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International Monetary Fund. Monetary and Capital Markets Department
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Publication Date:
17 Nov 2016
eISBN:
9781475554618
Language:
English
Keywords:
ISCR; CR; bank; asset; return on equity; bank assets; cross holdings
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Front Matter Page

IMF Country Report No. 16/355

SWEDEN

FINANCIAL SYSTEM STABILITY ASSESSMENT

November 2016

This paper on Sweden was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on October 26, 2016.

Copies of this report are available to the public from

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© 2016 International Monetary Fund

Front Matter Page

SWEDEN

FINANCIAL SYSTEM STABILITY ASSESSMENT

October 26, 2016

Approved by

James Morsink and Mahmood Pradhan

Prepared by

Monetary and Capital Markets Department

This report is based on the work of the Financial Sector Assessment Program (FSAP) mission that visited Sweden in April 18–29 and August 22–September 2, 2016. The FSAP findings were discussed with the authorities during the Article IV consultation mission in September 2016.

  • The team comprised Martin Čihák (mission chief), Liliana Schumacher (deputy mission chief), Jihad Al-Wazir, Atilla Arda, Jiaqian Chen, Eija Holttinen, Ivo Krznar, Martin Edmonds (all IMF staff); Michael Andrews, Timo Broszeit, Louise Carter, Francesco Columba, Jonathan Fiechter, and Ian Tower (all external experts); Craig Beaumont (mission chief for Sweden’s Article IV consultation) and Tomas östros (IMF Executive Director) participated in the concluding discussions. Dale Gray (IMF staff) joined a part of the mission to present an analysis, prepared with Rima Turk and Andy Jobst. Rima Turk presented studies from IMF headquarters. Richard Lalonde, Jonathan Pampolina, and others provided additional support from IMF headquarters.

  • The team met management and staff of Riksbank, Finansinspektionen, Ministry of Finance, and National Debt Office, as well as representatives of the Parliament, financial services companies, financial market infrastructure providers, research organizations, think-tanks and other nongovernment organizations. The team also met officials from other countries in the region.

  • The FSAP assesses the stability of the financial system as a whole and not that of individual institutions. It is intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in the FSAP.

  • Sweden is deemed by the Fund to have a systemically important financial sector, and this stability assessment is part of bilateral surveillance under Article IV of the Fund’s Articles of Agreement.

  • The report was prepared by Martin Čihák and Liliana Schumacher, with inputs from the Sweden FSAP team members. The report draws on seven Technical Notes.

