## EXECUTIVE SUMMARY (cr17311)

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### INTRODUCTION
- Scope:
  - Analyzes Sweden’s systemic risk oversight framework and tools to address systemic vulnerabilities (Section I: institutional framework, allocation of powers, trade-offs; Section II: instruments to mitigate systemic risk).
- Institutional developments:
  - Financial Stability Council (FSC) set up in 2013, chaired by the Minister for Financial Markets, comprising the Riksbank Governor, FI Director General, and the National Debt Office Director General; it is a forum without decision-making powers.
- Key judgment:
  - Rising vulnerabilities—high house prices and increasing household indebtedness—warrant short-term responses; buffers exist but a sharp correction could cause disruptions (see Technical note on stress testing).
  - Broadening and strengthening Finansinspektionen’s (FI) macroprudential mandate and toolkit is needed to address mounting vulnerabilities expeditiously.

### MACROFINANCIAL RISKS AND POLICY PRIORITIES
- Main vulnerabilities:
  - Rising share of highly indebted households and high housing prices.
  - A house price decline, with loss of confidence in housing collateral, could be amplified by Swedish banks’ reliance on wholesale funding.
  - Interconnectedness within the Nordic-Baltic financial systems implies significant regional spillover effects.
- Policy priorities and conclusions:
  - Higher bank capital is not sufficient to mitigate risks.
  - Short-term household resilience should be improved by adoption of a maximum debt-to-income ratio.
  - Strong political action is needed to remove obstacles to increasing housing supply while macroprudential policies should moderate housing demand during adjustment.
  - Removing tax benefits associated with real estate holdings and funding is needed to reduce imbalances.
  - Adequate calibration of mortgage LTV and introduction of a maximum debt-to-income ratio can help contain feedback between credit and asset prices and buttress household resilience.
  - The new amortization requirements are a welcome step; their effectiveness must be monitored.

### INSTITUTIONAL AND LEGAL ISSUES
- Framework actors:
  - Key institutions: Finansinspektionen (FI), Riksbank, National Debt Office (NDO), Ministry of Finance (MoF).
  - Riksbank: independent authority under parliament.
  - FI and NDO: operationally independent authorities under government; FI’s and NDO’s budgets are approved by the MoF.
- Legal and mandate weaknesses:
  - No single agency leads systemic risk identification; FI and the Riksbank both analyze systemic risks.
  - FI’s mandate: tasked in 1994 with financial system stability and well-functioning financial markets; amended in 2014 to add mandate to prevent financial imbalances aimed at stabilizing the credit market (referred to as FI’s macroprudential mandate). The difference between mandates and their content is unclear.
  - Riksbank’s mandate: under the Sveriges Riksbank Act to promote a safe and efficient payments system; in practice entails a responsibility to promote financial system stability but lacks a clearly defined formal role in macroprudential policy.
  - FI’s macroprudential mandate rests on a thin foundation: the MoF may swiftly change the ordinance regulating FI’s mandate; FI’s strategic direction, financing, appointment of Director General and Board, and mandates are given by the MoF (Instruction and annual Letters of Appropriation).
  - Uncertainty over which instruments FI can use without government or parliamentary approval (LTV, amortization, DTI, LTI, DSTI); the amortization requirement required government approval and faced lengthy debate and judicial challenges.
- Resourcing and analytical capacity:
  - FI macroprudential staffing: a dedicated department with about 20 employees and another 15-20 in supervisory areas addressing macroprudential issues.
  - Bank supervision: less than 100 staff to supervise 124 institutions, including one G-SIB.
  - Riksbank Financial Stability Department: six divisions, total of 65 employees; produces a high quality Financial Stability Report but lacks a formally sanctioned role in macroprudential policy.
  - Consequences: limited analytical capability, too few examinations, over-reliance on a small number of key people.
- Accountability and coordination:
  - Accountability for financial stability is weak and dispersed, creating a bias toward inaction or slow responses.
  - FSC: discussion forum with no decision-making powers, limited resources (secretariat staffed with two and a half full time employees), and no disciplined procedure to reach formal agreement among members on systemic risk analysis.
  - Riksbank’s analysis respected but recommendations sometimes discounted due to its limited formal role.

### ASSESSMENT AND RECOMMENDATIONS (HIGHLIGHTED)
- Legal and institutional reforms (timing, authority, paragraph references):
  - Clarify the financial stability mandate of the government and FI in the law. Timing: I. Authority: MoF. Paragraph: 17.
  - Give FI a broad macroprudential mandate and set of macroprudential instruments by law. Timing: I. Authority: MoF. Paragraph: 17.
  - FI should increase resources dedicated to systemic risk oversight and cross-institutions supervisory issues. Timing: I. Authority: FI, MoF. Paragraph: 17.
  - Provide the FSC, or a similar body, a statutory basis with power to issue recommendations, preferably with a ‘comply or explain’ attribute. Timing: MT. Authority: MoF. Paragraph: 22.
  - Upgrade the preparatory group of the FSC into a Systemic Risk Committee chaired by the Riksbank. Timing: MT. Authority: MoF. Paragraph: 22.
  - The law should ensure that the Riksbank finds a clear institutional role in the oversight of systemic risk. Timing: MT. Authority: MoF. Paragraph: 23.
  - The FSC should issue an annual assessment on financial stability risks with a work plan. Timing: NT. Authority: MoF, FI, NDO, RB. Paragraph: 25.
  - The FSC Secretariat should be staffed with more economists. Timing: NT. Authority: MoF, FI, NDO, RB. Paragraph: 25.
- Systemic risk oversight and management (timing, authority):
  - FI should be granted the ability to change the loan-to-value ratio of mortgages for macroeconomic stability. Timing: NT. Authority: MoF. Paragraph: 40.
  - Introduce a debt-to-income regulation. Timing: NT. Authority: FI, MoF. Paragraph: 42.
  - Close monitoring of the new amortization requirements and a yearly reassessment of their calibration. Timing: I. Authority: FI. Paragraph: 45.
  - Lower mortgage tax deductibility and revisit property tax ceilings. Timing: NT. Authority: MoF. Paragraph: 49.
  - Remove constraints to housing supply. Timing: NT. Authority: MoF. Paragraph: 49.
  - Include corporate risks in FI’s risk analysis. Timing: I. Authority: FI. Paragraph: 50.
  - Enhance financial stability frameworks within the Nordic-Baltic region. Timing: NT. Authority: FI, RB. Paragraph: 52.
  - Reduce banks’ cross holdings of covered bonds and closer monitoring of these exposures. Timing: NT. Authority: FI. Paragraph: 53.
- Operational recommendations:
  - Grant FI a clear legal mandate for macroprudential policy with full operational independence, including ability to adopt and change instruments and their calibration.
  - Provide the FSC (or similar body excluding the MoF) with a statutory basis and power to issue recommendations with a ‘comply or explain’ attribute.
  - Ensure Riksbank expertise in financial stability analysis has a clear institutional role in systemic risk oversight.
  - Monitor effectiveness of existing and new macroprudential measures (LTV, amortization requirements) and assess calibration annually.
  - Consider tax policy changes (lowering mortgage tax deductibility, revisiting property tax ceilings) and structural reforms to remove constraints to housing supply.
  - Strengthen FI staffing and analytical capacity to reduce reliance on a few key staff and improve supervisory coverage given the size of the banking sector.

