## 1sweea2023003 ## Source details **Canonical URL:** [1sweea2023003](https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1sweea2023003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1sweea2023003.pdf.json) --- ### Executive summary — key macrofinancial findings - Swedish banks entered the COVID-19 crisis with substantial capital and liquidity buffers, enabling continued credit provision to the real sector. - The economy recovered rapidly in 2021 as the Riksbank stepped in to support diminishing liquidity in markets and the government had ample fiscal space to support struggling companies. - Growth is expected to slow due to higher energy prices, tighter financial conditions, higher geopolitical uncertainty because of the war in Ukraine, supply side constraints, and lower property prices. - Prudent fiscal policy kept public debt at 35 percent of GDP. - Headline and core inflation are at historical highs. - The Riksbank brought forward monetary policy tightening, raising policy rates and starting a reduction of its balance sheet. - Household debt is at its historic peak; about 50 percent of mortgages are at variable rates (1 year horizon). - Banking sector assets were around 300 percent of GDP at end–2021. ### Cyclical and structural risks - Cyclical risks: - potential turn in the credit cycle, lower real estate prices, higher funding costs, and illiquid markets for corporate debt. - higher debt servicing costs for households and highly leveraged corporates due to Riksbank tightening. - Structural vulnerabilities: - Low Risk Weighted Assets (RWAs); average risk weights stood at just 23 percent as of June 2021 (ten percentage points lower than the EU average of 34 percent). - Mortgage loans and CRE exposures constitute 57 percent of Swedish banks assets. - Mortgage provision and CRE exposures supported by FI risk weight floors set since 2013: 25 percent for mortgage exposures and residential CRE and 35 percent for commercial CRE. - Consolidated (net of intercompany lending) corporate debt was around 121 percent of GDP in 2021; intercompany lending is highest among the Nordic countries. ### Financial sector structure, size, and exposures - Banking sector: - Size: nearly three times 2021 GDP; assets around 300 percent of GDP at end–2021. - The five largest banks (Svenska Handelsbanken (SHB), SEB, Swedbank, Nordea and Danske Bank’s Swedish branches and mortgage companies) account for over seventy-five percent of deposits and lending. - Mortgages constitute about fifty percent of banks’ lending portfolios. - Share of wholesale funding in three major banks remains high at 63 percent of total liabilities. - Covered bonds denominated in SEK represent between 70 to 80 of banks covered bonds issuance. - As of 2021, foreign investors held around 30 percent of covered bonds; domestic NBFI held around 34 percent; other banks and the Riksbank held around 15 percent each. - Non-bank financial intermediation (NBFI): - Insurance and Pension Funds (ICPF) hold more than 150 percent of GDP in assets. - Investment funds have almost tripled in size since 2015 and hold large equity portfolios (~110 percent of GDP); ICPF ~40 percent of GDP. - NBFI invest in corporate bonds on average around 12 percent of their assets. - Mortgages provided by non-bank fintechs amount to around 2 percent of the total stock of mortgages. - Payment and money transfer services are offered by around 105 companies of around 450 active fintechs (November 2021 data). ### Stress test and resilience results — banks - Coverage: three SIBs (Swedbank, SEB, Handelsbanken) and two largest mortgage banks (SBAB Bank and Länsförsäkringar Bank) covering around 75 percent of Swedish banking sector assets. - Design: forward-looking solvency analysis over a three-year horizon (2022–24) covering market, credit, and interest rate/funding risks. - Adverse scenario assumptions include up to 400 basis points increase in the Swedish repo rate and a 38 percent fall in residential and commercial real estate after two years. - Key outcomes: - Under an adverse scenario, systemwide CET1 ratio is depleted by 620 bps by the 3rd year. - Credit risk provisioning is the largest contributor to capital decline; increase in NII is insufficient relative to rise in funding costs. - No bank falls below minimum capital requirements in the scenario, but capital impacts are high, especially for banks heavily exposed to commercial CRE. - Sensitivity to additional CRE lending: - If banks extend loans equivalent to 35 percent of current CRE market funding: - Baseline scenario: CET1 capital is depleted by 1 percentage point. - Adverse scenario: CET1 capital is depleted by about 2.8 to 3.9 percentage points (range from pass-through between 5 and 35 percent). ### Liquidity stress tests — banks - Approach: cash flow–based liquidity stress test (LST) and standardized Basel III-LCR test for the five largest banks; central bank emergency liquidity facilities not factored in. - Findings: - Banks can withstand mild and medium liquidity outflows within 30 days using existing counterbalancing capacities, but positions weaken beyond one month. - In adverse scenarios, systemwide median Counterbalancing Capacity (CBC) declines by from 10 to 20 p.p. of total assets due to wholesale funding outflows and contingent liabilities. - One bank prone to short-term liquidity shortfalls due to derivatives positions; another exposed because of large off-balance-sheet exposures. - Accumulated reserves at central banks constitute the largest share of liquid assets immediately available. - Policy options: - Require banks to cover a predetermined threshold of wholesale funding outflows over a longer horizon. - Require holding a higher stock of HQLA. - Increase the proportion of longer-term and demand deposits. ### Investment funds — liquidity mismatch and stress tests - Sample: 171 Fixed-income, alternative and mixed funds (portfolio reporting date: Dec 31, 2021 or later). - Resilience: - Around 75 percent of the investment funds analyzed have enough highly liquid assets to meet redemption requests. - Many funds would be forced to sell less-liquid assets; some funds may face liquidity shortfall above 10 percent of Net Asset Value. - Market structure: - Corporate bond market extremely illiquid: 84 percent of corporate debt instruments traded on average less than 1 time per month. - Recommendations: - Require funds to align liability and asset liquidity profiles via liquidity management tools (LMTs) such as redemption terms aligned with portfolio liquidity, swing pricing, and redemption gates. - Provide industry guidance and require regular liquidity stress tests for funds with relevant exposure to limited market depth asset classes; require communication of results. ### Commercial Real Estate (CRE) — findings and stresses - Sample coverage and size: - IMF sample: about 3,800 firms with total assets amounting to US$482 billion (90 percent of GDP) and aggregate indebtedness of US$ 363 billon (70 percent of GDP), or around 40 percent of NFC debt. - FI stress tests include 15,000 