Thedéen discussed the impact of high household debt on financial stability and sustainable economic growth as well as the role of macroprudential policy at the 7th FIN-FSA conference on EU Regulation and Supervision.
Swedish house prices and household debt have grown rapidly over the past 15 years. Structural changes on the mortgage market together with the combination of low interest rates and a strong economy have contributed to this development. High household debt creates vulnerabilities in the economy, and one such vulnerability that FI has identified is the share of households with high debt relative to their income. These households are more sensitive to deteriorations in the economic outlook, and their behaviour in economic downturns could amplify macroeconomic fluctuations.
FI is able to approach its work on macroprudential policy from different angles.
"To handle vulnerabilities related to excessive household debt, we have, broadly speaking, two types of measures. First, we can introduce lender-based measures, such as stricter capital or liquidity requirements. These measures serve to increase the resilience of the banking system, but they have only a modest impact on lending and the underlying risks. Second, to curb the systemic risks associated with excessive household debt, we can use borrower-based measures, which have more of a direct impact on the vulnerabilities we have identified," Thedéen said.
FI has introduced three borrower-based measures: an LTV cap and two amortisation requirements, one linked to the LTV ratio and one linked to the LTI ratio. Each measure targets different dimensions of the risks associated with household indebtedness. The most recent measure, the amortisation requirement that targets the LTI ratio, aims to reduce the vulnerabilities related to households that have high debt relative to their income.
Borrower-based measures are a recent addition to FI's toolkit. The role of macroprudential policy has changed in recent years from a global perspective. Initially, the focus was on capital and liquidity requirements for the banks, but borrower-based measures are more frequently used today in many countries around the world.
"Because borrower-based measures impact households directly, they enter into the public debate in a different way. When these measures are introduced during a strong economy, they are sometimes met with scepticism from the public. This is increasingly true as the memory of the most recent crisis fades or when the impact on households during a global financial crisis is mild compared to other countries (as was the case for Sweden compared to Ireland or the United States in the last crisis). However, new crises will inevitably arrive. It is our job to ensure not only that households will not transform a downturn into a crisis when adverse shocks hit the economy but also that the financial system is resilient enough to dampen the impact," Thedéen concluded.