Risks threatening the stability of Sweden’s banking system have grown as the global economy deteriorates, said Mattias Persson, head of the financial stability department at the central bank.
There is an “uncertain situation in the world around us, which has led to an increased risk for the Swedish financial system and the commitments of the Riksbank,” Persson said in a phone interview out of Stockholm yesterday. “We need to make sure that we have the preparedness to handle the situations that may arise.”
The central bank will add 100 billion kronor ($15 billion) to its foreign reserves to protect the nation’s banks from a deterioration in global markets, it said yesterday. Policy makers including Governor Stefan Ingves, who is also the chairman of the Basel Committee on Banking Supervision, have urged Sweden’s banks to rely less on short-term foreign borrowing after they needed emergency liquidity peaking at $30 billion in 2008 following the collapse of Lehman Brothers Holdings Inc.
Today, the Riksbank’s main concern is an escalation of the turmoil in Europe’s single currency bloc, Persson said.
“The euro crisis and the problems in the euro area are the biggest threats to the Swedish financial system right now,” he said. “The uncertain situation abroad entails increased risks to the Swedish financial system.”
The turmoil in the euro zone is hurting demand for exports from Sweden, which sends about 70 percent of its goods sold abroad to Europe. Swedish unemployment hit a two-year high in November, reaching a seasonally-adjusted 8.1 percent, Statistics Sweden said today.
The lack of demand has also undermined price growth, with headline consumer prices sinking 0.1 percent in November from a year earlier, the office said today. That’s adding to the likelihood the central bank will cut its main lending rate by a quarter of a percentage point to 1 percent next week, said Michael Grahn, an analyst at Danske Bank A/S. It would be the fourth time over the past year that the bank eases policy.
Growth in the $500 billion economy will slow to 0.5 percent this year from 3.9 percent in, Svenska Handelsbanken AB forecast today. The rate of expansion will pick up to 1.3 percent next year, it said.
Sweden’s financial industry, which is dominated by Nordea Bank AB, Svenska Handelsbanken AB, SEB AB and Swedbank AB, comprises assets that are more than four times the size of the $500 billion economy.
Finance Minister Anders Borg, who is pushing through stricter capital requirements in Sweden than those set elsewhere, said Nov. 27 the government may limit bank borrowing in foreign currencies to protect taxpayers from the risk of losses. The threat followed warnings from Sweden’s Financial Supervisory Authority that banks are overly reliant on short-term funds in foreign currencies.
Of the total securities issued by Swedish banks as of the end of October, including certificates and bonds, 78 percent were in foreign currencies, according to Statistics Sweden. About 80 percent of liquidity buffers held by Sweden’s banks are in foreign currencies, the central bank said in June.
Sweden’s banks had 2.06 trillion kronor outstanding of securities at the end of that month. Of securities with maturities of one year or less, 93 percent were in foreign currencies while 64 percent of securities with maturities of more than 2 years were in foreign currencies, the data showed.
The central bank said yesterday it “needs a sufficiently large foreign exchange reserve to be prepared, if necessary, to provide the banks with liquidity in foreign currencies.”
The krona sank as much as 0.8 percent against the euro yesterday, and added to the losses today to trade 0.5 percent lower at 8.7379 as of 7:21 a.m. in Stockholm, its weakest since July 4. That left it the worst performing major currency tracked by Bloomberg against the euro, the dollar and the yen.
The Riksbank’s decision brings total foreign reserves to 310 billion kronor, including 45 billion kronor worth of gold, based on figures from Aug. 31, according to the Riksbank’s website. Of the total, 265 billion kronor are in bonds, of which 49 percent are in U.S. dollars and 36 percent in euros.
Riksbank Deputy Governors Karolina Ekholm and Lars E.O. Svensson entered reservations against the other four board members’ decision to boost reserves, the bank said.
“We consider a better alternative would be to enter into an agreement with the Swedish National Debt Office that the foreign exchange reserves will be restored within 10 banking days after a decision has been made to use the reserves for liquidity assistance,” they said in a statement. “Such an agreement would have the advantage that the taxpayers would not need to pay for the banks’ risky borrowing in foreign currencies.”