Riksbank calls for housing and tax reforms to reduce financial risks

Sveriges Riksbank has said Sweden’s government should reform tax and housing policy to help deal with rising financial vulnerabilities.

It also called on the country’s banks to avoid making large dividend payments and share buybacks in its financial stability report, published today (November 9). Commercial banks needed to address their exposure to highly leveraged real estate firms, it warned.

“After many years of low inflation and very low interest rates, increasing asset prices and rising indebtedness, it is uncertain how economic agents can cope with a rapid rise in inflation and interest rates,” says the report.

This environment increases the risk of “major credit losses among major Swedish banks,” it adds. To maintain credit supply to the real economy during a likely phase of low or negative growth, the Riksbank said banks should focus on serving their borrowers.

The report points out the Swedish financial system has accumulated “large vulnerabilities” since the crisis the country suffered in 1992.

“This primarily concerns the banks’ exposure to the highly indebted commercial property companies, but also the high level of indebtedness among households,” says the report. “The strains on many market participants in the financial system are now clear.”

In September, the consumer price index at fixed interest rate increased year on year by 9.7%, way over the central bank’s 2% target. The Riksbank started increasing its policy rate in May, when it was at 0%, bringing it to 1.75% now. Most analysts expect the central bank to increase it further at its next policy meeting on November 24.

Though the Riksbank can provide emergency liquidity, the report says market participants should not take that as a green light for reckless actions. “It is important that market participants realise that they cannot always count on support measures, since it is not the Riksbank’s role to facilitate for individual participants who have taken excessive risks.”

Instead, the Riksbank recommends the reform of housing and tax policy to deal with ever-higher housing prices and household indebtedness.

“The absence of reforms has contributed to the need to adopt macro-prudential policy measures,” says the report. The central bank praised the actions of Sweden’s financial supervisory authority Finansinspektionen.

These include the amortisation requirements the agency first implemented in 2016. They require households taking new mortgages with a loan-to-value ratio over 70% to amortise 2% of their loan every year. For households with loan-to-value ratios between 50% and 70%, the amortisation must be 1%.

The Riksbank also said loan-to-value limits have contributed to households taking out smaller loans. As a result, it says: “These measures should be retained and it would be inappropriate to introduce a general exemption to the amortisation requirements at the present time.”