Banks must heed long-term risks: Riksbank

Sweden's central bank, the Riksbank, on Monday said Swedish banks were weathering the current financial storm well compared to their European colleagues, but still sought a greater focus on capital and liquidity as a bulwark against the long-term impact of financial instability.

Banks must heed long-term risks: Riksbank

The Riksbank said that while the banks in Sweden were doing well, they needed “more resilience” in the long-run as developments in the crisis-hit eurozone still posed a great threat.

“The major banks are highly resilient to a weaker economic climate in the short term, but there are vulnerabilities in the structure of the Swedish banking system that may have a negative impact on financial stability in the longer term,” the Riksbank said in a statement issued on Monday.

The central bank said that previous recommendations that the bigger banks have access to enough capital had been heeded, but that the banks should take further measures.

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“The Riksbank therefore recommends that the major banks continue to ensure they have adequate capital and liquidity, and that they improve their public liquidity reporting.”

The major Swedish banks Handelsbanken, Nordea, SEB and Swedbank are all still making profits despite the turbulence and are well-capitalized compared to many other European banks. Their strong position has ensured continued access to market funding in both the krona and other currencies.

On the horizon, however, the threat of loan losses looms if the recession continues much longer, which would cool down the financial markets, with effects for the banks but also Sweden as a whole.

“Moreover, the banks may experience greater difficulty in obtaining access to market funding. Swedish housing prices may also fall if Sweden is hit by a prolonged economic slowdown,” the statement continued, citing Swedes’ high level of household indebtedness as a concern.

Any decline in consumption would take a swipe at Swedish growth figures, with the potential effect of companies in Sweden having problems with covering their day-to-day costs.

The set-up of the banks themselves could also contribute to a financial slump, the Riksbank noted.

“The banking system is large in relation to the Swedish economy and strongly interlinked, which means that a financial crisis could also require government intervention and thus become costly for taxpayers.”

In order to protect against liquidity risks, the major Swedish banks should start reporting any structural weakness in accordance with the definition in the Basel III Accord, the Riksbank recommended.

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Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”