we go forward, but there’s this levelling out now which is what we tried to achieve.

Are you concerned that LTV caps have fuelled a rise in shadow banking and people using unsecured loans to "top up" the amount borrowed for a mortgage?

That was one of our concerns. But after we introduced the LTV cap we’ve seen that very few households really take those loans.

Before the new rules, over a third of households had a mortgage of over 85pc LTV. After we introduced the LTV it was only 10pc of households that actually took an additional loan besides their mortgage when they bought the house. But we’ve seen that on those loans, you have an amortisation that pays down the loan in five to ten years. What we saw on the mortgage side before was that often there wasn’t any amortisation at all. So introducing the LTV has meant that we’ve gotten a rapid way of getting buffers in to the household sector. You need to tackle these problems before they grow too big, and we wanted to make sure that we could quite rapidly come down and have bigger buffers in the households if house prices were to fall. That way you don’t get the dramatic effect that you sometimes see if you’re sitting there with a mortgage that is worth more than your house.

One in ten households take additional loans outside their mortgage, but they are amortised down very rapidly, which means that in a few years, you have a bigger buffer. One thing that we have been thinking about for the future is a hardwire in regulation on amortisation in mortgages. Not to pay it off in 30 years, perhaps, but looking at regulation that forces household to pay down the mortgages to a certain LTV in a certain timeframe. But the problem with that approach is that it might be detrimental if households get into economic difficulties due to lower incomes or unemployment for instance. A rule that forces households to amortize might end up forcing people to amortise their relatively cheap mortgages, when in fact they have other expensive credits, or, loans that come with a much higher interest rate that should be paid down first in order to sort out their financial situation. That could be counterproductive both from a financial stability point of view but also from a consumer protection point of view.

That’s why we’ve opted to use an individually tailored amortisation plan so that all households looking for a mortgage will get information from their bank what amortisation means in terms of cost and the lifetime of the loan. What does it mean if you amortise on different levels? what does it mean when they retire? Because so few people have started amortising it means a lot of people within the next 10-15 years will retire with a big mortgage which was not so common 20 years ago."

Typically what happened in the past was that banks often told the customers to save money in mutual funds instead of amortizing as interest rates where low and their mutual funds have yielded a certain amount over the years. They were saying that it’s much better for you to put your money in there than to amortise. And of course it’s a double income for the bank, because people don’t pay back their loans, and they can take out these management fees for the mutual funds. So it was good business for the banks, but it means that Swedish households are pretty leveraged.

If you look at the balance sheet, Swedish households save a lot, and they have a lot of loans, so they are quite wealthy but they have a big balance sheet in that way."

What is your advice for Mark Carney?

Start to address the problems early. Discuss them openly because the public debate is extremely important. And take measures. Don’t wait until you feel you need to take more draconian steps because that will only hurt the economy.

The sooner you start, the less hard you need to be on the measures you take and then you can always follow up to take other measures. The process is equal parts art and science. I think the best way to address this problem is to work on both the supply and demand side and not choose just one of them. You can start with one of them, but you can follow up on the other side. It’s about progress in small steps and them evaluating what the effects are."

Do you see the benefits in introducing Hong Kong style mortgage insurance where people can take out higher LTV loans if they pay for this insurance?

When we introduced the LTV ceiling we said this could be one effect. So there was an opening there if someone wanted to provide this insurance but we haven’t seen it yet and that was four years ago, so I don’t know if there was any appetite because we haven’t seen it coming . If it’s good or bad, I don’t know, but there were some players that thought this was a suitable market but we haven’t seen it yet. If it’s supply or demand I can’t say, but the interest hasn’t really been there. I think the whole debate has made households less interested in taking high LTV mortgages.

You've talked a lot about the importance of amotisation. Why is this?

We want to come back to a situation where all households have buffers and where its normal to actually pay down your loans. We try not to be too prescriptive to individual households and consumers. Instead we try to sell it in a way that the requirements are in the advice itself.

No-one is saying that you need to die debt free. If you have an asset then you can have a debt on it. The thing is if you have a very high debt that you haven’t amortised during your working life it might be a big burden when you retire because you will have a much lower income. And it’s really all about making this visible for the customer. At the same time we have made sure the banks and the households have much bigger buffers so that they can withstand shocks, because that’s really the key.

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