### SYSTEMIC RISK MANAGEMENT — MEASURES ADOPTED
- Capital and liquidity measures timeline:
  - 2013: FI set a 15 percent floor on risk weights for mortgages, then raised to 25 percent in 2014.
  - January 2013: Liquidity coverage ratio (LCR) requirement introduced both in aggregate and separately in the EUR and USD currencies.
  - September 2014: 1 percent countercyclical capital buffer (CCB) introduced.
    - Raised to 1.5 percent in June 2015.
    - Raised to 2 percent in March 2016.
  - 2014: Capital conservation buffer of 2.5 percent of risk-weighted assets introduced.
  - 2015: Pillar II add-on of 2 percent of risk-weighted assets for the four largest banks.
  - January 2015: Systemic risk buffer of 3 percent for the four largest banks.
- Demand-side measures:
  - 2010: Loan-to-value (LTV) limit of 85 percent for new mortgages introduced (under FI’s consumer protection mandate).
  - June 1, 2016: Amortization requirement for new mortgages introduced (minimum annual amortization requirement).

### HOUSING MARKET AND HOUSEHOLD SECTOR VULNERABILITIES
- Debt and leverage statistics:
  - Share of households with debt-to-disposable income (DTI) ratios above 450 (600) percent was about 37 (17) percent in 2015, up from 21 (10) percent in 2011.
  - Credit-to-GDP gap is negative and credit to households is growing in excess of income though still at single digit rates.
  - 70 percent of residential mortgages are based on floating rates.
  - Average LTVs: 61 percent on the mortgage stock and 68 percent on new loans.
- Mortgage contract features:
  - Long maturities: 30–50 years, with longer maturities not uncommon.
  - Contracts reviewed every one to five years for renegotiation.
  - About 65 percent of households amortize; amortization low: about 1.3 percent of households’ loan amounts amortized in 2015.
  - New minimum annual amortization requirement (effective June 1, 2016) for mortgages issued after that date until LTV ratios reach 50 percent; excludes new construction.
    - Minimum annual amortization: 2 percent for LTV ratios above 70 percent, and 1 percent for LTV ratios between 50 and 70 percent.
- Effectiveness of prior tools:
  - 2010 LTV cap of 85 percent has not been effective in containing debt due to rising prices and uncollateralized loans above the cap.
  - Mandatory amortization requirement became effective on June 1, 2016 after government approval.

### STRESS TESTS AND SCENARIO RESULTS
- FI supervisory view:
  - Rising house prices, lending standards, and high household debt add to macroeconomic vulnerabilities rather than high immediate credit risk for banks.
  - FI’s stress tests show households have good capacity to service debt even under stress scenarios including higher unemployment and interest rates.
  - Banks use a 7 per cent interest rate at mortgage origination for capacity tests.
  - FI’s household stress test used a 6.7 per cent interest rate.
- Macroeconomic shock simulations:
  - Staff calculations: a house price fall by 20 percent would reduce GDP by 2.6 percent.
- Channels of impact:
  - Direct banking effects through rising NPLs.
  - Household deleveraging lowers consumption with knock-on effects on corporate investment.
  - Second-round effects on medium and small firms serving the domestic market.
  - High interconnectedness and reliance on wholesale funding amplify regional spillovers.

### HOUSING SUPPLY, PRICES, AND FISCAL INCENTIVES
- Demand-supply gap and construction:
  - Estimated gap of 700,000 housing units.
  - Current pace of housing completions represents less than 1 percent of the total housing stock.
- Structural factors adding upward pressure:
  - Restrictions on land use at the local level.
  - Rigidities of the rental market regulation.
  - Mortgage interest rate deductibility and lack of a property tax.
- Result:
  - Recent uptick in new building unlikely to close the estimated demand gap in the short term.

### BANKING SYSTEM INTERCONNECTIONS AND COVERED BONDS
- Regional footprint:
  - Swedish banks in Finland account for 70 percent of assets.
  - About 47 percent of lending by Swedish banks takes place outside Sweden, of which over ¾ in the Nordic-Baltic area.
  - Nordea is the largest bank in Sweden and Finland and the second largest in Denmark.
- Covered bonds:
  - Among Swedish investors, covered bonds are primarily purchased by insurance companies, other banks, and funds.
  - As of end-2015, Swedish banks’ holdings of covered bonds represented about 28 percent of their equity.
  - Covered bonds used to fund operations in Denmark, Finland, and Norway; typical average maturity about three years.
- Concentration risk:
  - Large exposures cap of 20 percent applies by name and does not take into account correlated risks from covered bond concentrations.

