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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Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview. 

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken. 

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.” 

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.” 

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said. 

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.