Households continue to be under pressure from both higher interest rates and other costs. This is evident in FI’s mortgage report. The report looks at new mortgagors during the autumn of 2023. We can see that there are fewer mortgagors than in previous years. Home buyers also bought slightly less expensive homes and borrowed slightly less. Total lending to households has stagnated, but despite this household indebtedness continues to be high.
Many smaller, unlisted commercial real estate (CRE) firms have a high loan-to-value (LTV) ratio and a low interest coverage ratio (ICR). This makes them vulnerable to a scenario with high interest rates and lower earnings. A new FI Analysis concludes that, given such a scenario, smaller CRE firms would constitute the majority of banks’ real estate sector-related credit risks.
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.
In this analysis, we estimate how much Swedish listed and larger privately owned commercial real estate firms need to reduce their debt in a climate of rising financing costs and falling property values. We calculate the firms need to reduce their debt to maintain certain levels of interest coverage ratio and loan-to-value.
The higher interest rate means that households and companies need to make adjustments to their finances. Finansinspektionen (FI) is now seeing a decline in risk-taking. However, the change in the state of the economy and uncertainty regarding how long the higher interest rates will remain pose a risk to financial stability. Commercial real estate undertakings with high debt are particularly at risk should the interest rates remain high. These are the conclusions of the second Stability Report of the year.
Since the publication of the stability report last autumn, inflation has slowed somewhat in the large economies but is still significantly higher than the central banks’ inflation targets. Monetary policy has therefore been tightened further, and interest rates continued to rise. High inflation and rising interest rates mean that the forecasts for global economic development continue to be weak.
Mortgagors are under pressure from rising interest rates. At the same time, the majority of new mortgagors continue to have good margins in their personal finances. These are the conclusions drawn by Finansinspektionen in this year’s Swedish Mortgage Market report, which is being presented today.
The minimum requirement for own funds and eligible liabilities (MREL) is designed in such a way that the banks can breach it before they breach the capital requirements. As a result, this can reduce the usability of the capital buffers. This is shown in FI’s analysis of how the capital buffers are impacted when a bank must meet both MREL and the capital requirements.
In 2019, FI’s overarching mandate was expanded to include a responsibility to ensure that the financial system contributes to sustainable development. FI is also the responsible supervisory authority for a number of new regulations related to sustainable finance that are the result of the EU’s ambitious sustainability agenda.
High inflation has led to rapidly rising interest rates. Given the current rapid change in conditions, both participants on the financial markets and borrowers need to transition quickly. In the short term, this means elevated risks and greater uncertainty. The already high risks in the commercial real estate sector have continued to increase.
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.
In this FI Analysis, we study how the risk weight floor has impacted the banks’ lending to CRE firms using detailed lending data. The aim is to analyse whether the risk weight floor impacted the banks’ interest margins and the risk in their lending. We also investigate how the volume of bank loans and bonds to CRE firms has changed before and after the introduction of the risk weight floor.
Swedish households continue to take increasingly larger loans. More new mortgagors than in previous years had both a high loan-to-income ratio and a high loan-to-value ratio. Higher inflation and rising interest rates mean that mortgagors have smaller margins in their personal finances. This decreases the consumption capacity at the same time as the mortgagors’ ability to repay their loan is impaired.
Sweden’s economy has largely recovered and there is good access to financing in the financial system. The Riksbank should therefore begin the phase-out of asset purchasing to avoid further increase of risk-taking. Amongst others, FI sees growing risks within the commercial real estate companies.
Since 2010, FI has implemented a number of macroprudential measures aimed at increasing the resilience in the financial system and subduing the risks associated with high and rising household debt. These measures include tightening the capital requirements on banks and introducing a mortgage cap and two amortisation requirements. In this report, we present an overall assessment of these measures, with a focus on the measures that, via lenders, place restrictions on households’ mortgage borrowing.
The temporary amortisation exemption resulted in new mortgagors borrowing almost 4 per cent more and buying homes that were approximately 1 per cent more expensive, concludes a new FI Analysis.
The ability to borrow is beneficial to households in many ways. At the same time, debt can make their consumption more sensitive to unexpected changes in interest rates, income, and house prices. This, in turn, can affect how the economy evolves in a crisis. But measures that lead to lower debt don’t necessarily increase the resilience of all households. To assess the effects of borrower-based measures, it is necessary to also consider households’ balance sheets, in particular their liquid assets.
The economy is continuing to recover. Support measures have been necessary to speed up the recovery, but they need to be gradually phased out as the economy strengthens. This applies primarily to measures that are associated with the build-up of stability risks.
New borrowers continue to take larger mortgages in relation to their income and the value of their home. At the same time, they have good margins for servicing their loans under weaker economic conditions.
Finansinspektionen has an assignment to promote the financial system’s contribution to sustainable development. The sustainability report outlines the current sustainability issues that are related to the financial sector and lists examples of what FI is working on in this area.
This FI Analysis describes how vulnerabilities from lending to non-financial firms arise and why FI needs to follow them to fulfil its assignment to safeguard financial stability.
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.
Large credit losses can result in otherwise profitable banks reporting a loss. This FI Analysis describes a methodology for estimating how large credit losses can be in a stressed macroeconomic scenario.
The tax rebate for interest expenses – the interest deduction – means that households borrow more, and can and want to pay more for homes. This means that the households experience an increase in both their liabilities and assets, which in turn could have an impact on the stability of the financial system. In this FI Analysis, we calculate the impact of a change to the interest deduction. The reason for this analysis is the direct link between interest deductions and households’ loans.
Commercial real estate firms are sensitive to changes in interest rate expenses and income. Following a shock, vulnerable commercial real estate firms could lead to credit losses for the banks.
The access of non-financial firms to credit is central for financial stability, particularly during financial crises. In recent years, the market for corporate bonds has grown steadily and currently plays an important role in firms’ financing. This analysis shows that it has not been easier to issue corporate bonds in Swedish krona during financial crises than to take a bank loan. This pattern deviates from previous research on the USA and the euro zone.
Many banks are working actively with continuity management and have implemented key measures to reduce the risk of serious disruptions. At the same time, FI sees a need for the banks to further strengthen their continuity management. FI expects the banks to continue to focus on enhancing the resilience of their critical functions. This supervision report describes the areas where FI would like to see improvements.
The coronavirus pandemic has resulted in an exceptional stress for the real economy. Governments, central banks and supervisory authorities have implemented significant measures to dampen the crisis. This has helped to reduce the uncertainty on the financial markets. But we are in still in the middle of the crisis, and there is considerable uncertainty going forward.
The percentage of new mortgagors with a high level of debt in relation to either their income or the value of the home continues to be high. New mortgagors in 2019 increased their average loan-to-income ratio. The average loan-to-value ratio also increased in 2019 among new mortgagors, thus breaking the trend of falling loan-to-value ratios since 2013.
This FI Analysis shows that households’ tendency to use mortgages for purchases other than buying a home decreased following the amortisation requirements.