Stability in the Financial System (2021:2)

2021-11-23 | Coronavirus Reports Stability Markets Insurance Bank

Sweden’s economy has largely recovered and there is good access to financing in the financial system. The Riksbank should therefore begin the phase-out of asset purchasing to avoid further increase of risk-taking. Amongst others, FI sees growing risks within the commercial real estate companies.

The global economic recovery in 2021 has been stronger than expected. Strong demand also contributed to an increase in inflation globally. If the inflation persists, interest rates may rise, which would have an impact on both households and companies since they are noticeably more indebted today than they were before the pandemic.

The support measures have been necessary for maintaining economic activity during the crisis and supporting the recovery. Long-term asset purchases contribute to stability risks by applying pressure to interest rates and risk premiums, which leads to increased risk-taking and higher debt. Since Sweden's economy has largely recovered and there is good access to financing in the financial system, the phase-out of asset purchasing should begin.

Within the commercial real estate (CRE) sector, demand for both bank- and market-based financing continues to be high. Debt is increasing in relation to the CRE companies' income, more firms are vulnerable, and they are more sensitive to interest rates. Increased vulnerabilities in the CRE sector indicate that the banks continue to need to hold large capital buffers.

The Swedish corporate bond market continues to feature low market liquidity. In the presence of renewed stress on the financial markets, it may become difficult once again to trade securities and issue new financing. There is therefore a need for additional measures to create a more functional corporate bond market with higher resilience.

It is now important to once again build up resilience in the financial system. FI has therefore made the decisions to, for example, withdraw the general possibility of exemption from the amortisation requirement since the end of August and reactivate the countercyclical capital buffer. FI has set the buffer at 1 per cent, and it goes into effect as of September next year. The increase is the first step in a gradual increase towards what FI considers a normal level. FI is also continuing its efforts to strengthen the functionality of the corporate bond market and fund market.