Further measures are needed to manage household indebtedness
Date
25/11/2015
The current high valuations of assets and high indebtedness among households are leading to increased risks in the Swedish economy. A serious economic shock, such as a fall in housing prices, could thus have major consequences. A combination of measures, such as changes to tax relief and the introduction of an amortisation requirement and a debt-to-income limit, are needed to make households less vulnerable and reduce the risks inherent in high indebtedness. The banking system is also vulnerable and needs to strengthen its resilience.
The financial system is vulnerable to shocks
The major Swedish banks are reporting high levels of profitability and the debt-servicing ability of their customers is good. This is contributing to the Riksbank's assessment that the financial system is currently working well. However, the Swedish banking system is also large and tightly interlinked. In addition, the major Swedish banks have a high proportion of wholesale funding, a large part of which is in foreign currency, as well as a low proportion of equity in relation to assets. This makes the banking system, and the financial system as a whole, sensitive to various economic shocks.
High valuations and indebtedness entail risks
Valuations on both the asset markets and the housing market in particular are unusually high at present. This means that the probability of a fall in prices is elevated. Together with increasing indebtedness in the household sector, this has made households, the financial institutions and the financial system as a whole more vulnerable. In the event of a serious economic shock, the consequences for the Swedish economy could be great.
Measures needed to counteract household indebtedness
It is of the greatest importance that the mandate for macroprudential policy of Finansinspektionen (the Swedish financial supervisory authority) be clarified as soon as possible so that efficient macroprudential policy can be conducted in Sweden. It is necessary that the Government and responsible authorities adopt, as a matter of urgency, further measures to reduce the risks inherent in the rising housing prices and households' high and rising indebtedness.
Reforms on the housing market aimed at finding a better balance between supply and demand of housing may slow down the rise in housing prices and thereby also indebtedness. Reforms are also needed to reduce households' willingness to take on debt, such as gradual reductions to tax relief and loan-limiting measures such as an amortisation requirement and a debt-to-income limit. The Riksbank thus considers that there is an urgent need for a combination of measures to both subdue new lending and reduce the risks inherent in existing loans.
The resilience of the major banks needs to be strengthened
At the same time, it is important to reduce the vulnerability of the Swedish banking system. In recent years, the major Swedish banks have improved their resilience to both credit and liquidity risks. This is a positive development, but the Riksbank considers that the resilience of the major banks needs to be improved further. Firstly, the capital requirements for the banks should be tightened, for example by introducing a minimum leverage-ratio requirement. Secondly, the major banks should reduce their structural liquidity risks and increase their resilience to short-term liquidity stress in Swedish kronor.
A press conference with the Governor of the Riksbank, Stefan Ingves, and Kasper Roszbach, Head of the Financial Stability Department, will be held today at 11:00 at the Riksbank.
Press cards or equivalent must be shown. The press conference will be broadcast live on the Riksbank's website, www.riksbank.se, where it will also be available to view afterwards.