CREs (small CREs around 40 percent of loan amount and around 90 percent of number). - Stress framework and key results: - Joint shocks to interest rates and GDP significantly weaken Interest Coverage Ratio (ICR); median ICRs fall below 1.5 and below 1 under more severe shock. - Debt-at-risk fluctuates between 20-35 percent. - Office vacancy rates increased from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm. - House prices peaked in Q1 2022; house prices started to decline in H2 2022, registering a 12 percent decline by November from their February peak. - Data gaps and policy recommendation: - Need more granular, higher-frequency CRE data: liabilities (especially FX), rental rates and prices, vacancies, transactions, and ownership structure; integrate CRE data into a single database. ### Digitalisation, CBDC (e-krona), fintech, and cyber risk - CBDC considerations: - Could bring technological advances, increased contestability and resilience, and continued access to a central bank liability. - Risks if used as a store of value: competition with bank deposits could produce deposit outflows (fast bank run or slow structural disintermediation). - Foreign demand could lead to currency substitution abroad and larger, more volatile capital flows. - Recommendations for Riksbank: conduct extensive testing and analysis of economic implications, evaluate incentives for adoption, continue technical testing, and cooperate with FI and NDO. - Fintech: - Number of active fintech companies increased to around 450 in 2019, from about 150 in 2010. - Fintech systemic importance currently limited but rapid growth and complexity warrant close monitoring. - FI lacks comprehensive data collection on fintech firms; recommendation to strengthen supervision, expand data collection, and periodically review regulatory perimeter. - Cyber risk: - Cyber threats are prominent, including DDoS and destructive attacks; financial sector highly digitalized and interconnected. - Multiple agencies involved with unclear responsibilities and barriers to information sharing. - Recommendations (NIST framework): clarify responsibilities, NCSC engagement via simulated cyber-attack case study, MSB/NCSC regular cyber threat intelligence reports, FI to maintain central database of essential service providers and outsourced arrangements, formalize operational and cyber incident response framework, and exercise regularly. ### Supervision, oversight, and crisis preparedness - Supervisory resourcing and process: - FI banking supervision less intrusive due to resource constraints, high staff turnover, and inability to attract senior risk experts; onsite inspection time rarely exceeds 3-4 days. - SREP cycle driven by systemic importance with limited consideration to a bank’s risk profile; monitoring of newly licensed institutions not formalized. - Supervision of IRB models: re-introduce model performance reviews and more comprehensive offsite monitoring and onsite testing (PD, LGD). - FI should automate data collection and analysis, deploy risk dashboards, and consider independent external experts for temporary specialist shortages. - FI should develop a staff retention strategy, benchmark salaries, and seek additional government funding. - Crisis management and resolution: - BRRD implemented; NDO established resolution colleges in 2016 for four major banking groups. - Recommendations: - Formalize a watchlist to identify banks at risk of failure (Responsibility: FI — Immediate). - Ensure bank resolution plans fully operational by clarifying MREL regulation, remove barriers to resolvability, and publish approach for bail-in and transfer tools (Responsibility: NDO & FI — Immediate). - Publish Riksbank policy framework describing lender of last resort bilateral liquidity facilities and funding in resolution (Responsibility: Riksbank — Immediate). - Limit Ministry of Finance role in approving NDO resolution decisions to those requiring government funding only. - NDO should be ready to use resolution tools for failing systemic institutions; Riksbank should be transparent that it is lender of last resort and establish ex-ante operational capacity for collateralized lending in a crisis. - Resolvability and reporting: - Banks must remove remaining barriers to resolvability and improve reporting on resolution valuation, funding in resolution, and operational service dependencies. - NDO to refine minimum requirement for MREL policy and ensure compliance by the 2024 deadline. ### AML/CFT and VASP supervision - Sweden broadly cooperative internationally; legal framework largely complies but gaps remain. - FI should step up AML/CFT inspections focused on cross-border dimensions and collect more granular data on cross-border transactions and customer activity. - FI to increase guidance on beneficial owner identification and pay more attention to correspondent banking and group level controls. - VASP supervision: - Sweden regulated VA exchanges and aligned framework with FATF revised standards. - FI should continue entity-level supervision of VASPs and collect more information on VASP activities. ### Climate-related risks and supervisory integration - Climate risks not immediate threat to financial stability but should be further integrated into supervisory processes. - FI actions: - Sustainability Committee and dedicated sustainability department established. - Climate risk explicitly included in SREP credit risk and Business Model Analysis, but currently does not impact institution risk ratings. - Surveys and joint analyses with Riksbank (e.g., using PACTA) and a pilot stress test conducted. - Recommended actions: - Require banks to report exposures to climate-related risks in supervisory reporting. - Broaden assessments of transition risk impacts and clarify supervisory expectations. - Systematically integrate climate risks into SREP proportionally. ### Key policy recommendations (selected) - Systemic Risk Analysis: - Employ structural models (household and CRE) to complement bank stress tests; develop tools to analyze contingent liquidity risks from loss of longer-term wholesale funding as well as corporate exposures for the largest banks. — FI — Immediate. - Require investment funds to offer redemption terms aligned with portfolio liquidity; consider swing pricing and gates; provide guidance on liquidity stress tests. — FI, MoF — Medium-Term. - Macroprudential policies: - Introduce standards on interest rate stress-tests that banks apply for mortgage loan applicants. — FI — Short-Term. - Commission independent study on costs and benefits of tax deductibility of mortgage interest. — MoF — Medium-Term. - Consider higher capital requirements and/or buffers for banks’ exposures to CRE risks. — FI — Short-Term. - Banking supervision: - Increase resources and enhance supervisory toolkit: automate supervisory data collection, deploy risk dashboards, improve offsite monitoring. — FI — Immediate. - Enhance frequency and intrusion of onsite inspections; ongoing assessment of IRB models; thematic reviews for smaller institutions; focus