Thedéen: The role of macroprudential policy in Sweden

2017-10-03 | Mortgage Speeches and debate Stability

The financial crisis in 2008-09 demonstrated just how vulnerable the international financial system was and had enormous consequences for the economies in the western hemisphere. Even if traditional stabilisation policy tools, such as monetary and fiscal policy, were able to mitigate the crisis, they did not successfully prevent the build-up of risk that occurred over a long period of time prior to the crisis. The crisis therefore triggered the development of macroprudential policy, which aims to reduce the risk of financial crises and their subsequent effects.” It is with these words that Erik Thedéen began his speech at Finansdagen in Stockholm.

Date: 03/10/2017
Speaker: Director General Erik Thedéen
Location: Finansdagen, Grand Hôtel in Stockholm

"Macroprudential policy is a new and rather unchartered policy area. It is therefore natural for the institutional arrangements to vary by country, and we must have respect for this. There is no 'one-size fits all' in terms of who is responsible for macroprudential policy, and in Sweden FI has been given the assignment. Just like in many other European countries, the Swedish approach places macroprudential policy with the same authority responsible for microprudential measures and supervision of banks. This reduces the risk that microprudential and macroprudential measures will pull in different directions. Since some macroprudential measures can have a tangible and immediate impact on individual households and companies, it is reasonable and preferable for such measures to be anchored in the political sphere to secure democratic legitimacy."

Because macroprudential policy is a relatively new area, the toolbox has not really been researched. Thedéen identified two groups of macroprudential policy tools. "The first group aims primarily to make the financial system – and primarily the major banks – more resilient to shocks. Examples include requiring the major banks to hold capital and liquidity buffers that are significant in size and that can be drawn upon in the event of a crisis. Here, FI has gone further than most macroprudential authorities in Europe," said Thedéen.

Thedéen continued to speak about the second group of tools, which aims to prevent households and non-financial firms from taking too much risk through high indebtedness. "Households with high levels of debt could contribute to excessive growth in house prices, and it has also been shown that they reduce their consumption more during recessions," said Thedéen. Measures that reduce the demand for loans include mortgage caps, loan-to-income caps and amortisation requirements. Experiences from other countries as well as FI's amortisation requirement show that such measures can slow debt and housing demand. Thedéen therefore emphasised that since the risks associated with household debt continue to be elevated, FI would like to implement a stricter amortisation requirement in the near future. This stricter requirement constitutes an important insurance against a process where debt rises too quickly.

"Macroprudential policy is an area that is gradually evolving. Even if there are positive signs that macroprudential measures can hold back the build-up of risk, there are probably limitations on how much these types of measures can achieve. Given today's conditions with extremely low global interest rates, high house prices and rapidly increasing debt, joint efforts from several policy areas are required to mitigate the risks," concluded Thedéen.