Are Nordic Banks Really That Strong? – Part 3

When you examine the strength of banks here in the Nordic region you can discount comments made in the media by the banks and by the supervisors.

The banks want to paint the picture that they are the cornerstone of the economy, when their main objective is to maximise short-term profits which are paid out to management and then to shareholders. The supervisors want to tell you what a wonderful job they are doing by keeping banks profitable. What they do not mention is that profits are being made with your money and losses too! Both are caused by moral hazard through “to big to fail”, and by consolidation of banking. There are now so few banks that we can talk openly about oligopolies in this sector.

Let’s examine the risks in banking which relate to the real estate markets – commercial real estate along with ordinary housing loans. We include commercial real estate today because banks are financing new housing developments as well as offices in urban centres.

The bigger the share of home owners with loans (people who own their houses with borrowed money) in relation to the nation’s economy, the greater the risks for banks. According to the OECD Denmark, Norway and Sweden have relatively high shares of home owners with loans. Lending standards have been weakened over the years. In Sweden tax breaks for homeowners have increased the attraction for housing loans, while a dysfunctional rental market, characterised by expensive and often illegal subletting, has forced more people into home ownership. 

In Finland, Norway and Sweden housing loans make up more than a third of banks’ total assets. In Denmark they account for nearly 50% of banks’ balance sheets! Sharp falls in house prices could trigger losses. In some urban areas or in sparsely populated areas apartments and homes already stand empty and abandoned when they cannot be sold.

The type of housing loan will also increases risks for banks and home-owners. Rising interest rates will be felt almost instantly by borrowers on variable interest rates, which move up with increasing interest rates. Fixed rate loans are safer but they too are risky when the fixed period comes to an end and they are re-fixed at a much higher level. Finland, Sweden and Norway have plenty of floating rate loans (between 70% and 90%) while Denmark is safer with some 16%.

Then we can see that rising rates impact those households with a larger loans. High levels of household debt in relation to disposable income in Denmark (242%), Norway (247%) and Sweden (201%), while Finland is lower at 154%. In all these countries households will face heftier monthly repayments just as soaring food and energy costs eat into their incomes.

In other words banks the largest banking groups in the Nordic countries, like OP Group, Nordea, Swedbank, Den Danske Bank and Handelsbanken, are all exposed much more than the supervisors are letting on! Since most of the above banks are active in all of the Nordic countries one can see that there are plenty of risk exposure floating around ready for the next banking crisis.

Site Footer