### MACROPRUDENTIAL EFFECTIVENESS, WELFARE ANALYSIS, AND AMORTIZATION ASSESSMENT
- Trends:
  - Growth in mortgage credit picked up to almost 8.5 percent in June 2016, up from 7.3 percent in 2015.
  - Annual house price increase in 2016 slowed to about 10 percent compared with peak growth of 18 percent in October 2015.
  - Debt to income ratio has continued to rise, especially for already highly indebted households.
- Instrument effectiveness (staff analysis):
  - Demand-side instruments (LTV limits, amortization requirement) are effective in reducing household DTI with small effects on consumption and output.
  - Tighter supply-side measures (mortgage risk weights) have marginal effects on household debt but relatively large impacts on household consumption.
  - A mix of macroprudential and tax measures would achieve higher welfare; tighter LTV cap on new mortgages, stricter amortization requirement, lower mortgage tax deductibility and higher mortgage risk weights improve welfare up to optimal levels.
- Amortization optimality (staff simulations, Chen and Columba, 2016):
  - Optimal amortization period from a welfare perspective: 25 years, implying an amortization rate of 4 per cent per year.
  - Recommendation: keep amortization requirements in place and perform yearly reassessment of their effects on systemic risk and households’ welfare, including reassessment of the interest-only period and/or LTV ratio thresholds.

### POLICY RECOMMENDATIONS (MACROPRUDENTIAL, FISCAL, SUPERVISORY, REGIONAL)
- Macroprudential toolkit and calibration:
  - Give FI full flexibility to calibrate LTV ratios, lowering them if needed.
  - Introduce a maximum debt-to-income (DTI) ratio to increase household resilience; FI should propose adoption soon but defer final activation and calibration until the tool is authorized by law and other developments (including experience with the amortization requirement) are taken into account.
  - Consider tighter LTV caps on new mortgages, stricter amortization requirement, lower mortgage tax deductibility and higher mortgage risk weights as a combined approach.
- Fiscal and structural measures:
  - Lower mortgage tax deductibility and/or revisit property tax ceilings.
  - Political action to ease constraints to housing supply associated with restrictive land-use regulations.
- Supervisory and corporate oversight:
  - Include corporate risks in FI’s risk analysis via top-down stress tests of corporate resilience similar to household stress testing.
  - Enhance supervisory focus on SME portfolios, particularly for banks with concentrated SME exposures.
- Regional cooperation:
  - Strengthen collaboration in the Nordic-Baltic region on supervisory information sharing and joint stress-testing.
  - Revamp cross-border cooperation arrangements and continue the Nordic-Baltic Macroprudential Forum.
  - Publish Forum assessments and collect exposure data for network stress testing.
- Monitoring and concentration risk:
  - Close monitoring of banks’ cross holdings of covered bonds and consider measures to contain potential concentration risk.

### KEY NUMERIC HIGHLIGHTS (preserved exactly as in source)
- Share of households with DTI above 450 (600) percent: about 37 (17) percent in 2015; up from 21 (10) percent in 2011.
- Average LTVs: 61 percent on the mortgage stock and 68 percent on new loans.
- 70 percent of residential mortgages are based on floating rates.
- Amortization: about 1.3 percent of households’ loan amounts amortized in 2015; new minimum annual amortization: 2 percent for LTV > 70 percent, 1 percent for LTV between 50 and 70 percent (effective June 1, 2016).
- Staff simulation: house price fall by 20 percent would reduce GDP by 2.6 percent.
- Mortgage credit growth: almost 8.5 percent in June 2016, up from 7.3 percent in 2015.
- Annual house price increase: about 10 percent in 2016 versus peak growth of 18 percent in October 2015.
- Estimated housing unit gap: 700,000 units.
- Housing completions pace: less than 1 percent of total housing stock.
- Covered bonds holdings: about 28 percent of banks’ equity as of end-2015.
- Loan-to-deposit ratio: about 200 percent.
- Customer deposits: around 40 percent of total funding.

### ANNEX II — DELEGATION OF AUTHORITY FOR MACROPRUDENTIAL POLICY-MAKING (PEER COUNTRIES)
- Peer set: Australia, New Zealand, United Kingdom.
- Common themes:
  - Clear legislative mandates strengthen willingness to act.
  - Ex-ante oversight (Statements of Expectations, Letters of Expectations, MoUs) and ex-post accountability (parliamentary hearings) improve transparency and accountability.
  - Combination of soft and hard powers limits inaction bias; calibration flexibility and targeted application of tools are common features.
  - Central bank involvement is desirable for expertise, independence, and coordination with monetary policy; Treasury involvement is typically limited or non-voting.
- Notable peer arrangements:
  - Australia: APRA has an explicit legislative mandate; coordination through the Council of Financial Regulators chaired by the RBA Governor; data sharing arrangements.
  - New Zealand: RBNZ has legal powers for macroprudential tools; MoU with MoF; flexibility to adjust LTVs and consider additional tools such as DTI.
  - UK: Financial Policy Committee (FPC) with statutory remit; powers include recommendations with comply-or-explain, directions to PRA/FCA, and ability to publish meeting records and a bi-annual financial stability report.

*Source: IMF staff analysis as presented in the chapter.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION
- The note analyzes the systemic risk oversight framework in Sweden and the tools employed to address systemic vulnerabilities (Section I: institutional framework, allocation of powers, trade-offs; Section II: instruments to mitigate systemic risk).
- Since the 2011 FSAP, a Financial Stability Council (FSC) was set up in 2013 chaired by the Minister for Financial Markets, comprising the Riksbank Governor, FI Director General, and the National Debt Office Director General; it is a forum without decision-making powers.
- IMF guidance (IMF, 2014) and international consensus emphasize clear mandates, adequate powers, and strong accountability for effective macroprudential policy.
- Rising vulnerabilities—high house prices and increasing household indebtedness—warrant short-term responses; buffers exist but a sharp correction could cause disruptions (see Technical note on stress testing).
- Broadening and strengthening Finansinspektionen’s (FI) macroprudential mandate and toolkit is needed to address mounting vulnerabilities expeditiously.

