FI Analysis No. 43: d-SRI: A systemic risk indicator for Sweden

The FI has performed an analysis on the Swedish economy using the d-SRI (developed by the ECB based on the risks that led to crises in the past) and data from the Swedish Central Bank to cater the country’s domestic condition. d-SRI is intended to detect early signs of an upcoming crisis caused by domestic factors.
6 factors that make up the d-SRI are:
– Credit development – in times of a healthy economy, businesses and households have a bigger appetite for borrowing. FI uses two variables for credit development measurement in a span of 2-years: bank credit vs GDP and total credit in real terms.
– Mispricing of risk – underestimating and overestimating economic risks can both lead to a vulnerable economy. FI uses the real price growth in the span of 3 years for this measurement.
– External imbalances – a constant high foreign debt can be an indicator of a vulnerable economy, especially in countries with a pegged currency (e.g. Saudi Arabia’s SAR currency is pegged to the USD). FI uses the difference between Sweden’s income and expenses, and compares this to the country’s GDP.
– The housing market – as most of the housing market is financed with mortgages and/or borrowings, and real estate’s pricing is coherent with the economic situation of the country, FI uses the residential housing price-to-income ratio in the span of 3 years as a variable.
– Debt burden – the higher the borrowings, the more vulnerable the borrower in times of rising prices and/or falling income, as they will have less free assets (cash) to use. FI uses the debt-service-ratio (which is the „private non-financial sector’s debt service costs for their loans in relation to their income“, such as interest) developed by BIS.
It is important to remember, that the d-SRI are used to identify the economy’s weaknesses but does not 100% confirm an upcoming crisis.