Dampened recovery can weaken financial stability

An increase in the spread of the coronavirus will dampen the recovery in European economies and, in the long run, this could impact financial stability, writes Finansinspektionen (FI) in this year’s second stability report, which will be published today.

The coronavirus pandemic has caused an economic downturn in many countries, even if there was a slight recovery during the summer. Extensive support measures during the crisis dampened the economic impact and reduced uncertainty on the financial markets, writes FI in its stability report.

During the autumn, infection rates increased once again, and several countries imposed new restrictions, which will dampen the recovery.

"This might enhance vulnerabilities in the form of weak economies, public finances, and the banking system in Europe, which ultimately could have an impact on financial stability. From this perspective, Sweden is in a more favourable position, but the Swedish economy and the financial system are closely linked to the rest of Europe," says FI's Director General Erik Thedéen.

FI writes that the support measures that were taken have been necessary. However, the measures need to be adapted to the greatest extent possible so as not to build up excessive vulnerabilities in the form of greater risk-taking and increased debt.

There is a risk of growing vulnerabilities among not only financial firms and markets but also households and non-financial firms since the low interest rates encourage more borrowing. Like before, the high debt of households represents a risk for the Swedish economy, and this debt is continuing to increase faster than income. Lending to the commercial real estate sector was high already before the crisis, and the sector is vulnerable to an economic downturn. This in turn can impact the banks.

"Therefore, the additional capital requirements for lending to the commercial real estate sector that FI previously decided on is a key long-term measure," says Erik Thedéen.

Live-stream presentation

FI's stability report will be published on fi.se, and the presentation by Director General Erik Thedéen and Chief Economist Henrik Braconier will be streamed live today at fi.se at 9:00 AM.

The presentation will only be held digitally. After the presentation, the media will be able to conduct individual telephone interviews after contacting FI's Press Office, +46 (0)70 300 47 32 (no text messages).

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