### MACROFINANCIAL RISKS AND POLICY PRIORITIES
- Main macrofinancial vulnerabilities:
  - A rising share of highly indebted households and high housing prices pose serious macrofinancial risks.
  - A house price decline, with loss of confidence in housing collateral, could be amplified by Swedish banks’ reliance on wholesale funding.
  - Interconnectedness within the Nordic-Baltic financial systems implies significant regional spillover effects.
- Policy priorities and conclusions:
  - Higher bank capital is not sufficient to mitigate risks.
  - Short-term household resilience should be improved by adoption of a maximum debt-to-income ratio.
  - Strong political action is needed to remove obstacles to increasing housing supply while macroprudential policies should moderate housing demand during adjustment.
  - Removing tax benefits associated with real estate holdings and funding is needed to reduce imbalances.
  - An adequate calibration of mortgage LTV and introduction of a maximum debt-to-income ratio can help contain feedback between credit and asset prices and buttress household resilience.
  - The new amortization requirements are a welcome step; their effectiveness must be monitored.

### INSTITUTIONAL AND LEGAL ISSUES
- Framework actors and roles:
  - Key institutions: Finansinspektionen (FI), Riksbank, National Debt Office (NDO), Ministry of Finance (MoF).
  - Riksbank: independent authority under parliament; FI and NDO: operationally independent authorities under government; FI’s and NDO’s budgets are approved by the MoF.
  - FI and NDO issue secondary regulation based on authorization by the government.
- Legal and mandate weaknesses:
  - The systemic risk oversight mandate is unclear—no single agency leads systemic risk identification; FI and the Riksbank both analyze systemic risks.
  - FI’s mandate: tasked in 1994 with financial system stability and well-functioning financial markets; amended in 2014 to add mandate to prevent financial imbalances aimed at stabilizing the credit market (referred to as FI’s macroprudential mandate). The difference between mandates and their content is unclear.
  - Riksbank’s mandate: under the Sveriges Riksbank Act to promote a safe and efficient payments system; in practice entails a responsibility to promote financial system stability but lacks a clearly defined formal role in macroprudential policy.
  - FI’s macroprudential mandate rests on a thin foundation: the MoF may swiftly change the ordinance regulating FI’s mandate; FI’s strategic direction, financing, appointment of Director General and Board, and mandates are given by the MoF (Instruction and annual Letters of Appropriation).
  - Uncertainty exists over which instruments FI can use without government or parliamentary approval (LTV, amortization, DTI, LTI, DSTI); the amortization requirement required government approval and faced lengthy debate and judicial challenges.
- Resourcing and analytical capacity:
  - FI staffing for macroprudential policy: a dedicated department with about 20 employees and another 15-20 in supervisory areas addressing macroprudential issues.
  - Bank supervision: less than 100 staff to supervise 124 institutions, including one G-SIB.
  - Consequences: limited analytical capability, too few examinations, over-reliance on a small number of key people, and unlikely prioritization of macroprudential support in supervisory areas.
  - Riksbank capacity: Financial Stability Department consists of six divisions with a total of 65 employees and produces a high quality Financial Stability Report; however it lacks a formally sanctioned role in macroprudential policy.
- Accountability and coordination:
  - Accountability for financial stability is weak and dispersed among political bodies, FI, NDO, and the Riksbank, creating a bias toward inaction or slow responses.
  - The FSC is a discussion forum with no decision-making powers, limited resources (secretariat staffed with two and a half full time employees), and no disciplined procedure to reach formal agreement among members on systemic risk analysis.
  - The Riksbank’s financial stability analysis is respected but its recommendations are sometimes discounted due to its limited formal role in the financial stability framework.

### ASSESSMENT AND RECOMMENDATIONS (HIGHLIGHTED)
- Legal and institutional reforms (timing, authority, paragraph references from Table 1):
  - The financial stability mandate of the government and FI should be clarified in the law. Timing: I. Authority: MoF. Paragraph: 17.
  - A broad macroprudential mandate and set of macroprudential instruments to be given to FI by a law. Timing: I. Authority: MoF. Paragraph: 17.
  - FI should increase the resources dedicated to systemic risk oversight and to cross-institutions supervisory issues. Timing: I. Authority: FI, MoF. Paragraph: 17.
  - Provide the FSC, or a similar body, a statutory basis with power to issue recommendations, preferably with a ‘comply or explain’ attribute. Timing: MT. Authority: MoF. Paragraph: 22.
  - The preparatory group of the FSC should be upgraded into a Systemic Risk Committee chaired by the Riksbank. Timing: MT. Authority: MoF. Paragraph: 22.
  - The law should ensure that the Riksbank finds a clear institutional role in the oversight of systemic risk. Timing: MT. Authority: MoF. Paragraph: 23.
  - The FSC should issue an annual assessment on financial stability risks with a work plan. Timing: NT. Authority: MoF, FI, NDO, RB. Paragraph: 25.
  - The FSC Secretariat should be staffed with more economists. Timing: NT. Authority: MoF, FI, NDO, RB. Paragraph: 25.
- Systemic risk oversight and management (timing, authority, paragraph references from Table 1):
  - FI should be granted the ability to change the loan-to-value ratio of mortgages for the purpose of macroeconomic stability. Timing: NT. Authority: MoF. Paragraph: 40.
  - Introduce a debt-to-income regulation. Timing: NT. Authority: FI, MoF. Paragraph: 42.
  - Close monitoring of the new amortization requirements and a yearly reassessment of their calibration. Timing: I. Authority: FI. Paragraph: 45.
  - Lowering mortgage tax deductibility and revisiting the property tax ceilings. Timing: NT. Authority: MoF. Paragraph: 49.
  - Removal of constrains to housing supply. Timing: NT. Authority: MoF. Paragraph: 49.
  - Including corporate risks in FI’s risk analysis. Timing: I. Authority: FI. Paragraph: 50.
  - Enhancing financial stability frameworks within the Nordic-Baltic region to monitor extant risks. Timing: NT. Authority: FI, RB. Paragraph: 52.
  - Measures to reduce banks’ cross holdings of covered bonds as well as closer monitoring of these exposures. Timing: NT. Authority: FI. Paragraph: 53.
- Operational recommendations:
  - Grant FI a clear legal mandate for macroprudential policy with full operational independence, including ability to adopt and change instruments and their calibration.
  - Provide the FSC (or similar body excluding the MoF) with a statutory basis and power to issue recommendations with a ‘comply or explain’ attribute.
  - Ensure Riksbank expertise in financial stability analysis has a clear institutional role in systemic risk oversight.
  - Monitor the effectiveness of existing and new macroprudential measures (LTV, amortization requirements) and assess calibration annually.
  - Consider tax policy changes (lowering mortgage tax deductibility, revisiting property tax ceilings) and structural reforms to remove constraints to housing supply.
  - Strengthen FI staffing and analytical capacity to reduce reliance on a few key staff and improve supervisory coverage given the size of the banking sector.

