If we look at those who have mortgages (which constitute approximately fourfifths of indebted households) the debt ratio reaches 313 per cent (see Chart 2). This comparison clearly shows that debt ratios vary depending on which households we choose to look at, and it also makes clear the extent to which the aggregate debt ratio underestimates the actual burden of debt for indebted individuals. 7  According to Statistics Sweden, loans from MFIs to households amounted to SEK 2,826 billion in July 2013, with 81 per cent of these being mortgages. 8  From July 2010 to July 2013. 9  According to Statistics Sweden, 7.7 million people aged over 17 were resident in Sweden in 2013. 4  BIS central bankers’ speeches  Chart 2. Debt ratios for different groups Per cent 400 350 300 250 200 150 100 50 0 All, including non-indebted  Only indebted  Only mortgage borrowers  New mortgage borrowers  Note. The debt ratio for the group designated “All, including non-indebted” corresponds to the aggregate debt ratio shown in Chart 1. It is calculated as the household sector’s total debts in relation to the sector’s total disposable incomes. The debt ratios for the other three groups are calculated as averages of the individual households’ debt ratios. Sources: Statistics Sweden, the Riksbank and Finansinspektionen  Not only new borrowers have high debt ratios Another claim is that high debt ratios are mostly to be found among new mortgage borrowers.
Creditors’ incentives are very similar to those during a bank run, except with investors now seeking security rather than immediacy.27 As with a bank run, this dynamic risks becoming self-fulfilling. The greater the level of, and risk around, encumbrance levels, the higher the return unsecured creditors will demand given the risks of subordination. And the higher this cost, the greater banks’ incentives to finance instead on secured terms. Both banks and their individual investors have incentives to encumber the balance sheet by progressively – and self-fulfillingly – larger amounts. There is an arms race spiral. Yet the equilibrium of this seniority game is unlikely to be an optimal one, either for individual investors or for the financial system as a whole. To queue-jump is ultimately futile for creditors; it is another Red Queen Race. Not everyone can be at the front of the seniority queue. Indeed, at high levels of encumbrance, the financial system as a whole may even be riskier, as it is more susceptible to pro-cyclical swings in the underlying value of banks’ assets. The quest for individual security generates system-wide instability. So under an arms race to safety, the like of which may be currently underway, the outcome for the financial system could be both socially and individually inefficient. If there were a benign, enlightened regulatory planner, able collectively to co-ordinate investors and banks on a lower-encumbrance equilibrium, this race for safety could be forestalled. Unfortunately, there is not. ************ What public policy lessons might be drawn from these financial arms races?