A stable, well-functioning financial market for allA stable, well-functioning financial market for allStability in the Financial System (2022:1)
Interest rates and interest rate expectations have increased in 2022 due to high and rising inflation. One sector that is vulnerable to rising interest rates is the commercial real estate sector. FI has also noted that liquidity on the bond markets has decreased, and the functionality of the corporate bond market is once again impaired.
Central banks have now begun to tighten their monetary policy to slow the high inflation and rising inflation expectations. Interest rates have increased in 2022 and are expected to continue to increase. Russia's invasion of Ukraine and subsequent sanctions are further driving inflation and slowing the economic recovery after the pandemic.
In the short term, the transition to higher interest rates will lead to elevated uncertainty and greater risks. An extended period of very low interest rates has resulted in high risk-taking, which is evident in rapidly rising debt and high prices for housing, real estate and financial assets. But rising interest rates that lead to more normalised interest rates can also contribute to a decrease in risk-taking among households, firms and in the financial system in the long term.
The Swedish corporate bond market has shown that its functionality is impaired during periods of elevated uncertainty and financial turbulence. During the spring of 2022, turnover on the secondary market decreased once again, and issued volumes have also fallen. At the end of 2021 and the beginning of 2022, liquidity on the treasury bond and covered bond markets also declined.
The banks' credit losses have fallen to pre-pandemic levels. There have already been large risks associated with the banks' lending portfolios, for example due to exposures related to commercial real estate. The banks therefore need to continue to hold significant capital and liquidity buffers that can be drawn upon if the economy dips.
Overall, the financial stability risks have increased. This demonstrates the importance of resilience in households, firms and the financial system. FI aims to raise the countercyclical buffer rate to a neutral level of 2 per cent in June in order to further strengthen the banks' capital buffers. We are also continuing to work to improve the functioning of the corporate bond and fund markets in order to mitigate risks and vulnerabilities during stressed market conditions. FI has also been given a more active role to strengthen the resilience of the financial sector to cyber attacks.