on small but high-risk institutions. — FI — Short-term. - Strengthen AML/CFT supervision targeted to high-risk areas including correspondent banks and VASPs; collect more granular transactional data. — FI — Short-term. - Cyber resilience: - Clarify roles and responsibilities for cyber risk management; develop contingency plans and crisis protocols; enhance information sharing. — FI, MoF, the Riksbank, NCSC, MSB — Immediate. - Establish and maintain a database of essential service providers and outsourcing arrangements. — FI — Immediate. - FMIs and payments: - Strengthen legal frameworks and oversight for weakly regulated FMIs; strengthen regulation, oversight, and supervision of key service providers Getswish and Finansiell ID-Teknik BID AB. — MoF, FI, the Riksbank — Short-term. - CBDC and fintech: - Extensively test robustness and resilience of CBDC; analyze financial safeguards and impact on payments and financial system. — Riksbank — Short-term (time horizon dependent on e-krona project continuation). - Facilitate information exchange and enhance understanding of fintech risks; collect additional data; review regulatory perimeter periodically. — FI — Medium-term. ### Appendix highlights — Risk Assessment Matrix (June 2022) and stress testing matrices - Major geopolitical and macro-financial risks identified include: - Russia’s invasion of Ukraine (Likelihood: H; Impact: Medium). - De-anchoring of inflation expectations in U.S./advanced Europe (Likelihood: M/L; Impact: High). - Significant property price decline in Sweden (Likelihood: L; Impact: Medium). - Geopolitical tensions and deglobalization (Likelihood: H; Impact: Medium). - Cyberthreats (Likelihood: M; Impact: Medium). - Stress testing parameters: - Banking solvency test cut-off: December 2021; tax rate: 20.6; dividend payout cap: 40 percent. - Commercial real estate stress test covered 3,800 firms (assets = 90 percent of GDP). - Investment funds LSTs use portfolio data (Dec 31, 2021 or later) and flows from 2008–2021; redemption shocks based on VaR and Expected Shortfall. - Appendix VI — Liquidity stress testing specifics: - Detailed outflow and inflow stress factor matrices and usable fractions of counterbalancing capacity for asset classes and funding lines (e.g., Retail deposits: stable: 0% 3% 5% 10% 15%; Retail deposits: unstable: 0% 5% 10% 20% 25%; Cash = 1040 usable fraction: 100% 100% 100% 100% 100%; Covered bonds = 1200 + 1240 usable fraction: 100% 97% 95% 93% 93%; RMBS = 1320 usable fraction: 100% 85% 75% 65% 65%). *Source: IMF 2022 FSAP — Executive Summary and chapter excerpts (Sweden, 1sweea2023003).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Key macrofinancial findings - Swedish banks entered the COVID-19 crisis with substantial capital and liquidity buffers, enabling continued credit provision to the real sector. - The economy recovered rapidly in 2021 as the Riksbank stepped in to support diminishing liquidity in markets and the government had ample fiscal space to support struggling companies. - Growth is expected to slow due to higher energy prices, tighter financial conditions, higher geopolitical uncertainty because of the war in Ukraine, supply side constraints, and lower property prices. - Prudent fiscal policy kept public debt at 35 percent of GDP. ### Cyclical and structural risks - Cyclical risks to financial stability arise from: a potential turn in the credit cycle, lower real estate prices, higher funding costs, and illiquid markets for corporate debt. - The Riksbank brought forward the path of monetary policy tightening, raising policy rates and starting a reduction of its balance sheet, increasing debt servicing costs for households and highly leveraged corporates. - Household debt is at its historic peak and a large fraction is at variable rates, thus sensitive to higher interest rates. - Note: About 50 percent of mortgages are at variable rates (1 year horizon). - Corporate sector is highly leveraged with debt securities accounting for nearly half of its funding. - The CRE sector is highly indebted and concentrated, exposed to funding rollover and interest rate risks and potential declines in rental rates from a shift to remote work. ### Financial sector structure and exposures - Banking sector size is nearly three times 2021 GDP and twice the European median. - Wholesale funding accounts for a large share of banks’ liabilities. - Banks are highly interconnected domestically and regionally. - Investment funds increased their size over the last five years, while banks’ role in domestic financial markets declined slowly. - Banks’ exposure to the mortgage and CRE sector is high, but regulatory capital ratios are supported by relatively low risk weight densities. - Nordea moved its headquarters to Finland; Nordea’s Swedish subsidiary is systemically important (category 1) and will receive an O-SII buffer of 1 percent of RWAs. ### Stress test and resilience results - FSAP bank solvency stress tests suggest the banking system appears resilient to simulated adverse shocks, though capital buffers decline more if CRE exposures grow further. - Under an adverse scenario, systemwide CET1 ratio is depleted by 620 bps. - If CRE exposures increased (e.g., credit lines drawn down), the negative impact on bank capital would be an additional two hundred basis points. - While no bank falls below minimum capital requirements in the scenario, the impact on capital is high, especially for banks heavily exposed to commercial CRE. - Liquidity stress tests indicate banks can withstand large outflows of wholesale and retail funding and the closure of covered and corporate bond markets for up to 3 months. - Accumulated reserves at central banks constitute the largest share of liquid assets immediately available. - FX swap and derivative market activities and credit lines require additional monitoring to better identify contingent liquidity and wholesale funding risks. - Investment funds: More than 70 percent of investment funds analyzed appear to have enough highly liquid assets to meet investors’ redemptions, but those not sufficiently diversified or heavily exposed to unrated or poorly rated debt are vulnerable. - Many corporate bonds are traded infrequently, limiting the ability to gauge price impact of redemptions in stress. ### Financial stability implications of digitalisation and cyber risk - Introduction of a CBDC could lead to structural changes in the banking sector and potentially lower profits. - The fintech sector is growing rapidly and needs better understanding; outsourcing risks arise from adopting foreign payment systems and developing a new Nordic payment system. - Cyber threats have become more prominent, hitting many Swedish financial institutions; a framework for comprehensive operational and cyber resilience is needed. - Regulation and cross-border supervisory arrangements must adapt to these changes. ### Supervision, oversight, and crisis preparedness - Bank supervision has been effective but could be improved by increasing resources. - Onsite inspections must