Stability in the Financial System (2020:2)

2020-11-25 | Coronavirus Reports Stability Markets Insurance Bank

The pandemic has triggered a deep economic recession in many countries, even if a slight recovery has begun. Extensive support measures have mitigated the economic impact and reduced the uncertainty on the financial markets. During the autumn, infection rates have once again begun to increase and several countries have introduced new restrictions, which will dampen the economic recovery, even though it is uncertain to which extent.

A more dampened recovery could also enhance vulnerabilities in the form of weak economies, public finances and banking systems in Europe and in the long run impact financial stability. Sweden's economic situation is more favourable, but at the same time the Swedish economy and the financial system are closely linked to the rest of Europe.

The major Swedish banks entered the crisis with good profitability and satisfactory capital buffers. Demand for credit to date has been relatively low compared to other countries, and the banks' credit loss provisions have not increased significantly. Therefore, there has been limited impact on the banks' capital adequacy. FI considers the banks to have sufficient resilience to be able to supply the economy with loans even if the need for loans increases or the banks experience significant losses. At the same time, the rising infection rates mean that the forecasts continue to be uncertain. As a result, dividends to shareholders should become relevant first after the recovery has established itself and is not being heavily impacted by the spread of the virus. It is also important that the banks can maintain both the supply of credit and sound credit quality. The banks' exposures to commercial real estate continue to constitute a vulnerability, and the additional capital requirements FI decided on previously are important.

The support measures taken have been necessary, but they could result in increased stability risks in the form of higher risk-taking and higher debt. This applies to participants on the financial markets as well as households and non-financial firms for which the low interest rates encourage more borrowing. House prices and household debt are once again growing significantly faster than income. Debt is also continuing to increase among non-financial firms. Continued support measures must be adapted to the greatest extent possible to prevent the build-up of excessive vulnerabilities.