Nordea could raise interest margins of existing home loans

Banks granted right to alter interest margins unilaterally in March

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In March this year banks in Finland have had the right to unilaterally raise the interest margins on housing loans, if the capital adequacy of the bank is at stake.
      Erkki Kontkanen of the Federation of Finnish Financial Services (FK) says that the matter, which has been under preparation for two years, has the approval of the Financial Supervision Authority, and that of consumer officials.
      Of Finland’s larger banks, Nordea has availed itself of the possibility to put a clause in new loan contracts allowing for such a move under certain circumstances. The smaller Tapiola Bank has done the same. Nordea introduced the clause in its new housing loan contracts in July.
      A similar clause had been added to Tapiola’s home loan contracts already in May.
      The new conditions only apply to loans with the specific clauses in the contracts: banks cannot manipulate the interest margins of older loans.
      Nordea manager Jussi Mekkonen emphasises that the clauses provide an option to be used in crisis situations. “If enacting this were ever to be considered, it would be influenced by very many factors: trust, reputation, competition, and market share, which should be taken into consideration”.
     
The bank can activate the clause only when its solvency and capital adequacy are in jeopardy - that is, if it is on the brink of bankruptcy, as has been the case with a number of American banks in recent days. Before making any decisions on the matter, the banks need to negotiate with the Financial Supervision Authority.
     FK’s Kontkanen notes that banks operating in Finland have a good solvency rate, and are quite very far from a situation in which the clause could be activated.
     However, recent events in the United States have shown that bank liquidity can fluctuate rapidly.
      Nordea cannot raise its interest margins before July 2011. Tapiola could do it two months earlier, as the clauses stipulate that the changes are not possible until three years have passed from taking out the loan.
     The bank also cannot increase the margin to any level it wants - only to the “level of the day”. What that level is, is not easy to determine, however, as all banks determine the margins individually with each customer.
     Currently the margin of the day at Finnish banks varies between 0.4 and 0.5 per cent, but there are always customers who have an even higher margin. A bank could, in principle, raise its customers’ loan margins to the highest rate in use, and claim that it is the level of the day.
     However, Harri Lauslahti, CEO of Tapiola Bank, says that banks are unlikely to try to milk their customers for cash by raising interest margins, as such an institution would easily be labelled a bank in crisis.
     
Nordiea’s main competitors, Pohjola Bank and Sampo Bank, have not added any clauses to their loan contracts that would allow manipulation of interest rates of existing home loans. Handelsbanken and Aktia have also opted out of the possibility.
      Although banks insist that raising the margins would be a measure to be enacted only in a serious crisis, they nevertheless want to keep the option open.
      “Loan periods have become very long. I do not know any company that would sell a 25-year service without a possibility of re-examining the situation later”, says Carl-Johan Granvik, director of Finnish operations of Nordea.
      Loans with a payback time of 25 years or more did not become popular in Finland until the present decade, at the initiative of the banks themselves.


Previously in HS International Edition:
  Limited impact of Lehman Brothers bankruptcy on Finnish investors and bank customers (16.9.2008)
  Expert: Finnish bank accounts are safe (16.9.2008)

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