Erik Thedéen: Current assessment of financial stability

FI’s Director General Erik Thedéen participated in a panel discussion on the opportunities and risks associated with increased application of artificial intelligence and machine learning within lending and advice to households. Before he described FI’s view on this topic, Thedéen commented briefly on FI’s current assessment of the stability of the Swedish financial system.

  • Date: 2022-08-22
  • Speaker: Erik Thedéen, Director General
  • Meeting: AI & Machine Learning in Finance, the Swedish House of Finance Annual Conference

"High inflation (partly reflecting rising food and energy prices), rising interest rates, and concerns about an economic downturn, introduces challenges for not only commercial real estate companies but also households and other actors in the financial system," Erik Thedéen opened.

"We know that there is a risk that many of the vulnerabilities that have built up in the financial system over a number of years could now materialize. The structural measures that FI has taken, such as amortisation requirements and a higher capital requirement for lending to the commercial real estate sector, have dampened the build-up of risk and increased resilience among households and banks. Therefore, the impact from the ongoing adjustment for the Swedish economy and financial stability has been smaller than it would otherwise have been," continued Thedéen.

"Mortgagors' cash flows are under pressure from higher living costs and higher interest rates. Our investigations show that they have margins that can absorb this pressure, but it will lower their consumption or savings. At the same time, housing prices have decreased sharply in the late spring and during the summer. The amortisation requirements and the mortgage cap that FI has implemented have dampened household debt. Without our measures, many borrowers would have experienced larger increases in their interest expenses and housing prices could have fallen even more," emphasised Thedéen.

"The rising interest rates create challenges for the highly indebted commercial real estate sector. We have warned about this sector's high leverage in relation to its cash flow for some time. We are now at a crucial junction where their resilience is being tested. Financing costs for commercial real estate companies are increasing as interest rates, credit spreads, and even to some extent bank lending margins increase. But it will take time before the full effect is realised," explained Thedéen.

"Financing conditions for commercial real estate companies have gradually declined and become more expensive, even if there has been a slight improvement in the past few weeks. Bond financing has become more expensive, but the banks still have the capacity to fund their customers. However, it is uncertain how long they are willing to go, and it is also the banks' credit exposures that FI views as a potential risk to financial stability. These risks are also rising as financing costs increase more steeply and for a longer period of time. It is therefore important for financial stability that the banks are well-capitalised, and that is why we raised the capital and buffer requirements for the banks in recent years," said Thedéen.

"In summary, the financial stability risks in the short- and mid-term continue to be elevated and have even increased slightly over the summer. The resilience of households and commercial real estate companies is being tested now. But at the same time, an environment with higher interest rates and lower risk appetite, combined with our measures, could slow debt and risks in the longer term," concluded Thedéen.