Contents

  • Glossary

  • EXECUTIVE SUMMARY

  • MACROFINANCIAL SETTING

  • RISKS AND VULNERABILITIES IN HOUSEHOLDS’ AND CORPORATES’ BALANCE SHEETS

  • A. The Housing Market

  • B. The Nonfinancial Corporate Sector

  • RESILIENCE OF THE FINANCIAL SYSTEM

  • A. Banks

  • B. The Insurance Sector

  • C. Investment Funds

  • D. Interconnectedness Across Institutions and Borders

  • OVERSIGHT FRAMEWORK

  • A. Macroprudential Framework

  • B. Systemic Liquidity Management

  • C. Banking

  • D. Insurance

  • E. Securities Markets

  • F. FMIs

  • G. Financial Integrity

  • CRISIS READINESS, MANAGEMENT, AND RESOLUTION

  • BOX

  • 1. Proposed Conversion of Nordea’s Nordic Banking Subsidiaries to Branches

  • FIGURES

  • 1. Key Structural Aspects of Swedish Banks

  • 2. Nordic Countries: Assessment of Cyclical Vulnerabilities

  • 3. Bank Profitability

  • 4. Swedish Bank Capitalization in a Regional Perspective

  • 6. Stress Testing Results: Bank Liquidity

  • 7. Insurance Companies: Duration Mismatches and Asset Allocation

  • 8. Insurance Solvency Stress Tests

  • 9. Investment Funds: Stress Test Results

  • 10. Holders of Swedish Covered Bonds

  • 11. Major Banks’ LCR by Currency

  • 12. Market and Structural Liquidity

  • TABLES

  • 1. Key Recommendations

  • 2. Selected Economic Indicators, 2013–19

  • 3. Macroprudential Measures Adopted since 2011

  • 4. Corporate Vulnerabilities

  • 5. Financial Soundness Indicators for Banks

  • 6. Risk Assessment Matrix

  • 7. Stress Testing: IMF Stress Scenario

  • APPENDICES

  • I. Follow-Up on the 2011 FSAP’s Key Recommendations

  • II. Stress Test Matrix

Glossary

AML/C FT

Anti Money Laundering/Combating the Financing of Terrorism
bps

basis points
BRRD

Bank Recovery and Resolution Directive (European Union)
BU

Bottom-up (stress test)
CET1

Common Equity Tier 1 capital
CRD-IV

Fourth Capital Requirements Directive (European Union)
DTI

Debt-to-income
EBA

European Banking Authority
ECB

European Central Bank
EDF

Expected Default Frequency
EEA

European Economic Area
ELA

Emergency Liquidity Assistance
EU

European Union
FI

Finansinspektionen
FMI

Financial Market Infrastructure
FSAP

Financial Sector Assessment Program
FSC

Financial Stability Council
GDP

Gross domestic product
G-SIB

Global Systemically Important Bank
IRB

Internal Ratings Based
LCR

Liquidity Coverage Ratio
LTV

Loan-to-value
MOF

Ministry of Finance
MoU

Memorandum of Understanding
MREL

Minimum Requirements for Own Funds and Eligible Liabilities
NDO

National Debt Office
NSFR

Net Stable Funding Ratio
NPL

Nonperforming loan
PD

Probability of default
RB

Riksbank
ROA

Return on assets
ROE

Return on equity
SEK

Swedish kronor
TD

Top-down (stress test)

Executive Summary

The Swedish financial system is large and highly interconnected, putting a premium on the accompanying policy framework. Relative to the size of the domestic economy, the financial system is among Europe’s largest. It features complex domestic and international linkages, reflecting Sweden’s role as a regional financial hub. The systemic nature of the financial sector raises expectations for the quality of the policy framework and financial safety nets.

The authorities have followed up on the 2011 FSAP recommendations. They have taken important steps to strengthen the policy and regulatory framework. These steps include creating the Financial Stability Council (FSC), increasing resources at Finansinspektionen (FI), and introducing a new resolution framework for credit institutions and investment firms.

Nonetheless, macrofinancial risks have grown since 2011, for example the rising share of highly indebted households. Although the immediate effect of a potential decline in housing prices on Swedish households appears contained, the indirect macroeconomic impact—including via the corporate sector—could be sizeable. In an extreme but plausible scenario, this could combine with a broader loss of confidence in housing collateral, amplified by Swedish banks’ reliance on wholesale funding. Given the high interconnectedness among the Nordic-Baltic financial systems, such a shock could have significant cross-border spillovers.

Stress tests suggest that banks and nonbanks are largely resilient to solvency shocks, but concerns persist about the ability of bank models to capture unexpected losses. It is important to preserve and strengthen the risk-based approach to supervision. However, modeling tail risks in Sweden is challenging, and available models may suffer from overreliance on recent historical experience. To safeguard against model and measurement errors in calculating capital ratios, the mission recommends a timely adoption of a leverage ratio as a backstop.

Banks’ structural liquidity gaps have narrowed, but are still more pronounced than for European peers, and justify the adoption of monitoring beyond international standards. Banks are reliant on wholesale funding and have significant maturity mismatches. To improve the oversight of banks’ liquidity profile, the mission recommends monitoring an extended Liquidity Coverage Ratio (LCR) in euro and U.S. dollar. Close monitoring of banks’ interconnectedness through the covered bond market would be another important step towards increasing resilience.

