Stability in the Financial System (2018:2)

The economy continues to be strong, both in Sweden and globally, but it is now showing signs of a slow-down. Interest rates have been low for a long period of time, which has led to high risk-taking and rising asset prices. As a result, the risks in the financial system are elevated. The resilience in the Swedish financial system is satisfactory in general but continued high growth in debt fuelled by lending and investments related to residential property and commercial real estate require monitoring.

As monetary policy globally becomes less expansive, interest rates are expected to rise. This should lead to both less risk-taking and that debt will grow at a slower rate. However, there is considerable uncertainty about the size of any vulnerabilities that may have built up during the prolonged period of exceptionally low interest rates. It is therefore not possible to rule out that the return to more normal interest rates could be a turbulent period with corrections in asset prices.

There have been some improvements on the fixed-income and foreign exchange markets: utilisation of the Swedish National Debt Office's repo facilities has declined, and supply and demand have been balanced on the currency swap market. Despite these improvements, FI still considers vulnerability to be elevated, and market liquidity may quickly deteriorate in the presence of financial stress. It is FI's assessment that the systemically important financial infrastructure in Sweden is working well in general, but a unique and serious event occurred in September 2018 at a central counterparty – Nasdaq Clearing AB. FI conducted an initial analysis of the event and takes a serious view to the course of events.

FI makes the assessment that the resilience of the three major Swedish banks to shocks is satisfactory in general. This is because the capital and liquidity requirements are high, but also because the major banks' strong profitability are supported by continued favourable economic conditions. The stress test conducted by the European Banking Authority (EBA) in 2018, the major Swedish banks demonstrated resilience in a scenario with a sharp economic downturn and large falls in the prices of homes and commercial real estate. Because the Swedish commercial real estate market is large in comparison to the commercial real estate markets in other European countries, and banks and other participants on the financial markets hold large exposures to it, problems in this market can threaten financial stability. The commercial real estate market is therefore important for financial stability, and FI considers the risks to be elevated.

At the same time, FI considers the systemic risks in the Swedish financial system to have increased. In order to increase resilience in the Swedish banking system, FI decided to raise the countercyclical capital buffer from 2.0 per cent to 2.5 per cent. The new buffer rate will be applied as of 19 September 2019.

It is FI's assessment that the insurance undertakings can handle a relatively large fall in share prices. In the long term, though, the challenge of persistent low interest rates, when combined with falling assets prices, could pose risks to financial stability.

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