become more frequent and intrusive. - More efficient analytical tools and risk dashboards could facilitate offsite monitoring. - FI should step up AML/CFT supervision targeted to high-risk areas, including correspondent banks and VASPs, and collect more granular transactional data. - FI should receive greater and more stable funding and develop a strategy to better attract and retain staff. - Crisis management and resolution framework improved since the 2016 FSAP but still needs greater clarity and guidance: - Operational details to be elucidated include a watchlist to identify banks at risk of failure and a consistent methodology to determine banks’ solvency, viability, and systemic impact. - Banks must remove remaining barriers to resolvability. - The National Debt Office (NDO) should stand ready to use its resolution tools for failing systemic financial institutions. - The Ministry of Finance’s role in approving NDO resolution decision-making that might have “direct budgetary or systemic effect” should be limited to resolutions that require funding from government budget only. - The Riksbank should publish a policy framework describing its lender of last resort bilateral liquidity facilities, including funding in resolution. ### Climate-related risks - Climate-related risks do not present an immediate threat to financial stability but should be further integrated into supervisory processes. - Authorities have published several climate risk studies; authorities should expand capacity to assess climate risks and encourage climate risk disclosures in the financial sector. ### Key recommendations (Table 1: Sweden: 2022 FSAP Key Recommendations) - Systemic Risk Analysis - Employ structural models (household and CRE) to complement bank stress tests; develop tools to analyze contingent liquidity risks from loss of longer-term wholesale funding as well as corporate exposures for the largest banks. — FI — Immediate (references: 20, 24, 27) - Require investment funds to offer redemption terms that are aligned with the liquidity profile of their portfolio; consider price- and quantity-based measures (e.g. swing pricing and gates); and provide guidance on liquidity stress tests. — FI, MoF — Medium-Term (reference: 31) - Macroprudential Policies and Systemic Risk Oversight - Introduce standards on the interest rate stress-tests that banks apply for mortgage loan applicants. — FI — Short-Term (reference: 54) - Commission an independent study to determine the costs and benefits of the tax deductibility of mortgage interest. — MoF — Medium-Term (reference: 54) - Consider higher capital requirements and/or buffers for banks’ exposures to CRE risks. — FI — Short-Term (reference: 57) - FSC, FI, and the Riksbank to use soft powers and joint communication to ask CRE firms to disclose their contingency funding plans in annual reports and bond prospectuses. — FI and Riksbank — Short-term (reference: 56) - Banking Supervision and Regulation - Increase resources to improve effectiveness of supervision and improve supervisory toolkit by enhancing offsite monitoring and screening tools, automating supervisory data collection and analysis, improving internal supervisory manuals, and deploying risk dashboards covering all key risks. — FI — Immediate (reference: 45) - Enhance supervision by: (i) increasing frequency and intrusion of onsite inspections; (ii) comprehensive onsite inspection of banks; (iii) ongoing assessment of IRB models and banks’ internal stress test processes; (iv) well-targeted thematic reviews for smaller institutions; and (v) heightened focus on small but high-risk institutions. — FI — Short-term (references: 44, 46) - Continue integrating climate-related risks into supervisory processes and ensure alignment of practice with emerging international standards. — FI — Medium-term (reference: 67) - FI should strengthen supervision of banks and VASPs targeted at ML/TF risks especially from cross-border operations by evolving risk management tools and collecting and analyzing more granular data. — FI — Short-term (references: 64, 65) - Cyber Resilience - Clarify roles and responsibilities for cyber security risk management; develop contingency plans and crisis protocols for large-scale attacks; enhance information sharing among agencies and with the financial sector. — FI, MoF, the Riksbank, NCSC, MSB — Immediate (reference: 59) - Establish and maintain a database of essential service providers and outsourcing arrangements, including to identify concentrations and dependencies. — FI — Immediate (reference: 59) *Source: IMF 2022 FSAP — Executive Summary (Sweden).* ### 5.1 percent by end-2021. This momentum continued in 2022 following the removal of COVID-19 ### 1sweea2023003 - 5.1 percent by end-2021. This momentum continued in 2022 following the removal of COVID-19 ### Macroeconomic context and policy response - Headline and core inflation are at historical highs. - The Riksbank started policy tightening by raising interest rates and started to reduce its balance sheet much earlier than anticipated. - Sweden has few trade links with Russia and Ukraine but is highly affected by developments in key trading partners, especially Germany. - Most banking links with Russia had been severed due to money laundering scandals in the Baltic subsidiaries of Swedish banks a few years prior to the war. ### Financial Market Infrastructures (FMIs) — key recommendations - Strengthen legal frameworks for weakly regulated FMIs to enforce compliance with the PFMI and other guidelines; strengthen regulation, oversight, and supervision of key service providers Getswish and Finansiell ID-Teknik BID AB. - Responsibility: MoF, FI, the Riksbank - Time horizon: Short-term ### Crisis Management, Resolution and Safety Nets — key recommendations - Develop crisis management capacity within and between the authorities by formalizing a watchlist process to identify banks at risk of failure. - Responsibility: FI - Time horizon: Immediate - Ensure bank resolution plans are fully operational by clarifying MREL regulation and removing other known barriers to resolvability; publish the approach for deploying bail-in and transfer tools and imposing losses on MREL holders. - Responsibility: NDO & FI - Time horizon: Immediate - Publish a policy framework describing the lender of last resort bilateral liquidity facilities, including funding in resolution. - Responsibility: Riksbank - Time horizon: Immediate ### CBDC and Fintech — key recommendations and priorities - Extensively test the robustness and resilience of CBDC, and analyze the effectiveness of financial safeguards, and the impact on the payments and financial system. - Responsibility: Riksbank - Time horizon: Short-term - Note: Priority for CBDC recommendations not inserted as time horizon will depend on whether the e-krona project continues. - Facilitate exchange of information and enhance understanding of risks between Fintech firms and supervisors; collect additional data to support a more comprehensive analysis of fintech firms and conduct periodically a