Sweden’s central bank should have sole responsibility for handling macroprudential supervision to improve the Nordic country’s ability to prevent another financial crisis, Riksbank Governor Stefan Ingves said.
A proposal to share the task of limiting systemic risks with the financial watchdog would create uncertainty and weaken the country’s ability to act, Ingves said in an opinion piece in Dagens Industri today.
There are “big advantages with coordinating macroprudential supervision with monetary policy since both these policy areas to a large extent affect the economy through the same channels,” he wrote. “Better conditions will be created for Sweden to get a stable economic development, with both financial stability and low and stable inflation.”
Sweden is considering how to improve its defenses in the wake of the global financial crisis, which hurt its banks’ access to funding and resulted in soaring loan losses after a credit-fuelled housing boom in the Baltics, where Swedish banks are the biggest lenders, went bust. The Riksbank has identified record-high household debt, fueled by rising house prices, as one of the biggest risks to the Swedish economy.
“It’s now important to, as soon as possible, create a toolkit” that “should initially contain a set of tools designed to counter the risks associated with high credit growth and debt,” Ingves said in the opinion piece. “We also need tools that handle the large liquidity risks that characterize the Swedish financial system.”
Swedish banks, whose total assets are four times the size of the $500 billion economy, are vulnerable to a liquidity crunch because of their large borrowing in foreign currency.
Decisions on when to use the tools should be made jointly with the watchdog and possibly external experts in the likely scenario that Sweden needs more than just “a few” new insutruments to prevent future crises, Ingves said.
Politicians also need to take measures that damp the risks of rising household debt, he said.
“Long-lasting solutions require that underlying problems with low housing construction and an inefficient rental market are gradually dealt with through other measures that are beyond the areas of macroprudential oversight,” he said.