*International Monetary Fund — Executive Summary of the Sweden Financial Sector Assessment/FSAP chapter*

### 17. Sweden’s financial stability framework poses challenges that can weaken its ability and

### 17. Sweden’s financial stability framework poses challenges that can weaken its ability and willingness to act promptly.

### Institutional framework and mandate issues
- Lack of a clear mandate and separation of responsibilities between FI and the government:
  - Makes the framework prone to a slow reaction to financial stability risks, as evidenced by lingering vulnerabilities in the housing market and household sector.
  - Recommendation: The allocation of macroprudential policy powers between the government and FI should be clarified in the law to clarify accountability.
- Legal and institutional arrangements:
  - Sweden’s model: no legally enshrined formal role for the central bank and no powers to a financial stability committee (FSC).
  - Many peer jurisdictions assign the macroprudential mandate to an influential central body or committee with substantial convening power and the ability to take a broad view of the entire financial system.
  - IMF (2014) finding: frameworks more conducive to willingness to act are those where the macroprudential mandate is assigned to a body or committee with clear accountability and where the central bank plays an important role.
- Cooperation and convening power:
  - Where the supervisory authority is the decision-maker, coordination can be facilitated through a coordinating or advisory body or by attributing a strong role to the central bank on decision-making boards.
  - Combination of soft powers (recommendations not subject to comply or explain) and harder powers (direct control over macroprudential tools or formal recommendations with a ‘comply or explain’ mechanism) is key to limit inaction bias (IMF 2013).

### Recommendations to strengthen governance and roles
- Upgrade FSC responsibilities and legal basis:
  - Recommendation: The FSC should have a statutory basis with recommendation power, preferably with a comply or explain attribute, to foster cooperation among authorities involved in systemic risk oversight, without touching exclusive Riksbank areas (e.g., monetary policy as per the Riksbank Act).
  - If legal constraints prevent granting such powers to the FSC, create a similar body with representatives from FI, the RB, and the NDO, possibly excluding the government’s Minister for Financial Markets to ease legal challenges.
  - Within the FSC, the RB (Riksbank) should be given the leading role in systemic risk analysis to benefit from its expertise and information on the financial system.
- Establish Systemic Risk Committee (SRC):
  - Recommendation: Upgrade the preparatory group of the FSC to a Systemic Risk Committee (SRC) chaired by the Riksbank.
  - SRC composition and operations:
    - Chaired by a Riksbank Deputy Governor.
    - Composed of high-level representatives of FI and the NDO.
    - Monitor systemic risk and propose recommendations to the FSC.
    - Meet at least quarterly.
    - Assisted by an FSC secretariat staffed mainly with economists, leveraging RB and FI staff on rotation if needed.
    - Allow and publish majority and minority views supporting votes on adoption of recommendations.
- Formal role for the Riksbank:
  - Recommendation: Give the Riksbank a more formal role in financial stability discussion and recommendations, ensuring its expertise in systemic risk analysis has a clear institutional role.
- Resources and staffing:
  - Finding: Lack of resources dedicated to macroprudential policy in FI and the FSC, while RB resources are not fully leveraged.
  - Recommendation: FI should be allowed to increase resources dedicated to systemic risk oversight and to cross-institutions supervisory issues.
  - The FSC should act as the venue to bridge differences and convey a stronger unified assessment of systemic risk.

### Transparency and outputs
- FSC annual assessment:
  - Recommendation: The FSC should issue an annual financial stability assessment leveraging member analyses to provide a clearer guide to financial system stakeholders.
  - The assessment should provide a shared view of key risks and could include a financial stability map assigning scores to major risk categories.
  - The assessment would draw on FI and RB reports and provide an influential reference point for monitoring risks.

### Analytical and data tool enhancements
- Strengthen analytical toolkit and data collection:
  - FI (consulting RB if necessary) should:
    - Conduct regular surveys on the distribution of households’ financial assets.
    - Undertake tests of second round effects from household deleveraging and regular corporate stress tests.
    - Enhance liquidity stress testing by using maturity ladders.
    - Strengthen solvency stress tests by using granular time series for calibration of credit risk parameters.
    - Start collecting interbank exposures, including cross border, for contagion analysis.
  - FI and RB collaboration:
    - Could explore collaboration in data collection for cross-sectional and cross border contagion analysis and in scenario design that are more scenario driven and risk based.
  - Staffing recommendation reiterated: FI should be allowed to increase resources dedicated to systemic risk oversight and cross-institutions supervisory issues given rising supervisory and financial stability challenges.

### Systemic risk management — overview of measures adopted by FI
- Capital and liquidity measures adopted over time:
  - 2013: FI set a 15 percent floor on risk weights for mortgages, then raised to 25 percent in 2014.
  - January 2013: Liquidity coverage ratio (LCR) requirement introduced both in aggregate and separately in the EUR and USD currencies.
  - September 2014: 1 percent countercyclical capital buffer (CCB) introduced.
    - Raised to 1.5 percent in June 2015.
    - Raised to 2 percent in March 2016.
  - 2014: Capital conservation buffer of 2.5 percent of risk-weighted assets introduced.
  - 2015: Pillar II add-on of 2 percent of risk-weighted assets for the four largest banks.
  - January 2015: Systemic risk buffer of 3 percent for the four largest banks.
- Demand-side measures:
  - 2010: Loan-to-value (LTV) limit of 85 percent for new mortgages introduced (under FI’s consumer protection mandate).
  - June 1, 2016: Amortization requirement for new mortgages introduced (minimum annual amortization requirement).

