FI Analysis No. 43: d-SRI: A systemic risk indicator for Sweden

Cyclical systemic risks typically build up when lending conditions are loose and asset prices increase. Financial crises have often arisen following such periods. However, high credit growth and rising asset prices can also be an indication that the future prospects of the economy are good. It is therefore difficult to quantify the build-up of cyclical systemic risks.

Adapting the risk indicator to Swedish conditions

In an attempt to estimate when cyclical systemic risks increase, the European Central Bank (ECB) has developed the domestic systemic risk indicator (d-SRI). This indicator is comprised of several components, each of which reflect different dimensions of cyclical systemic risk. d-SRI is intended to give an early warning signal before crises caused by domestic imbalances arise. This enables decision makers to build up resilience before a crisis emerges. This FI analysis serves to adapt d-SRI to Swedish conditions.

Indicates where deeper analysis is required

The adapted d-SRI we have developed indicates build-up of risks during the years leading up to the crisis in the 1990s, the 2000 dot-com crash, and the 2008 financial crisis. This is fully in line with how d-SRI is intended to function. As the Riksbank started raising the policy rate to combat inflation in 2022, we have simultaneously witnessed reduced credit growth and lower asset prices. As a result, the d-SRI is currently showing that financial conditions are tight.

d-SRI can contribute by providing a quantitative assessment of the overall build-up of risks. This facilitates FI's work as a macroprudential authority. However, d-SRI is not an indicator for studying specific risks at close range. Depending on which component is driving the development, it instead gives us an indication of where in the economy imbalances are increasing and requires closer analysis.