Stefan Ingves: Financial stability is important for us all
Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, to the Riksdag Committee
on Finance, Stockholm, 15 March 2012.
* * *
Today, I would like to give you a few examples from Sweden and abroad to illustrate why
financial stability affects us all, not least in our role as consumers. It can easily happen that
discussions of bank regulations, not least at the EU level, can be considered difficult to
understand. This is partly because the discussions are often technical, and partly because
they can seem abstract. I would like to demonstrate how the political framework for financial
stability very strongly affects Swedish banking customers - in other words, almost all
households.
Crises cost society enormous amounts
As financial crises are very costly for the citizens of a society, we should try to avoid them at
almost any price.
The financial system forms the cornerstone of a modern economy. Its basic functions are
converting savings to investments, managing risks and mediating payments, functions that
we all constantly come into contact with every day, in one way or another. A functioning
financial system is also necessary for the repo rate, which is to say monetary policy, to have
an impact. A modern society cannot do without the functions of the financial system. Without
the financial sector, Sweden would grind to a halt. But the system also entails risks. Banks
are dependent on confidence, are highly leveraged and are thus vulnerable. Problems in the
financial sector are contagious.
Precisely because we need the financial system so much, reducing the risk of financial crises
must be an important priority. Financial crises cause great damage to society. In addition, we
know that financial crises have permanent effects on growth. It takes a long time to recover
from the major fall in GDP following on from a deep financial crisis. Normally, we see a
downwards shift in GDP level even if good times may then mean a return to the same rate of
growth.
The modern Swedish example of a financial crisis was a frightening experience for many of
us. The social costs of the crisis at the start of the 1990s can be illustrated in several ways.
One way would be to compare actual growth with the trend development. The difference in
Sweden's GDP towards the end of the 1990s corresponds to 20 per cent of GDP each year,
or SEK 50 000 per person in 1998 prices. The financial crisis of a few years ago, which was
milder for Sweden, has cost the people of Sweden thousands of kronor more per year.
The real effects have a high social and economic price
One of the more tangible effects of the crisis of the 1990s was its impact on the labour
market. Having gotten used to a level of unemployment of a few per cent, we then saw
unemployment increase to double figures over only a couple of years. Overheating at the
end of the 1980s and the resulting financial crisis almost doubled long-term unemployment.
And, of course, shocks to the national economy of this kind do not spare us citizens in our
role as taxpayers either.
Problems in the banking sector impact the country's citizens in several ways
A banking crisis thus impacts individual citizens in several ways.
Lower or even negative growth leads us, as employees, to run an increased risk of
unemployment and to earn lower wages than would otherwise have been the case. When
the growth path falls over the longer term, we also have to count on lower pensions.
Bank crises also risk being costly to us in our role as taxpayers. If the government is forced
to compensate those who have put money into a bank, or even take over and capitalise a
bank on the ropes, there will be less funding left for other purposes. Taxes will be higher or
public welfare lower - or both.
As almost all citizens are also bank customers, they are also impacted more directly. A crisis
in the Swedish banking system would lead to higher funding costs for the banks and thus
higher lending rates. Customers in a bank needing to be restructured may also need to
change bank and negotiate conditions under circumstances that would probably not be
particularly favourable.
All of this risks leading to major difficulties for households. And this is something that we saw
all too many examples of at the start of the 1990s.
Financial crises ultimately threaten fundamentally important social functions
An even more serious financial crisis could even threaten fundamentally more important
social functions. Households are dependent on the banks' ability to manage payments so
that they can receive wages, purchase food and so on. In turn, our banks are dependent on
the financial market as a whole.
If a serious crisis should break out - if the payment systems should stop working, if the
banks should stop trusting each other or if the banks should cancel payments - there would
be problems for a great many of us. As a conjectural experiment, we could ask ourselves
how many Swedish households would be able to cope with a week or two in which neither
charge cards nor ATMs functioned. Thankfully, we haven't had to worry about such problems
in Sweden.