### Financial system role in the region
- Sweden as a nodal center for Nordic-Baltic financial systems:
  - Swedish banks in Finland account for 70 percent of assets.
  - About 47 percent of lending by Swedish banks takes place outside Sweden, of which over ¾ in the Nordic-Baltic area.
  - Nordea is the largest bank in Sweden and Finland and the second largest in Denmark.
  - Swedish banks’ Baltic subsidiaries account for large shares of total assets in Estonia, Lithuania, and Latvia.
  - Sweden is the most important (“central”) financial system in the Nordic region.

### Housing market and household sector vulnerabilities
- Rising household debt and leverage:
  - The share of households with debt-to-disposable income (DTI) ratios above 450 (600) percent was about 37 (17) percent in 2015, up from 21 (10) percent in 2011.
  - Credit-to-GDP gap is negative and credit to households is growing in excess of income though still at single digit rates.
  - 70 percent of residential mortgages are based on floating rates, making households vulnerable to interest rate increases.
  - Average LTVs: 61 percent on the mortgage stock and 68 percent on new loans.
- House prices and affordability:
  - The price-to-income ratio is 32 percent above its 20-year average—highest among the OECD countries.
  - Continued house price gains incentivize households not to amortize loans and to take larger loans relative to income.
  - Recent decline in average LTVs and origination to 68 percent may reflect banks becoming more conservative.
- Features of mortgage contracts increasing vulnerabilities:
  - Swedish residential mortgages have long maturities (30–50 years, with longer maturities not uncommon).
  - Mortgage contracts were reviewed every one to five years, allowing renegotiation of interest rate and amortization.
  - About 65 percent of households amortize, but amortization is low: about 1.3 percent of households’ loan amounts amortized in 2015.
  - New minimum annual amortization requirement (effective June 1, 2016) for mortgages issued after that date until LTV ratios reach 50 percent; excludes new construction.
    - Minimum annual amortization: 2 percent for LTV ratios above 70 percent, and 1 percent for LTV ratios between 50 and 70 percent.
- Effectiveness of prior policy tools:
  - 2010 LTV cap of 85 percent has not been effective in containing debt, given rising prices and the possibility of taking uncollateralized loans above the cap.
  - Lack of mandatory amortization persisted for a long time due to FI’s insufficient mandate; mandatory amortization requirement became effective on June 1, 2016.
- Supervisory assessments and stress testing:
  - FI views rising house prices, lending standards, and high household debt as adding to macroeconomic vulnerabilities rather than high credit risk for banks.
  - Supervisors focus on the impact of household deleveraging on consumption, employment, and small firms.
  - FI’s stress tests show households have good capacity to service debt even under stress scenarios including higher unemployment and interest rates.
  - Banks indicated that at mortgage origination they stressed borrower capacity using a 7 per cent interest rate, interpreted as tantamount to an amortization requirement.
  - FI’s household stress test employed a 6.7 per cent interest rate with a strong outcome in terms of household resilience.

*Source: IMF staff analysis as presented in the chapter.*

### 35. Structural constraints and fiscal incentives impair the ability of house supply to match

### 35. Structural constraints and fiscal incentives impair the ability of house supply to match

### Housing supply-demand imbalance and price pressures
- Demand pressure with an estimated gap of 700,000 housing units.
- The current pace of housing completions represents less than 1 percent of the total housing stock, lagging behind rising populations especially in the larger urban areas.
- Structural factors adding upward pressure on house prices:
  - Restrictions on the use of land at the local level impair a strong expansion of housing supply.
  - Rigidities of the rental market regulation do not help.
  - Mortgage interest rate deductibility and the lack of a property tax contribute to further propel house demand adding to house price increases.
- Regulatory issues and fiscal incentives mean the recent uptick in new buildings construction is not likely to accommodate the estimated demand gap in the short term.

### Corporate sector vulnerabilities (summary)
- Public data on Swedish corporates suggest some vulnerabilities that are worth monitoring.
- Interest coverage and currency exposure:
  - Large corporates appear to have strong interest coverage ratios (ICR), but the strength declines with corporate size.
  - About half of corporate debt is denominated in foreign currency.
  - Banks usually do not require clients to have income in foreign currency as a condition to grant loans in foreign currency.
- Shock sensitivity:
  - A 250 basis points (bps) shock to interest rates would bring the interest coverage ratio of medium and small corporations to about 1.5.
  - This would be aggravated if a recession reduced corporations’ earnings.
- Bank exposures:
  - Corporate fragility is particularly important for banks with sizeable exposures to small and medium-sized enterprises (SMEs).
  - For the largest four banks, corporates represent 30 percent of total exposures.

### Banking system interconnections and covered bonds
- Swedish banks’ high interconnectedness with the Nordic-Baltic banks creates the potential for sizable contagion effects.
  - Sweden is both a potential source of contagion for the regional financial systems and at the receiving end of spillovers generated by shocks in the region through its banks’ interconnectedness.
  - Nordic banks follow similar business and funding models, which could be a source of regional contagion (e.g., through the covered bond market if a fall of asset prices were to trigger a loss of confidence).
- Covered bond market role and exposures:
  - Among Swedish investors, covered bonds are primarily purchased by insurance companies, other banks, and funds.
  - Swedish banks invest in covered bonds to have buffers of liquid assets and to act as market makers; as of end-2015, their holdings represented about 28 percent of their equity.
  - Banks also issue covered bonds in Denmark, Finland, and Norway to fund operations in these countries.
- Concentration risk:
  - Holdings of covered bonds are subject to the overall cap on large exposures (20 percent), but large exposures are defined by names and do not take into account potential contagion due to correlated risks.

### Financial stability assessment: shocks and macroeconomic impacts
- Staff calculations: a house price fall by 20 percent would reduce GDP by 2.6 percent.
- Channels of impact:
  - Direct banking effects through rising NPLs.
  - Household deleveraging lowers consumption with knock-on effects on corporate investment.
  - Second-round effects on medium and small firms serving the domestic market, which have weaker financial health than larger export-oriented companies.
  - Given high interconnectedness within the Nordic-Baltic financial systems, a fall in house prices with an associated loss of confidence in Swedish housing market collateral underpinning covered bonds could trigger disturbances across the region.
  - High reliance on wholesale funding and covered bond concentration in bank portfolios would act as amplifying factors.
- Housing finance and bank funding structure:
  - Customer deposits represent around 40 percent of total funding.
  - Sweden has one of the highest loan to deposit ratios in European countries (about 200 percent).
  - Long-maturity residential mortgages rely on wholesale funding, such as covered bonds with typical three-year average maturity.