review of the adequacy of the regulatory perimeter. - Responsibility: FI - Time horizon: Medium-term ### Corporate and household borrowing, housing, and CRE sector findings - Corporate borrowing persisted throughout the pandemic but at a slow pace; companies on average had ample access to cheap credit. - Positive credit-to-GDP gaps suggested a build-up in vulnerabilities in 2020-21, though numbers were volatile given significant GDP movements induced by the pandemic. - Swedish companies mostly rely on bank funding, which remained stable during the pandemic; many larger companies increasingly turned to debt financing after mid-2020. - House prices peaked in Q1 2022 while total household debt in relation to income peaked in Q4 2021. - House prices started to decline in the second half of 2022, registering a 12 percent decline by November from their February peak. - Interest rate payments in relation to disposable income remain at historically low levels, yet are subject to further monetary policy tightening. - CRE loans represent between 10 and 25 percent of the largest banks’ lending to private sector. - The share of CRE companies’ non-bank debt has increased recently (above 40 percent of their total debt), raising refinancing risks as market funding spreads widen. - CRE sector risks have been mitigated so far by: - the sector’s healthy pre-crisis balance sheets, - pre-crisis regulatory measures (e.g., additional capital requirements for the banks' exposures to CRE lending), - crisis response measures. ### Financial sector structure, size, and interconnectedness - Banking sector assets were around 300 percent of GDP at end–2021. - The five largest banks (Svenska Handelsbanken (SHB), SEB, and Swedbank, as well as Nordea and Danske Bank’s Swedish branches and mortgage companies) account for over seventy-five percent of deposits and lending. - Mortgages constitute about fifty percent of banks’ lending portfolios. - Large banks finance mortgage loans by issuing covered bonds, held by insurance companies and pension funds, as well as other banks. - During the COVID pandemic, banks’ business loan portfolio shifted towards SMEs and micro companies. - Swedish banks are highly interconnected regionally across the Nordic-Baltic region and the United Kingdom; exposure to Russia remains insignificant. - Non-bank financial intermediation (NBFI) is growing: - Insurance and Pension Funds (ICPF) hold more than 150 percent of GDP in assets. - Investment funds have almost tripled in size since 2015. - Investment funds have large equity portfolios (~110 percent of GDP) and ICPF ~40 percent of GDP. - NBFI are increasingly investing in corporate bonds (on average around 12 percent of their assets). - Mortgages provided by non-bank fintechs amount to around 2 percent of the total stock of mortgages. - Payment and money transfer services are offered by around 105 companies of around 450 active fintechs (November 2021 data, source investstockholm.com). - Sweden hosts one of the thirteen EU CCPs—Nasdaq clearing. ### Profitability, capital, and liquidity positions - Sweden’s financial sector remained profitable with solid fundamentals, partly because of low operating costs and limited effects of COVID-19. - Banks have structurally higher profitability than their European peers and high regulatory capital, partially driven by low risk weights. - Liquidity positions exceed regulatory minima; measures that sustained positions included: - a full release of the counter-cyclical capital buffer, - permission for banks to temporarily fall below the minimum liquidity coverage ratios (LCR), - recommendation that banks postpone dividend payments, - temporary exemption of borrowers from amortization requirements (the exemption expired in August 2021). - The counter-cyclical capital buffer remained at zero until September 29, 2022 when it was applied at 1 percent. A further rise, effective June 23, 2023, will put the CCyB at 2 per cent. - Central bank reserves represent 67 percent of counter balancing capacity (CBC). - Share of wholesale funding in three major banks remains high at 63 percent of total liabilities. - All banks have more liquidity than the regulatory minimum of 100 percent LCR requirement in significant currencies (SEK, USD, EUR). - As of 2021, foreign investors held around 30 percent of covered bonds issued by Swedish banks; domestic NBFI held around 34 percent; other banks, and the Riksbank, held around 15 percent each. - Covered bonds denominated in SEK represent between 70 to 80 of banks covered bonds issuance. ### Structural vulnerabilities and risk drivers - Low Risk Weighted Assets (RWAs) and high levels of interest sensitive household debt remain structural vulnerabilities. - As of June 2021, average risk weights stood at just 23 percent, ten percentage points lower than the EU average of 34 percent. - Global average risk weights are 29.4 percent, first quartile at 25.7 percent (BIS (2016) reference in source). - Mortgage loans and CRE exposures constitute 57 percent of Swedish banks assets. - FI has set risk weight floors at 25 percent for mortgage exposures and residential CRE and 35 percent for commercial CRE since 2013, which have significant impact on largest five bank capital requirements. - Low risk weights are one reason reported capital adequacy ratios are high. ### Investment funds, liquidity mismatch, and interconnectedness - Fund shares represent on average 16 percent of life insurers and pension funds’ assets, excluding unit-linked products (ratio grows to 38 percent including unit-linked products). - Investment funds have structural liquidity mismatch and persistent liquidity risk when faced by significant redemptions due to illiquidity of investments, particularly corporate bonds. ### Corporate sector leverage and intercompany lending - Corporate sector total nonconsolidated debt is high, in part due to large intercompany lending. - Consolidated (net of intercompany lending) debt was around 121 percent of GDP in 2021. - Intercompany lending is highest among the Nordic countries. ### CRE sector risks and exposures - Office vacancy rates increased from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm. - CRE rental income may be under stress; rising vacancy rates could trigger downgrades of CRE firms and worsen market funding conditions, potentially forcing CREs to revert to banks. - CREs are large borrowers from banks and bond market; ownership concentration has recently increased. - CRE prices rose rapidly in recent years despite high and increasing debt levels and falling returns. - FI’s analysis (2021) and Riksbank’s analysis (2017) indicate problems in property sector may have tangible effects on banks; FI’s stress tests (2020) show rising market funding elevates refinancing risks. - Over half of CRE bonds are held by foreign investors, who tend to divest faster in times of heightened global risk aversion. ### Stress test scenarios and assumptions - Stress test analysis used a baseline and an adverse macroeconomic scenario over a three-year horizon (2022-24). - Baseline scenario aligned with April 2022 World Economic Outlook (WEO) projections. - Adverse scenario envisages: - A de-anchoring of inflation expectations in the U.S. and advanced European economies amid persistent geopolitical tensions and continued pandemic-related shortages and supply chain issues; - Widespread cost-push shocks in energy and food markets; - Second round effects leading to a coincident increase in advanced country policy rates (up to 400 basis points for the Swedish repo rate) contributing to a recession afterwards; - Tighter financial conditions, lower confidence, a spike in risk premia, and a contraction in asset prices, especially in real estate (38 percent lower after two years, for both residential and commercial real estate). *Source: IMF staff compilation from the referenced PDF content.