The financial crisis of 2007-2009 impacted borrowers in other countries hard
A meltdown in the global financial economy was averted in 2008 and 2009 at a price we are
still unable to calculate. Even if the total cost has yet to be calculated, we can still note that
the consequences of the financial crisis are clear if we take one of its fundamental causes,
the US housing crisis, as an example. In the autumn of 2011, 22 per cent of all US mortgage
holders still owed more than the value of their property. This is almost 11 million
homeowners.1
One of the factors behind the development of the US housing market was irresponsible
lending to households with weak debt-servicing ability. We have also seen examples of this
in Europe.
Problems in the housing sector could have severe consequences for households
We don't want to have to go through a similar development in Sweden. Our experiences of
the crisis of the 1990s are more than enough. And we didn't emerge unscathed from the
crisis of 2008 either. Nobody wants a new financial crisis.
At the moment, the greatest risks to financial stability in Sweden are the financial unease in
the euro area and the resulting unease on the financial markets. However, our assessment is
that the Swedish banks are also well-prepared for weaker development than in our main
scenario.
I would also like to touch on a domestic risk that is frequently mentioned - Swedish
households' high levels of indebtedness and the risk of a fall in housing prices. Firstly, I
would like to say that we don't see any acute threat in this regard. We are not facing any
dramatic falling housing prices. In addition, our assessment is that the Swedish banks can
also cope with fairly large falls in the market value of housing.
Nonetheless, we at the Riksbank have long warned that the high level of indebtedness may
make the Swedish economy vulnerable. If the economy should develop adversely,
households may be forced to cut back on their consumption. When a home falls greatly in
price, the household becomes unable to move without realising major losses. Individual
households can then find themselves in particularly dire straits.
A couple of days ago, Finansinspektionen presented a report on housing loans in Sweden.2
Encouragingly, this report showed that the mortgage ceiling introduced in 2010 may have
dampened indebtedness and risk. At the same time, it can be noted, for example, that over
half of new loans approved have no amortisation requirements whatsoever. Of the remaining
loans, almost half must be amortised over a period of 50 years or longer. A large percentage
of the loans being issued at present will remain for a long time. To a certain extent, these
entail risks that the banks will also have to manage in several decades' time.
The higher capital adequacy demanded by the Ministry of Finance, Finansinspektionen and
the Riksbank for the major Swedish banks should be seen in light of this. The banks need to
lend a little more of their own money and slightly less of other people's. This would mean that
they would be able to bear losses more easily and would reduce the risk of future costs for all
of us, as citizens.
The European Commission is concerned about developments in Sweden
The European Commission is also concerned about the high debts accumulating among
Swedish households. In a recent report, the Commission identified a number of risks to the
financial stability of various EU countries, including Sweden.3
In this sense, the European Commission's analysis does not depart radically from our own.
As I have already said, there are good reasons to try to prevent problems and to curb
excessive risk-taking as regards housing loans. This is why we in Sweden have argued that
Sweden must have the possibility of placing higher requirements on the Swedish banks -
particularly the major banks.
As you are aware, the EU countries are currently negotiating new capital adequacy
regulations for the EU. The Riksbank's opinion is that the EU should establish minimum
requirements, but that individual countries, such as Sweden, for example, should be able to
go further - just to reduce the risk of financial crises at a national level. I know that the
Ministry of Finance and Finansinspektionen agree, as do several other countries and, for
example, the European Systemic Risk Board.
The Riksbank has an important role to play in the prevention of financial crises
The Riksbank's task of preventing new crises is connected to our responsibility for the
country's means of payment. Only the Riksbank can provide unlimited liquidity to the
Swedish banks in a crisis situation. During the crisis of 2008 and 2009, the banks could also
borrow as much as they needed from the Riksbank.
The Riksbank monitors the financial sector with a systemic perspective. If we hadn't realised
it before, one clear lesson from the crisis of 2008-2009 was that monitoring individual
institutions is not enough. We and other authorities around the world learnt that we have to
keep our eyes on the connections between the banks and how they are affected, as a whole,
by developments on the markets. Among other means, the Riksbank influences financial
market participants through the analyses we make and the recommendations we issue in the
Financial Stability Reports.
Another important role for the Riksbank is being the country's representative in several
forums that set the standards for the financial sector, primarily the Basel Committee on
Banking Supervision, the European Systemic Risk Board (ESRB) and the Committee on
Payment and Settlement Systems (CPSS).
