Stability in the Financial System (2024:1): A slightly better outlook in an uncertain environment

The outlook for financial stability has improved somewhat, and uncertainty has decreased, but we are still in the middle of a recession. Higher costs for both interest payments and other goods and services are putting pressure on households and firms. The worsened global security situation is also imposing increased demands on the operational resilience in the financial sectorn. These are the conclusions of this year's first stability report.

FI assesses financial stability on an ongoing basis and describes the status of the financial markets. It also provides an account of lending and lending terms and conditions to corporates and households. Since the last stability report, which was published in November 2023, inflation has dampened and is close to the Riksbank's target. The Riksbank has lowered the main policy rate, and market actors are expecting more interest rate cuts in the coming year.

Weak economic development but strong banks

The Swedish economy is in a recession and has had negative growth for four consecutive quarters. Highly indebted households and firms are under pressure, which entails that some vulnerabilities in the financial system are at elevated levels.

"We are headed in the right direction, and uncertainty has decreased, but the situation is still tough for many households and firms. It is too early to breathe a sigh of relief, even if there are positive signs," says FI's Director General Daniel Barr.

Even though the margins of many households have become substantially smaller in recent years, FI makes the assessment that most households are able to make their loan service payments. However, households' buying power has become weaker and consumption has contracted, which spills over into businesses that target households. Even if interest rates have started to come down, the weakened demand could linger and result in a deteriorating economic situation with rising unemployment.

Swedish banks are still very profitable and have significant buffers. This means that they are able to continue to issue loans and handle credit losses even if the economy were to worsen.

The situation for commercial real estate firms has improved, but many still need to reduce their debt

A number of commercial real estate firms have started to reduce their debt, and access to financing has improved. Even though the situation in the commercial real estate sector is better today than it was six months ago, many commercial real estate firms have too much debt.

It is therefore important for highly leveraged firms not to be passive but to continue to reduce their debt.

An uncertain world means continued high uncertainty

There are clear expectations of interest rate cuts in the future, which is reflected in an increase in risk-taking on the financial markets in recent months. The uncertain geopolitical situation could however lead to events that once again will heighten stress on the financial markets. The global security situation also entails an elevated risk of shocks to the digital infrastructure, which could have a rapid negative impact on the function of the financial system.

"The Swedish financial system has undergone rapid digitalization, which means increased efficiency. But new digital solutions also impose increased requirements on digital resilience, and it is important that financial corporations continue to work to strengthen this," says Daniel Barr.

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