* ### 19. Stress tests indicate that CREs face debt servicing pressures even under a mild ### 19. Stress tests indicate that CREs face debt servicing pressures even under a mild scenario. ### CRE stress-test findings - Sample coverage and size: - A sample of about 3,800 firms with total assets amounting to US$482 billion (90 percent of GDP) and aggregate indebtedness of US$ 363 billon (70 percent of GDP), or around 40 percent of NFC debt. - FI stress tests include 15000 CREs, including small CREs, which stand for around 40 per cent of the loan amount and around 90 percent of the number of CREs. - Stress framework: - Shocks applied to interest rates, GDP (impact on revenues), and FX; impacts measured on customary financial ratios, notably the interest coverage ratio (ICR). - Key results: - The joint occurrence of shocks, particularly the interest rate and GDP shocks, significantly weakened the ICR, with the median ICRs falling below 1.5, and below 1 under a more severe shock. - Debt-at-risk was found to fluctuate between 20-35 percent. - Medium and large-size firms were affected similarly. ### Data and information gaps (policy recommendation) - More granular and higher-frequency data collection on CREs is needed, including: - Firms’ liabilities, especially in foreign currency. - Rental rates and prices, vacancies, and transactions. - Ownership structure of CREs to identify interlinkages across firms and associated vulnerabilities. - Integrate CRE data into a single database. *Figure and methodological references: Sweden FSAP: 2022. Technical note on Risk Analysis and Stress Testing (2023); T. Chow (IMF Working Paper 15/216).* --- ### Banking sector solvency stress tests — scope and main outcomes - Coverage: - Three Systemically Important Banks (SIBs): Swedbank, SEB, Handelsbanken. - Two largest mortgage banks: SBAB Bank and Länsförsäkringar Bank. - These five banks cover around 75 percent of Swedish banking sector assets. - Test design: - Forward-looking solvency analysis covering market, credit, and interest rate/funding risks with three-year bank-by-bank projections of earnings, costs, and balance sheets. - Results and vulnerabilities: - Baseline scenario: banks’ capital ratios increase slightly as profitability before loan losses remains high; simulated RWAs increase as defaults rise with higher interest rates. - Adverse scenario: negatively impacts capital ratios, but no bank sees its capital ratio fall below the hurdle rate. - On aggregate, the CET1 ratio declines by about 620 basis points by the 3rd year. - Credit risk provisioning is the largest contributor to the decline in capital ratios at the system level. - Increase in NII is insufficient relative to the rise in funding costs; flows of new provisions are driven by high loss rates on CRE exposures. - RWAs rise beyond the risk weight floor, underscoring the need to conserve or increase capital buffers, particularly for CRE portfolios. ### Bank sensitivity: additional CRE lending - Assumption: banks extend loans equivalent to 35 percent of current CRE market funding. - Impact: - Under the baseline scenario, CET1 capital is depleted by 1 percentage point. - Under the adverse scenario, CET1 capital is depleted by about 2.8 to 3.9 percentage points (range obtained by changing the pass-through between PDPiT and PDTTC; pass-through ranges between 5 and 35 percent). ### Liquidity stress tests and implications - Scenarios: - Multiple scenarios formulated in terms of roll-on/roll-off rates and haircuts to Counterbalancing Capacity (CBC) to capture retail deposit outflows, increased use of committed credit lines, and higher market risk aversion. - Findings: - Banks can withstand mild and medium liquidity outflows within 30 days using existing counterbalancing capacities, but liquidity positions become weaker beyond one month. - One bank is prone to short-term liquidity shortfalls due to derivatives positions; another is exposed because of large off-balance-sheet exposures. - In adverse scenarios, the systemwide median CBC declines by from 10 to 20 p.p. of total assets due to wholesale funding outflows and contingent liabilities. - Policy options to address longer-horizon liquidity gaps: - Require banks to cover a predetermined threshold of wholesale funding outflows over a longer horizon. - Require holding a higher stock of HQLA to withstand liquidity stress tests. - Increase the proportion of longer-term and demand deposits. --- ### Investment fund sector stress tests and vulnerabilities - Resilience: - Around 75 percent of the investment funds analyzed would have enough highly liquid assets to meet investors’ redemption requests and avoid a liquidity shortfall. - Nevertheless, many funds would still run into difficulties and be forced to sell less-liquid assets. - Portfolio vulnerabilities: - Portfolios that are not sufficiently diversified or heavily exposed to unrated or poorly rated debt securities face limited market liquidity under stress. - In some cases, the liquidity shortfall (difference between redemption shock and liquid assets, in percent of Net Asset Value) would be above 10 percent. - Funds holding domestic corporate bonds and pursuing long-term buy-and-hold strategies appear more likely to have shortfalls due to limited market depth and structural limitations in assessing credit/liquidity risk. - Corporate bond market liquidity: - The corporate bond market is extremely illiquid and structurally weak. - The vast majority of corporate debt instruments (84 percent) are traded on average less than 1 time per month; only a few are exchanged more than 5 times, impairing price discovery. ### Investment fund policy recommendations - Require funds to align liability and asset liquidity profiles by adopting liquidity management tools (LMTs), such as: - Redemption terms aligned with portfolio liquidity. - Swing pricing. - Redemption gates. - Provide industry guidance and require regular liquidity stress tests for funds with relevant exposure to asset classes with limited market depth; require communication of results. --- ### Interconnectedness and contagion channels - Interbank exposures: - Interbank exposures across the five largest banks are small, limiting direct contagion; stress testing interbank