Financial Stability Report 2023:2

Inflation has fallen, but is still high. Central banks have stated that although the largest rate increases have probably already taken place, it may take time before policy rates are cut. Longer-term market rates have also risen recently. Greater geopolitical tension may affect the inflation and economic outlook and lead to greater turbulence in financial markets. After a long period of low interest rates and rising asset prices and indebtedness, it is uncertain how agents will adjust to higher interest rates. This is also true in the Swedish economy, where interest-rate sensitivity is a vulnerability. Higher interest rates are squeezing both property companies, to which banks are very exposed, and highly indebted households. Although the financial system is functioning well, risks remain elevated.

The higher interest rates are affecting property companies via higher funding costs and lower property values. The situation is particularly difficult for some companies, while others are better placed to manage it. However, if interest rates rise further or remain at a higher level for a long time and economic activity slows down even more, more serious problems may arise. Property companies therefore need to reduce their financial risks. Banks also have an important role to play, by maintaining credit supply to viable companies and by requiring property companies to take corrective measures.

High indebtedness and short interest-rate fixation periods are making households sensitive to shocks. In an adverse scenario where households find it even more difficult to cope with cost increases and consumption declines sharply, banks’ loan losses could increase and financial stability could be negatively affected. The Riksbank considers that structural reforms are needed to improve the functioning of the housing market and contribute to long-term sustainable debt development. Moreover, it is important to retain the mortgage cap and amortisation requirements. However, the option of exemptions from the amortisation requirements for special reasons is positive.

The Riksbank’s calculations indicate that banks have sufficient capital to deal with significant problems in the property sector. However, in such a scenario, confidence in the banking system and therefore banks’ funding conditions could deteriorate, which may affect their ability and willingness to supply credit. The calculations do not take into account such confidence effects. Banks should take into account the uncertain economic situation when making their loan loss provisions and should also ensure that, even after the provisions, there are ample margins over their capital requirements. The Riksbank considers that the major Swedish banks should for the time being aim to have a margin over their formal capital requirements that is not less than the upper limit set by the banks themselves for their management buffers. This can be achieved by restricting dividends and share buybacks.

This spring’s banking problems in the US and Switzerland showed that there may be a case for reviewing global regulatory standards for banks. The international work that has now begun to examine these issues is therefore important. In light of the problems that arose, the Riksbank has analysed the deposits in 24 Swedish banks. The analysis shows that the deposits vary in flightiness, and may be particularly flighty at some smaller banks. The fact that new technologies and social media may have made deposits more flighty makes it is important to continue monitoring the risks associated with deposits going forward.