In this section primary data was collected from interviews with key actors in the bank branch. Summaries of essential parts of the interviews are given, rather than to present the complete interviews. Unrelated information was removed, as it did not present relevance of importance for the purpose of this study.
Credit granting process
The main criteria’s taken into account in the credit granting process is the salary, the stability of the company the borrower is working at and the borrowers repayment ability as well as the increased number of divorces. After expenses for rate, rent, amortization and operation costs you must have a certain sum over for living, this sum depends on the number of family members. When counting on the calculus the bank count with the customer to be able to handle a rate at 7,5% rather than the current rate at 1,5%-2%. Handelsbanken has not implemented the amortization plan suggested by Swedish Financial Supervisory Authority yet but that will come in the near future. In the current situation the customer must amortize from 85% down to 70% in a period of 15 years. Before the GFC you could borrow 100% of the real estate value plus the sum for title deed and mortgage deed. Today Swedish Financial Supervisory Authority has implemented a maximum limit for loans to be 85% of the real estate value. This limit can be tougher as well if the borrower plan to buy a home in a place2 where the future demand and price increase is hard to forecast.
The limit of 85% is essential for households to not overwhelm themselves with debt but the regulation has consequences mainly as it create class distinctions. Cicki claim that it should be some relief for young, first time buyers to entry the market, it is as good as impossible to buy an apartment if they do not have a parent that is able to help them with the down payment. Parents have traditionally been recommended to open a savings account for their children from their birth already. Today, and in the future, parents are instead recommended to open a savings account in which they save a specific sum every month that will be enough for a down payment to an apartment by the time the children are grown up.
Further, Cicki explain the relevance of the banks rating in the credit granting process. Moody’s is one of the three largest credit rating agencies in the world and rate banks in 35 countries, Handelsbanken among these (Moody’s, 2015). Handelsbanken rank their customers with different level of ratings and strive after having many customers with good repayment ability that they can rank high. If the bank have many high rated customers this minimize the risk exposed to the bank and will in turn lead to that the bank itself may earn a higher rating by Moody’s. A high rating result in that Handelsbanken would loan cheaper in the world market. This statement should not be misinterpreted as if the bank only seeks for the top customers, as that is not the case.
In the 1990s many banks strived to offer home loans in large volumes as the more loans they could get out in the market, the more profit they could make. That was showed to be a risky behavior and is one of numerous reasons that have contributed to stricter rules of that the credit granting process has become stricter and that the customer is more carefully chosen.
The risk management is centralized and has been expanding since the GFC. The main risks facing Handelsbanken, and probably all banks these days, is the risk of an economic downturn and/ or increased rates.
Although risk management has increased, there are new dilemmas facing the teams working with this. Society is different from what has ever been seen before with a negative rate and an inflation that does not seem to increase even if the central bank have put in effort and actions to increase it. Traditional theories of forecasting risks build on statistics but as the external factors look different today, these theories are not applicable in the same range anymore.
Further, the increased number of terror attach’s, natural disasters and other catastrophes in the world affect the stock market extremely and these disasters are usually impossible to predict, which pose an additional risk to banks. These facts also contribute to the complex stock market that is not possible to forecast according to firms quarter reports anymore. News headlines look more often like this “Handelsbanken exceeded expectations – the stock fell” what is the logic behind that?
That all regulations, especially Basel III with its capital adequacy policies, have become stricter since the GFC can be seen in literature and is strengthened by Cicki who also claim that they are about to become even stricter in the future. The Basel III regulation are under constant improvement as it is planned to be fulfilled first in 2019 (Finansmarknadskommittén, 2012),
which may be a reason that the regulations can make it tough to even pursue bank activity sometimes.
Further I asked if there is any possibility to deviate from the Basel regulations. It is not possible to deviate from them but they can be interpreted differently, which can be meaningful in a competitive perspective.
The collapse of Lehman Brothers in 2008 was an eye-opener for both financial institutes and private persons. Many people investing in options were not aware of what risk they commit to. For instance, if a person bought a financial asset through a financial institution that only focus on investments such as Navexa3 (previously named Acta), note that Handelsbanken or other Swedish banks were not included as one of the sellers of these assets, the asset could be a mix of securities and that way the customer may have had a risk in Lehman Brothers without knowing about it. By this time people knew that there was a risk of loosing but not in what range, they could never expect the largest investment bank in the world to collapse and that they would be affected through their bank commitment, or whatever institute the option was bought in. After this, a new regulation was implemented to all financial institutions where the fact that the customer knows their rights and exactly what risks they commit to must be documented. This has resulted in that the financial sector has become more careful.