exposures assuming 100 percent loss rate did not yield significant CET1 depletion. - Common-holdings and portfolio similarity: - Contagion across financial institutions due to similarities in portfolio holdings appears more prominent but is not easily quantifiable due to data constraints. - CRE bonds are a key potential channel of contagion via exposure to the same issuer/security. - Investor and issuer statistics: - Foreign investors hold 28 percent of Swedish corporate bonds and 53 percent of CRE bonds. - Remaining 47 percent of CRE bonds outstanding: investment funds 21 percent, insurance and pension companies 12 percent, and remaining shares with non-financial corporations, the public sector, and the Riksbank. - About 55 percent of CRE-issued bonds are Euro denominated. - Data recommendation: - Banks should disclose more data on their exposures to CREs, including contingent liabilities (e.g., credit lines) to better gauge risks. --- ### Systemic risk considerations for a potential e-krona - Benefits and risks: - The e-krona could bring technological advances, increased contestability and resilience of the payment market, and continued access to a central bank liability. - However, issuance could create systemic risks depending on use and foreign demand. - Financial-stability channels: - If used primarily for transactions: risks to existing payment service providers from heightened competition. - If used as a store of value: competition with bank deposits could produce deposit outflows—either fast (a bank run) or slow (structural disintermediation). - Foreign demand could lead to currency substitution abroad and larger, more volatile capital flows in Sweden. - Operational and reputational risks: - Risks from personal data treatment, integrity risks, cyber risks, and reputational risks if demand falls short amid high implementation costs. - Recommendations for the Riksbank: - Conduct extensive testing and analysis of economic implications. - Evaluate incentives for e-krona adoption by public and private sectors. - Continue technical testing and cooperate with relevant authorities (e.g., FI and NDO). *Note: Sight and term deposits of households and non-financial corporations account between 30 and 40 percent of the liabilities of major banks.* --- ### Fintech sector: size, risks, and supervisory gaps - Size and growth: - Number of active Fintech companies in Sweden increased to around 450 in 2019, from about 150 in 2010. - Swedish fintech firms mostly operate in payments, credit provision, and infrastructure; many business models are hard to label. - Systemic-risk channels: - Fintech could create systemic risks through size, risk profile, interconnectedness, and concentration. - Specific business-model risks include cyber risks, third-party reliance, legal/regulatory risk, and potential leverage, maturity, and liquidity mismatches. - Current assessment and supervisory recommendations: - Systemic importance appears limited given generally small size and limited interconnections with banking, but rapid growth and complexity warrant close monitoring. - FI’s day-to-day supervision monitors related risks but lacks comprehensive data collection on Fintech firms to assess sectoral development and regulatory perimeter gaps. - FI should enhance fintech supervision via strengthened communication, expanded data collection, systematic review of the regulatory perimeter, and evaluation of FI’s adequacy of resources. - Close monitoring is needed to protect consumers from fraud and unfair practices. *Italicized source: IMF staff summary based on the provided chapter content.* ### 41. Since the last FSAP in 2016, the authorities have adopted several regulatory reforms. ### 1sweea2023003 - 41. Since the last FSAP in 2016, the authorities have adopted several regulatory reforms. ### Regulatory reforms and supervisory resourcing - Since the 2016 FSAP, key legal changes largely reflect EU initiatives: (i) revisions to Capital Requirement Regulation (CRR) and transposition of European Directives; (ii) implementation of International Financial Reporting Standard on Financial Instruments (IFRS 9); (iii) the revised Payment Services Directive (PSD2); and (iv) the Banking Recovery and Resolution Directive (BRRD). - Country and transfer risk have been incorporated in the credit risk regulation, but there is still no supervisory process. - Banking supervision by FI is less intrusive than in other jurisdictions due to: - resource constraints in the banking supervision function of FI; - high staff turnover and inability to attract senior level risk experts. - Consequences of resource and capacity shortfalls include: - inability to undertake more regular and intrusive supervision of systemic banks; - challenges in meeting set timelines for approval of IRB models; - reliance on banks’ internal controls and internal audit to ensure high quality data and information; - investigations taking longer; - delays in development of analytical tools, including those for offsite monitoring and screening of institutions; - very limited engagement with high-risk but smaller institutions. - Time spent onsite by supervisors is noted as varying but rarely exceeding 3-4 days, which is inadequate for detailed assessment of banks’ risk profiles. ### Supervisory (SREP) cycle and monitoring of new institutions - The SREP cycle is predominantly driven by systemic importance and gives limited consideration to a bank’s risk profile, which could harm timeliness of supervisory action for high-risk institutions. - Monitoring of newly licensed institutions is not formalized; recommendation to specify: - time within which institutions must undergo a full SREP or onsite examination; - any additional reporting required to facilitate close monitoring. ### Supervision of Pillar 1 credit risk models (IRB) - Supervision should re-introduce model performance reviews and evaluation of deployment quality once the EBA review is finalized. - Ongoing assessment of IRB models should re-introduce a more comprehensive offsite monitoring and onsite testing process, including detailed testing of risk parameters such as Probability of Default (PD) and Loss Given Default (LGD). - Possible supervisory actions: - collection and analysis of granular model level data from banks; - onsite evaluation of deployment of approved IRB models, including assignment of exposures to specific regulatory approved IRB models; - calculation of Risk Weighted Assets (RWAs); - review of banks’ data management and model governance arrangements. - Purpose: ensure integrity of models and reliability of solvency positions reported by major Swedish banks under the IRB approach. ### Staffing, resourcing, and technology recommendations for FI - FI should ensure it is adequately resourced and can attract and retain experienced risk experts. - FI should develop a strategy for attracting and retaining staff, particularly risk specialists, anchored on competitive salaries benchmarked against the private sector. - To increase resources for banking supervision proportionate