Erik Thedéen: Buffers should be usable

Mr Thedéen looks forward to the Riksbank taking over responsibility for the countercyclical capital buffer and intends to keep the positive neutral rate at 2 per cent. 

In his speech, he emphasised that buffers should be usable by the banks. But the banks are often reluctant to use them in times of stress – even though that is what they are designed for – because they do not want to be seen as weak. Mr Thedéen says that the countercyclical capital buffer can be used to counteract this. The ceiling for reciprocity should also be raised from the current 2.5 per cent to ensure good competitive conditions for Swedish banks.

”The uniqueness of the countercyclical buffer is that it can convert a buffer requirement that is deemed mandatory into actual usable capital. When it is released, the banks’ room for manoeuvre increases and the risk of a credit crunch decreases.”

Commenting on the discussion on simplifying the capital adequacy regulations, he said that this was indeed needed and could make more capital available to the banks. Complex regulations are often costly. But the issue of simplification raises more questions with many stakeholders. There are strong forces that see this as an opportunity to water down the regulatory framework to achieve better competitiveness. Mr Thedéen stressed that there is a difference between simplification and deregulation, and that he does not want to undermine the banks’ capacity to withstand shocks and crises. 

”Following the global financial crisis, the banks’ capital has increased significantly, contributing to economic stability. The crises we have seen since then have not been amplified by the banks. On the contrary, in several cases the banks have been able to help mitigate the problems by holding sufficient capital. Taking short cuts will not make the financial system resilient. It becomes resilient by our preparing for storms.”

”We must not forget that in crises – when the banks are needed the most – only stable and well-capitalised banks continue to lend money and support creditworthy households and companies.” 

The economic situation and monetary policy

During his speech, Mr Thedéen also commented on the economic situation. 

The war in the Middle East has now been going on for about a month and there are as yet few concrete signs of an imminent de-escalation. “I believe that, unfortunately, we have to prepare for the fact that the war – and the global economic consequences of the war – could be both extensive and protracted.”

There is no doubt that higher fuel prices will push up CPIF inflation. The question is to what extent this will have knock-on effects in terms of price increases for other goods and services. 

Monetary policy cannot prevent energy prices from rising, said Mr Thedéen. But monetary policy can counteract price increases from spreading widely to other categories of goods and to service industries. ”One insight from recent years is that it is risky for a central bank to assume that it is possible to see through supply shocks. If the risks of spillover effects and persistently higher inflation increase, we may need to tighten monetary policy.”  

At the same time, Mr Thedéen considers that there are reasons to take a wait-and-see approach. “Inflation is relatively low to start with and we do not yet know how strong the inflationary impulses resulting from the war will be. A lot has happened in just four weeks and a lot can happen in the five weeks left until our next interest rate decision. We are maintaining a steady course, but are ready to swerve if necessary.”