I asked Cicki to conclude what the biggest differences in the banks are compared to the GFC in which she answer that everything has changed. Risk management, regulation, credit granting, fund management – everything has become stricter as a result of the crisis. Handelsbanken have always been the Swedish bank that has experienced financial crisis with the best result but that does not mean that they have not felt the downturns in the markets.
I wondered about people’s general consumption behavior and if they are afraid of a rate increase. People are not concerned about a rate increase in the range they should be, which is a bit worrying to the bank. Further, Cicki experience that the generation that still want to pay off their loan is dying, while the young live after the monthly cost4 and is not so eager to amortize.
I asked if it is too easy to loan today. Cicki states that it is not too easy to be offered a home loan as calculus are strict but it is absolutely too easy to access small, quick loans with high rates, which people use for renovating, travel, Christmas gifts or consumption. Sometimes a bank customer want to use their house as collateral when it is vacation time and they have a need for it very quick – then one can expect that this extra loan will be used for traveling. The borrower does not need to tell why he or she want to increase the loan amount.
Finally I was interested in Cicki’s opinion of whether there is a real estate bubble or not. Cicki claims that one should not be specially worried about buying a real estate in the central parts of Jönköping at least, as it is a popular city with an increased growth in addition to the plans of a station for high-speed train that should make the interest for the city increase even more. It is very hard to forecast whether there is a real estate bubble but even if Jönköping is a popular city and is forecasted to be so in the future as well, Cicki claims that there is definitely risk of an economic setback if rates for instance start to rise. The primary risk group will then be the ones who have bought overvalued real estates in the outskirts of Jönköping and other larger cities. Further I asked if she could mention something about the situation in Stockholm where the real estate prices are most extreme. There are a few reasons against a real estate bubble in Stockholm, first, people move to the suburbs instead and second, the last two months one has actually seen a small slowdown in the real estate prices in Stockholm. However, bubble or not, if the economy starts to turn and rates increase, it turns so quickly that many people will probably end up in a tough position although they have been offered the loan in the first place.
Greta Petersson has a long experience from the banking industry, she works as a consultant at Swedbank in Jönköping today but have worked in Länsförsäkringar before that and has been in banking industry since 2001.
Credit granting process
The base criteria’s taken into account with a new customer is whether they have a permanent job, unemployment benefit, savings account or any other safety. Further, you must have 15% of the real estate value in cash as deposit plus money for title deed and mortgage deed. Except for the standard criteria’s the bank recommend to have an income insurance especially for the ones who earn a high salary as their difference will be notable if they loose their job and a life insurance if you have small children in the family.
The official 3 month rate at Swedbank for November is 1,97% and the average rate is 1,51%. When offering a loan to a customer Swedbank count with that the customer must afford a rate at 7%. In addition, you should also need to be able to amortize according to the suggested rules by Swedish Financial Supervisory Authority, which is 2% if your loan is above 70% of the real estate value and 1% if your loan is between 50 and 70% of the real estate value. Though, the Administrative court of appeal in Jönköping is against the amortization policy suggested by Swedish Financial Supervisory Authority.
Further, in addition to rates and amortization there are operation costs, 45 000 if you are buying a house plus rent fee and after all these costs are paid, to be offered a loan you must have 10 200 Swedish crowns left if you are alone, the more persons in the family the higher this number gets. If you have less than that sum, the bank recommend you to look at a cheaper real estate or go in with more cash. The standards are strict although, there is always an individual evaluation of a person. For instance if you lack 50 000 they can make a private loan on the sum or use parents house as a safety. If the borrower have no previous payment defaults like CSN, an overall good calculus, own firm or alike, in general the bank can be flexible because “gut feeling is usually right”. In risky cases the bank can also demand a higher down payment than 15% and that could be in cases where the borrower will buy a home in a really small village out in the woods where the future prices is very unpredictable. Minimizing of the credit risk.
I asked of peoples consumption behavior; how people can afford nice cars, travel etc. and that is possible because many have a overvalued house and that way they can add the car to the house, but this loan is separated from the house in order for the bank to have control. Greta does not agree that people borrow for the borrowing; people say they do not want to borrow more than necessary. Overall she thinks that people amortize quite well and she thinks that they have an understanding although there are exceptions.
Table of content
1.2 Problem statement
2 Theoretical frame
2.1 Global Financial Crisis
2.2 A Swedish perspective of the Global Financial Crisis
2.3 Household behavior
2.4 Risk management in banking sector
2.6 Credit granting process
3 Methodology and Method
4 Empirical Findings
4.4 Summary of all banks
5.1 Swedish perspective of the GFC
5.2 Basel Regulations
5.3 Risk management
5.4 Credit granting process
5.5 Household behavior
8 Critiques to research7
9 Future research
10 List of references