The risks in the financial system have increased

The Central Bank of Sweden, Riksbank, has published a press release in which it outlines existing key challenges for maintaining stability in the financial system and markets particularly in view of a continuing high inflation. According to Riksbank, global inflation has risen rapidly since 2021, leading to tighter monetary policy and a rise in interest rates and causing assets prices to fall, interest-rate spreads to increase, and market volatility to rise. Despite targeted monetary measures, inflation remains high, which makes the economic outlook rather weak. On top, recent incidents in the financial markets, particularly in the banking sector of the United States and Switzerland, have impacted financial markets globally.
In Sweden, the property sector is particularly impacted by higher interest rates. It is facing increased funding costs and declining property values, as the demand for real estate is diminishing. Therefore, Riksbank urges property companies to strengthen their balance sheets and banks to adopt measures in their loan procedures to ensure that real estate borrowers reduce their financial risks.
Likewise, household indebtedness is another key area of concern and so are the short interest-rate fixation periods in mortgages. According to Riksbank, structural reforms are needed to improve the housing market and promote sustainable debt development. Retaining measures such as the amortisation requirements of customers (customers must pay-off at least part of the principle of a loan) and mortgage caps (loan-to-value restrictions) are important in mitigating these risks.
Furthermore, the banking turmoil experienced in March highlights the need to review global regulatory standards for banks. Factors such as new technology, social media, and the design of deposit insurance schemes may have influenced the speed and extent of bank runs. Although Swedish banks were less affected by the turmoil and are typically exposed to less liquidity risks as their U.S. or Swiss counterparts, Riksbank calls upon financial institutions to maintain additional liquidity beyond the required regulatory levels and to review their dividend policies and share buy-back programs in an effort to restore confidence in the banking sector.
Finally, Riksbank calls upon financial institutions to ensure that Bankgirot, the key clearing system in Sweden for financial transactions, is functioning as intended. As Bankgirot will not be replaced by another clearing system in the near future (like it was anticipated), banks must ensure to take on responsibility in this matter. Riks will be closely monitoring banks‘ management of Bankgirot to ensure its effectiveness.