Two economic commentaries: Impacts of high valuations and low interest rates on financial stability

Date 24/11/2015

Swedish asset valuations are high

The Economic Commentary "Asset Valuations and Financial Stability" examines the prices of equities, bonds, and housing in Sweden, and concludes that the current valuation of housing in particular, but of equities as well, seem high by historical standards. While high valuations do not necessarily lead to large falls in asset prices, they do pose risks to financial stability by increasing the probability of such an occurrence. The authors argue that high household indebtedness in Sweden, combined with high asset valuations, can imply an elevated level of vulnerability for both the households and the banking system.

Low interest rates could make Swedish financial institutions more vulnerable

The Economic Commentary "Swedish Financial Institutions and Low Interest Rates" examines the consequences of low interest rates for three key types of Swedish financial institutions; banks, insurance companies and investment funds. The authors argue that low interest rates could make these institutions more vulnerable, and that this could affect financial stability. For example, low interest rates make life insurance companies more vulnerable to a fall in equity prices. In addition, banks may choose to invest in riskier assets in order to maintain their profitability. It is therefore important to monitor these institutions to see if their risk-taking increases if interest rates remain low.

Prior to the publication of the Financial Stability Report on 25 November, analyses used as a basis for the report are published as these Economic Commentaries. In line with the main theme of the report, the commentaries contain an analysis of the possible risks posed by the current valuations of equities, bonds, and housing in Sweden to financial stability and the consequences of low interest rates to Swedish financial institutions.

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Asset Valuations and Financial Stability by Paolo Giordani, Anna Grodecka, Simon Kwan, Paola Morales, Erik Spector and Dilan Ölcer, and Swedish Financial Institutions and Low Interest rates by Nathalie Gibas, Reimo Juks and Jonas Söderberg, who all work in the Financial Stability Department.

The opinions expressed in Economic Commentaries are the sole responsibility of the authors and should not be interpreted as reflecting the views of the Riksbank.