### Macroprudential measures, effectiveness, and calibration
- Recent trends and measures:
  - Growth in mortgage credit picked up to almost 8.5 percent in June 2016, up from 7.3 percent in 2015.
  - Debt to income ratio has continued to rise in particular for those households with already high debt burden.
  - Annual house price increase in 2016 slowed to about 10 percent compared with the peak growth of 18 percent in October 2015, led by slower apartment price increases in Stockholm and Gothenburg.
  - Recently adopted macroprudential measures and other factors (government announcement of more housing construction and public discussion of mortgage interest deductibility) may have helped to cool demand, but house price expectation indicators have rebounded following a two-month decline.
  - The amortization requirement does not apply to mortgage loans granted before June 2016.
- Effectiveness of instruments (staff models and analysis):
  - Demand-side macroprudential instruments may reduce the household DTI ratio effectively.
  - Introduction of a LTV limit and of amortization requirement are effective in reducing households DTI with small effects on consumption and output.
  - Tighter supply-side macroprudential measures, such as mortgage risk weights, would only have very marginal effects on household debt despite relatively large impacts on household consumption.
  - Staff welfare analysis suggests it can be welfare improving to further tighten macroprudential measures, and that a combination of macroprudential and tax measures would achieve a higher welfare level. Tighter LTV cap on new mortgages, stricter amortization requirement, lower mortgage tax deductibility and higher mortgage risk weights improve welfare up to optimal levels.
  - A mix of macroprudential measures is needed to deliver the maximum level of welfare.
- Amortization requirement assessment:
  - The new mandatory amortization rules allow new Swedish mortgage loans to be considered less high-risk than before, but when the LTV ratio goes below 50 percent no amortization is required.
  - Staff simulations (Chen and Columba, 2016) indicate an optimal amortization period from a welfare perspective of 25 years, implying an amortization rate of 4 per cent per year, which coupled with the 2.5 per cent interest rate assumption would compare to the interest rate assumed by banks and FI in credit assessment and stress test respectively.
  - Recommendation to keep amortization requirements in place and to perform yearly reassessment of their effects on systemic risk and households’ welfare, including reassessment of the extent of the interest-only period triggered after the LTV prescribed limit is reached and/or of LTV ratio to be reached before the borrower may decrease the amortization rate or stop amortizing the debt.

### Policy recommendations (macroprudential, fiscal, supervisory, and regional)
- Macroprudential toolkit and calibration:
  - Give FI full flexibility to calibrate LTV ratios, lowering them if needed, to contain the feedback between credit and asset prices.
  - Introduce a maximum debt-to-income (DTI) ratio to increase household resilience and stop higher indebtedness from supporting higher housing prices. FI should proceed with proposing the adoption of a DTI limit soon, but a final decision on activation and calibration should be deferred until the tool is authorized with a law and to take into account developments including experience with the amortization requirement.
  - Consider tighter LTV caps on new mortgages, stricter amortization requirement, lower mortgage tax deductibility and higher mortgage risk weights as a mix to improve welfare, up to optimal levels.
- Fiscal and structural measures to restore demand-supply balance in the medium term:
  - Lower mortgage tax deductibility and/or revisit the property tax ceilings to moderate the incentives to accumulate housing debt.
  - Political action to ease constraints to household supply associated with excessively restrictive regulations in the use of land is warranted (as testified by the 22-point government program for more housing).
- Supervisory and corporate oversight:
  - Include corporate risks in FI’s risk analysis by implementing top-down stress tests of corporate resilience along the lines of household stress testing.
  - Enhance supervisory focus on SME portfolios, in particular for banks with concentrated SME exposures.
- Regional cooperation and financial stability frameworks:
  - Strengthen collaboration of supervisory authorities in the Nordic-Baltic region, in particular in supervisory information sharing and joint stress-testing, given the material potential for contagion.
  - Revamp regional cross-border cooperation arrangements and continue operating the Nordic-Baltic Macroprudential Forum.
  - Improve the Forum’s work by:
    - Publishing the Forum’s assessments of risks as well as current macroprudential developments in the region, ideally on the websites of all participating agencies or via the chair agency or a dedicated website.
    - Collecting exposure data for the implementation of network stress testing among financial intermediaries to supplement national solvency and liquidity stress tests and help calibrate second round effects of financial and macroeconomic shocks.
- Monitoring and concentration risk:
  - Close monitoring of banks’ cross holdings of covered bonds and consider introducing measures to contain potential concentration risk that adds to direct bank exposure to the housing market through mortgage loans.

*Source: IMF staff assessment and recommendations in "35. Structural constraints and fiscal incentives impair the ability of house supply to match" (cr17311).*

### Annex II. Delegation of Authority for Macroprudential Policy-

### Annex II. Delegation of Authority for Macroprudential Policy-Making in Selected Peer Countries

### Scope and framing
- Drawn from 3 countries—Australia, New Zealand, and the United Kingdom (UK).
- Grouped under three main themes: interactions with the government and parliament; design and implementation of instruments; and institutional arrangements.

### Interactions with the government and parliament
- Mandate
  - A clear legislative mandate strengthens willingness to act and is essential for taking responsibility for macroprudential policy decisions.
  - Australia: explicit legislative mandate of financial stability for the Australian Prudential Regulation Authority (APRA) enables it to take a systemic perspective on supervision.
  - New Zealand: legislation establishes legal powers of the Reserve Bank (RBNZ) for macroprudential policy.
  - UK: legislation assigns clear roles and responsibilities of macroprudential supervision and regulation to the Financial Policy Committee (FPC).

