A Swedish toolkit for macroprudential policy

Date 06/11/2012

The starting point for the study is that tools are needed to manage the risks and vulnerabilities that are most serious for Sweden. The results point to nine tools as suitable candidates for inclusion in an initial Swedish toolkit for macroprudential policy. Five of these are determined by the international regulatory agenda.

Firstly, tools are needed to manage systemic risks related to strong credit growth and increased indebtedness. Appropriate tools for this purpose are countercyclical capital buffers, sector-specific risk weights, leverage ratios and loan-to-value (LTV) caps.

Secondly, there must be tools to reduce liquidity and funding risks, as the Swedish banks are vulnerable when market liquidity falters. Requirements such as both the Liquidity Cover Ratio (LCR) and the long-term Net Stable Funding Ratio (NSFR) are suitable tools, possibly complemented with some form of targeted charges.

Thirdly, structural risks must be identified and counteracted. This will require persistent development work for a long time to come. We should already be trying to minimise the problem of certain banks having become 'too big to fail'. An extra capital requirement for systemically-important banks is one appropriate tool. In addition, one of the Swedish authorities should be clearly assigned to identify systemic risks arising inside as well as outside the regulated sector at an early stage.

Macroprudential policy deals with measures to discover, monitor and prevent risks threatening the stability of the financial system. As macroprudential policy is still under development, it is, of course, difficult to assess which tools are appropriate. In Sweden, as in other countries, we will thus, quite simply, have to proceed by trial and error and learn from our own and others' experiences. To ensure that this work is conducted in a structured and long-term manner, both the actual toolkit and the process of modifying it should be clearly confirmed by Swedish law.