IMF Urges Sweden to Build Bank Buffers Against Property Risk

(Bloomberg) — The International Monetary Fund said Sweden might have to require banks to hold more capital and increase funding for the financial regulator, as risks rise in the country’s property sector.

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Swedish housing as well as commercial real estate has come into focus as the prices of homes have plunged in the last nine months, and property companies are facing a funding squeeze as large bond volumes approach maturity. The financial watchdog’s stress tests have shown little risk that credit losses would surge even in a prolonged housing slump, while there are more concerns regarding commercial property.

In a statement following an official staff visit, the IMF said that even as Swedish banks have strong capital and liquidity positions that would help cushion severe macroeconomic shocks, the country needs to be vigilant about risks to financial stability.

Read More: What’s Causing the Swedish Housing Market Plunge: QuickTake

“As pockets of vulnerabilities exist in the face of higher interest rates, it is recommended that the frequency and intrusiveness of inspections be increased, for which more resources need to be made available to Finansinspektionen,” IMF said. “Close attention needs to be given to residential and commercial real estate developments, which requires improving the collection of balance sheet data.”

A slump in Swedish property values, with housing prices expected to dive by 20% from their peak, has evoked memories of the real estate crash in the early 1990s that brought the economy and its banks to their knees and broke the krona.

Still, Sweden’s five largest lenders have “significant resilience” against a deterioration in earnings and rising credit losses in a severe scenario where interest rates and inflation rises, the country’s financial watchdog said in November.

The development in Swedish housing, which is emblematic of a broader international trend, started last year as inflation began to accelerate and the country’s central bank, the Riksbank, responded by increasing borrowing costs. While the central bank has flagged a 25-basis point interest-rate hike at its February meeting, most economists believe it will have to do more after December inflation rose to a three-decade high.

IMF advised the Riksbank to be better safe than sorry when charting the path for monetary policy.

“The potential costs of entrenched inflation due to undertightening outweigh those of over-tightening,” it said. “The Riksbank should therefore continue to closely monitor developments and consider to slightly tighten the announced interest-rate path in order to increase the probability of comfortably achieving its desired inflation path.”

(Updates with details from second paragraph.)

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