At the same time, it is worth pointing out that, at present, the Riksbank does not have any
sharper tools than words in the preventive work or macro-prudential supervision. We can
warn and recommend, but when it comes to real measures, other authorities currently hold
responsibility. It is a difficult task. Always raising a warning when everything seems to be
going well seldom makes you popular.
Financial stability policy is of great importance for Swedish households
Preventing future crises is an important task - as is being able to manage them if they break
out anyway.
I hope that this speech has clarified why Swedish households are dependent on financial
stability. Firstly, households and the economy as a whole need functioning financial services.
Secondly, all experience shows that the consequences of a financial crisis are very costly for
households, employees, taxpayers and bank customers.
As citizens of a modern society, we thus have a right to expect that the authorities will do
their best to prevent and manage financial crises. In turn, the authorities need tools and a
clear responsibility structure to prevent crises, as far as is possible. It is equally important
that there be efficient tools to manage crises if they break out anyway.
Sweden cannot afford to go through another crisis like that in the 1990s. Neither can the
world afford a new 2008. This is why it is so important that we constantly strive to ensure that
new financial crises do not break out. This is in the interests of every citizen.
The regulation of the financial sector
affects the country's citizens
Could be perceived as abstract
Policy discussions Often technical
in Sweden, in the EU, globally
Behaviour of the
financial sector
Effects on the real economy
Swedish citizens
and consumers
Crises cost society enormous amounts
GDP growth in Sweden, 1960-2010, SEK billion
S
The real effects have a high social and
economic price
Unemployment in Sweden, 1985-2000, percentage of labour force
Source: The Riksbank
Problems in the banking sector impact the
country's citizens in many ways
Problems in the
banking sector
Via the real Directly against
economy bank customers
Via the public sector
Deposit guarantee
Weaker economic Increased New banking
Need for capital
development uncertainty relationships
injections
Higher unemployment Higher taxes Higher
Lower wages Deterioration of interest New terms
Lower pensions public welfare rates
Poorer Poorer economy economy
for for households households
A financial crisis will ultimately threaten
basic social functions
Household
Who can pay whom
The financial system
is central in the society
in a serious crisis?
Household's
bank
Grocery Grocery shop's
Employer
Employer's
shop bank
bank
?
Other financial market
participants
- in and outside
Sweden
The financial crisis of 2007-2009 impacted
borrowers in other countries hard
Problems in the housing sector could have
severe consequences for households
Distribution of new mortgage loans by amortisation period,
per cent
70
60
50
40
30
20
10
0
0 - 10 10 - 30 30 - 40 40 - 50 > 50 None
Amortisation period, years
Source: Finansinspektionen
The European Commission is concerned
about developments in Sweden
From Alert Mechanism Report 2011/2012
"Despite overall good macroeconomic performance some countries
display developments in assets markets, including in particular housing,
and a continuous build-up of indebtedness in the private sector,
which also warrant further analysis"
 The European Commission would like a closer examination of
Swedish households' indebtedness
 Sweden's mandate to handle the situation depends on how the
Basel III regulations are implemented in the EU
S C
The Riksbank has an important role to play
in the prevention of financial crises
The Riksbank is responsible for means of
payment and can provide liquidity
But the
Riksbank
The Riksbank monitors the financial
lacks sharp
sector with a systemic perspective
preventive
tools
The Riksbank represents Sweden in
International regulatory cooperation
Preventing financial crises is of great
importance for Swedish households
Swedish households need functioning financial services and protection
from financial crises and their effects
Citizens have the right to expect that authorities will prevent and
manage financial crises to the best of their ability
Authorities need the right tools to prevent and manage crises
References
European Commission (2012): Alert Mechanism Report
Finansinspektionen (2012): Den svenska bolånemarknaden (the Swedish mortgage market)
Modestino, A. S., & Dennett, J. (2012): "Are American Homeowners Locked into Their
Houses? The Impact of Housing Market Conditions on State-to-State Migration", Working
Paper No. 12-1, Federal Reserve Bank of Boston