- Ex-Ante Oversight
  - Independence, transparency, and accountability are strengthened by broad expectations for the responsibility of macroprudential policymaking.
  - Australia: the government’s Statement of Expectations (SOE) sets forth the role and responsibilities of APRA, its independence from the government, and accountability to the parliament; APRA responds with a Statement of Intent.
  - New Zealand: a Letter of Expectations from the Minister of Finance to the Governor of the Reserve Bank outlines broad expectations; a Memorandum of Understanding (MoU) between the MoF and the RBNZ requires consultation with the MoF ahead of making decisions, although the final decision rests with the Governor of the RBNZ.
  - UK: remit and recommendations letters outline the FPC’s responsibility in supporting the government’s economic policy, explaining decisions, publishing a record of its formal meetings and a bi-annual financial stability report, and appearing before members of parliament.

- Consultation [Coordination]
  - Explicit mechanisms for cooperation and information sharing between agencies strengthen the effectiveness of supervision.
  - Australia: coordination takes formal (e.g., Coordination Committee meeting every 6 weeks, analysts’ meetings) and informal forms; public backing by the Reserve Bank of Australia (RBA) of APRA’s actions supports policy objectives; data sharing arrangements give the RBA access to supervisory data on individual institutions; analyses by the RBA and APRA are often circulated between agencies ahead of meetings, report publication, and communication.
  - New Zealand: the RBNZ is accountable to the Minister of Finance for macroprudential policy advice and decisions; the Board of Directors ensures legislative responsibilities are met while powers are exercised in appropriate consultation with the government.
  - UK: overlapping membership of the FPC with other policy bodies and use of supervisory intelligence and data from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) enhance communication and understanding of policy interactions.

- Communication
  - Commitment to take action is strengthened through communication tools, including cost and benefit analyses that complement financial stability reports, policy statements, and meeting records.
  - Australia: risk registers record elevated but not normally seen risks if significant and affecting more than one institution; act as both a communication and risk management tool for APRA.
  - New Zealand: the RBNZ regularly reviews appropriateness and effectiveness of macroprudential policy decisions; publishes a regulatory impact assessment of any deployed macro-prudential policy and initiates public consultation on those measures.
  - UK: the FPC is required to communicate how it plans to use its direction powers, weighing costs and benefits from deployment of macroprudential tools.

- Ex-Post Oversight / Accountability
  - Parliamentary hearings strengthen the accountability framework for delegation of authority.
  - Australia: APRA operates as part of the government and is accountable to parliament through the Treasury Ministers, the Parliamentary Committee process, and formal discussion of its annual report.
  - New Zealand: the RBNZ communicates and explains its views on systemic risks to the public and to parliament; its bi-annual publication of annual financial stability is reviewed by the parliament’s Finance and Expenditure Committee.
  - UK: members of the FPC must appear regularly before parliament at Treasury Committee hearings to explain their assessment of risks and policy actions; appointment hearings for FPC members by the Treasury Committee; FPC must publish a record of its formal meetings and a bi-annual financial stability report.

### Arrangements for the introduction and design of new measures
- Power over Instruments
  - A combination of soft and harder powers limits inaction bias and avoids implementation delays; powers can be “hard,” “semi-hard,” or “soft.”
  - Australia: power to use macroprudential tools is vested in APRA, consistent with its mandate of taking an industry-wide or systemic perspective on regulation.
  - New Zealand: hard powers derive from the ability to deploy four instruments established by legislation—LTVs on mortgage credit loans, a core funding ratio, a countercyclical capital buffer, and sectorial capital requirements.
  - UK: hard, semi-hard, and soft powers are provided to the macroprudential authority; the FPC can make recommendations to other agencies on a comply-or-explain basis to the PRA and the FCA, give directions to the PRA and FCA to deploy macroprudential tools, and recommend changes to the Treasury or other regulators.

- Calibration
  - Macroprudential tools need not be applied uniformly and can be calibrated to contain efficiency costs.
  - Australia: APRA adjusts prudential settings in response to assessed changes in systemic risk; example—APRA increased supervisory oversight on mortgage lending in December 2014 in the context of historically low interest rates, high levels of household debt, strong competition in the housing market, and accelerating credit growth.
  - New Zealand: flexibility allowed adjustments to the LTV ratio two years after the limit was first introduced, such as varying the ratio by property location and investor type; the RBNZ restricted the share of banks’ new residential mortgage lending that has an LTV exceeding 80.
  - UK: a 15 percent limit is applied on the proportion of new mortgage loans with loan-to-income at or above 4.5 that any lender can issue, allowing lending to households with low current but high prospective income while limiting excessive household indebtedness.

- Flexibility
  - A flexible framework allows the government to expand powers over new instruments as needed.
  - New Zealand: the MoU between the RBNZ and the MoF allows consideration of additional macroprudential tools such as a debt-to-income ratio.
  - UK: the FPC’s original powers of direction targeting bank health were expanded by the government to contain housing vulnerabilities, including housing tools such as limits on loan-to-income and loan-to-value ratios; following a further request by the FPC for powers of direction over the buy-to-let market, the government has completed its consultation on the matter.

### Institutional arrangements
- Central bank role and Treasury involvement
  - It is desirable for the central bank to play an important role in macroprudential policy and for the involvement of the Treasury to be more limited.
  - Rationale: central bank role harnesses incentives to act, expertise, and independence; ensures better coordination with monetary policy, provision of liquidity, and payment systems oversight; can help shield macroprudential policymaking from political interference.
  - Australia: APRA has powers over macroprudential tools; both APRA and the RBA are involved in macroprudential analysis and policy as part of the Council of Financial Regulators, a non-statutory central coordinating body chaired by the RBA Governor; APRA’s relationship with government is outlined in Statements of Expectations.
  - New Zealand: macroprudential policy powers are established for the RBNZ; a MoU governs its relationship with the MoF, with consultation ahead of macroprudential decisions; the Minister is regularly informed of conditions that warrant a macroprudential response.
  - UK: the FPC is chaired by the Governor of the BoE; macroprudential tools are designated by the Treasury and approved by parliament; the Treasury is a non-voting member in the FPC.

*Annex II. Delegation of Authority for Macroprudential Policy-Making in Selected Peer Countries (cr17311 - Annex II).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17311.pdf_