af Jochnick: Why does the Riksbank care about household indebtedness?
International confidence in the Swedish mortgage market is a necessary condition for confidence in the financial system in Sweden, as the Swedish banks to a large degree fund their mortgages on the financial markets. Moreover, financial developments are linked to developments in the real economy, and household indebtedness can thus affect the Riksbank's ability to carry out its tasks. There is thus every reason for the Riksbank to care about household indebtedness. This was the message in a speech held by First Deputy Governor Kerstin af Jochnick at the Centre for Business and Policy Studies in Stockholm on Friday.
Ms af Jochnick began by describing how the Swedish financial system had evolved and how it had become so dependent on the confidence of market participants. Today, the financial system is constructed in such a way that the Swedish banks largely finance mortgages short term on the financial markets, and in addition, this funding is also to a great extent in foreign currency. A necessary condition for the banks to be able to finance Swedish mortgages is therefore that market participants have fundamental confidence in Sweden, in Swedish banks and in the Swedish mortgage market. If investors consider that risks linked to household indebtedness have increased, this confidence might weaken. This would in turn make it harder for the banks to obtain funding or funding would become more expensive.
Ms af Jochnick pointed out that it is also important to remember that there is an interplay between developments in the financial markets and developments in the real economy. "If we were to experience a fall in housing prices during a recession and thus similar problems to those experienced by other countries, it is likely that we would suffer both a decline in demand in the economy and that the banks would experience greater difficulty and greater cost in obtaining market funding. This in turn would risk aggravating the recession further, which would result in a further rise in unemployment. It is therefore important to avoid incorporating potential vulnerabilities into the economy, such as large debts."
Ms af Jochnick also said that measures are needed in several fields to dampen growth in debt. For instance, housing construction needs to increase. Another measure could be to create economic incentives for households to reduce their borrowing. There is also a need to create a better balance and thus better stability in the banks' funding sources. Action is needed now to reduce the risks of household indebtedness. These risks entail large, complex issues and can affect the Riksbank's ability to carry out its statutory tasks, price stability and financial stability. It is therefore important that the Riksbank continues to follow developments, analyses and points out risks linked to household indebtedness, concluded Kerstin af Jochnick.
Read the entire speech: Why does the Riksbank care about household indebtedness?
