IMF published its staff report under the 2019 Article IV consultation with Sweden. Directors welcomed the adoption of stricter mortgage amortization requirements, while calling for financial sector risks to remain under close watch, including by collecting household-level balance-sheet data. They supported continued review of the adequacy of banks’ commercial property risk management and the health of commercial property borrowers.
The report reveals that the macro-prudential framework was strengthened and a well-targeted tightening of macro-prudential measures was adopted. Addressing a key recommendation of the 2016 Financial Sector Assessment Program (FSAP) to enable timely and effective macro-prudential action, the Swedish Financial Supervisory Authority's macro-prudential mandate was expanded from February 2018, giving it the authority to apply measures subject to government approval but no longer requiring parliamentary approval. A stricter amortization requirement became effective in March 2018, raising the minimum amortization on new mortgages with a loan-to-income (LTI) over 450%.
Noting increased risk-taking in the financial sector, the Swedish Financial Supervisory Authority announced, in September, increased (by 0.5 percentage point) the countercyclical capital buffer (CCyB) to 2.5% from September 2019; this CCyB is the highest in Europe. Macro-prudential policy should remain on alert and household-level data collection enhanced to help evaluate its effectiveness. The recent decline in housing prices and the subsequent stability have been associated with some slowing in the household credit growth. As the stricter amortization requirements take hold, the Swedish Financial Supervisory Authority expects the share of new high LTI mortgages to decline substantially, helping to contain vulnerabilities over time.
The banking system is robust, yet it faces challenges from financial innovation, requiring steps to contain prudential risks without preventing competition. Swedish banks maintain high profitability and capital levels, along with sound loan books. However, new entrants into the mortgage market are capitalizing on innovations in the financial services technology, relatively high profit margins on mortgages, and the ready availability of market funding from institutional investors. These nonbank entities provide low-cost mortgages to high-quality borrowers (with less than 60% loan-to-value for instance) and transfer the credit risk to end-investors such as life insurers. Although these nonbanks are a small share of the mortgage market, it is important that they meet the same macro-prudential and consumer protection requirements, while ensuring compliance costs are manageable. Commercial real estate is another area where nonbank financing is playing a growing role, but bank exposure remains material.
The IMF staff recommends that Swedish Financial Supervisory Authority should continue to closely review the adequacy of risk management by banks, along with the financial health of commercial property borrowers. The Swedish Financial Supervisory Authority should also assess the adequacy of measures adopted to contain default risks and improve the efficiency of default management procedures.
Related Link: Staff Report
Keywords: Europe, Sweden, Banking, Insurance, Macro-Prudential Framework, Credit Risk, FSAP, Mortgage, Article IV, CCyB, IMF
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