The mission recommends addressing key data gaps that reduce the efficacy of systemic risk oversight. Given the household sector indebtedness issue, a crucial missing element is data on the distribution of household financial assets, available in many other countries but discontinued in Sweden. For systemic risk monitoring purposes, the mission recommends introducing comprehensive anonymized surveys of household balance sheets. The mission recommends enhancements in the stress testing framework of banks, insurance companies, and investment funds. FI should improve the availability and quality of investment fund data, to enhance the authorities’ ability to conduct stress testing and other analyses. To better understand the effects of shocks on the broader economy, it will be important to undertake periodic stress tests of corporate resilience.

The authorities have responded to increasing household debt, but need to take additional steps. The response—which relies on macroprudential measures targeting credit supply and a mandatory statutory amortization requirement—goes in the right direction, but it is important to add a cap on the debt-to-income (DTI) ratio to the macroprudential policy toolkit, as a tool to help contain the risks from high household indebtedness. To further reduce imbalances, the mission urges the authorities to remove tax benefits associated with holding real estate and funding it with debt. In the medium term, further policy action is needed to remove obstacles to housing supply.

Sweden’s financial stability framework needs strengthening. The macroprudential framework should allow FI to be more proactive in adopting measures and issuing regulations. A statute should clearly define the FI’s responsibility for macroprudential policy and ensure that FI has powers, tools, and resources to address systemic risks in a timely and effective manner. The FSC is an improvement since the 2011 FSAP, but addressing its limitations will promote financial stability in Sweden and help realize Sweden’s responsibilities for financial stability in the region. The mission recommends that the legal framework clearly sets out the objectives, functions, and powers of the FSC. The FSC’s mandate should be expanded to include crisis preparedness.

FI needs to step up supervisory intensity. Bolstering FI’s ability and willingness to act requires financial and human resources that are sustainable and commensurate with the size and complexity of the financial system. It also requires broadening FI’s mandate to issue binding regulations on safety and soundness issues. FI needs to enhance cooperation with foreign supervisors, especially in the supervision of systemic bank branches and cross-border management of investment funds.

The authorities should amend the Riksbank Act to clarify the Riksbank’s financial stability mandate. This should include a clear role in the oversight of systemic risk and explicit confirmation of statutory authority to extend emergency liquidity assistance (ELA) for financial stability purposes to individual banks and the financial system as a whole. The law should also prescribe coverage by the state of a shortfall in the Riksbank’s capital and general reserve; this should be complemented with ex ante, standing indemnification and guarantee arrangements for liquidity assistance losses if incurred by the Riksbank, which would not subject each ELA operation to ad-hoc approval from third parties. To ensure the availability of ELA in foreign exchange, the Riksbank should seek to conclude swap-agreements with central banks in jurisdictions where Swedish banks operate through branches.

The safety net and crisis management framework rests on strong foundations, but further investments are needed to ensure operational capacity to rapidly deploy recovery and resolution tools. Under the FSC’s auspices, the authorities need to ensure agency-specific and national financial crisis preparedness, including a national crisis management plan, and regular single-and multi-agency financial crisis simulation exercises. The Nordic-Baltic Stability Group needs to be revamped to fulfill a similar role at the regional level. The authorities should define strategies for liquidity assistance to banks in resolution and conclude a cooperation agreement for the solvency and viability assessment of institutions that need liquidity assistance. The authorities need to ensure that appropriate and sustainable financial and human resources are allocated to recovery and resolution planning commensurate with the size and complexity of Sweden’s financial sector and the country’s home-country responsibilities

Table 1.

Key Recommendations

article image

C = continuous; I (immediate) = within one year; NT (near term) = 1–3 years; MT (medium term) = 3–5 years

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Cover IMF Staff Country Reports
Sweden: Financial System Stability Assessment
Author:
International Monetary Fund. Monetary and Capital Markets Department
Volume/Issue:
Volume 2016: Issue 355
Publisher:
International Monetary Fund
ISBN:
9781475554618
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781475554618.002