to the size and complexity of the banking system, FI requires additional funding from the government. - FI could explore use of independent external experts for specific supervisory tasks to address temporary specialist shortages, noting independent external experts should not be used as a long-term solution. - Further automation of offsite monitoring, including interactive risk dashboards and automated data collection, is recommended to focus scarce resources on higher-risk areas and institutions. - FI collects extensive supervisory information and should consider fully automating analysis to enable efficient screening of risks and identification of vulnerabilities; information includes credit exposures and qualitative information via mandatory self-assessment questionnaires as part of AML/CFT reporting. ### Phased approach to address supervisory process gaps Priority actions: - (i) optimizing current processes and tools; - (ii) reviewing staff retention strategy and phased recruitment of experts in IRB models, cyber risk, and governance; - (iii) enhancing onsite inspections with detailed testing of data quality and effectiveness of internal controls, initially prioritizing systemically important banks and more material risks. ### Legal and regulatory gaps - Swedish law does not recognize the concept of “senior management”. - Credit institutions are not legally obliged to notify FI of material information that may undermine the suitability of a major shareholder, constraining licensing, fit and proper assessments, and corrective action. - Currently, only board members and the Chief Executive Officer (CEO) are legally subject to fit and proper assessment and can be removed by FI under current Swedish laws. ### Macroprudential institutional framework and coordination - Increase in market-based finance challenges macroprudential policy; borrower-based measures for market-based finance do not yet exist and many market-based finance participants are outside the national regulatory perimeter. - Responsibilities are concentrated in FI with the Riksbank playing an important monitoring role; no overall decision-making body internalizes and coordinates all financial stability decisions. - The Financial Stability Council (FSC) is a discussion forum but has limited powers; constitutionally no authority can ask another to take an action. - Recommendation: authorities should make more use of “soft power” and joint communication, especially when risks become more systemic. Joint communication can be an effective tool when risks sit outside the regulatory perimeter and to reduce capture by short-term or special-interest groups. ### Systemic risk monitoring and data gaps - Important data gaps exist for almost all sectors: - lack of household liquid asset data makes it difficult to assess imbalances from high household debt and calibrate macroprudential tools; - other data gaps include derivatives data and mutual fund asset data. - A newly proposed data collection scheme will substantially improve coverage, but delivery is not expected for a few years. - FI and the Riksbank should increase resources for modelling tail risk, spillovers, and interconnectedness; work begun in 2018 but model development hampered by resource constraints. - Technology for modelling tail risk such as GDP-at-Risk is evolving rapidly and modelling interconnectedness requires extremely large datasets. ### Key systemic risks: household indebtedness and commercial real estate (CRE) - Household indebtedness: - High levels create imbalances complicating policymaking; most households could still pay mortgages after a substantial interest rate increase but would cut consumption. - Trade-offs arise between inflation and output stabilization in certain shocks and if inflation expectations de-anchor. - As a small open economy, Sweden faces pressure to increase policy rate to prevent krone depreciation from fueling inflation. - A large or rapid policy rate increase could cause a considerable fall in disposable income for many borrowers—particularly those with a high loan-to-income ratio—leading to economic slowdown and potential corporate impairments. - FI’s remit includes addressing financial imbalances that affect the macroeconomy, allowing action on high debts and high risk-taking among households and non-financial companies. - Possible tools to address household indebtedness: i. FI could consider introducing an interest rate stress test based on interest and amortization payment as a proportion of income for banks to apply to customers seeking short-term variable rate mortgages. This would counter a decline in lending standards where market testing declined from 7 percent to around 6 percent. ii. The government should commission an independent study into distortions from interest tax deductibility. Sweden’s marginal effective tax rate for owner occupied debt-financed housing is around -30 percent (the third lowest in the OECD). The tax deductibility encourages higher indebtedness and higher house prices; competitive mortgage market structure will determine who captures tax benefits. - Commercial real estate (CRE) risks: - CRE companies’ increased use of market-based finance leaves them vulnerable to shifts in market sentiment, increased funding costs, or funding cutoffs. - Amplification mechanisms include cross-ownership contagion, investor pullback from CRE issuance, liquidity premia raising funding costs, and redemptions from investment funds withdrawing liquidity. - Broader spillovers: asset liquidations could lower property values across CRE and possibly residential real estate, weigh on consumption and investment, and impair bank capital. - Recommended actions for CRE: - CRE firms should improve disclosures, including contingency plans for market funding dries up; disclosure should be included in bond issuance templates and encouraged by authorities and securities market association. - Authorities should ensure banks hold enough capital for CRE lending; FI should consider further increasing capital requirements against CRE given concentration, structural issues and feedback loops. Ideally feedback loops will be integrated in stress-testing models. ### Cyber risk in financial oversight - Sweden’s financial sector is highly digitalized and interconnected; cyber threat landscape includes DDoS attacks against Swedish financial institutions and risk of wider destructive attacks. - Multiple agencies and authorities are involved in cyber threat identification, monitoring, and mitigation; responsibility and interagency cooperation responsibilities are spread across agencies causing lack of clarity. - Communication and information sharing beyond the Riksbank–FI axis is subject to perceived legal constraints and differing security classifications, impeding coordination and information sharing. - Recommendations following the NIST framework: Identify - (i) Swedish authorities, including the Government and the Riksbank, should allocate clear responsibilities for cyber risk management and interagency cooperation in the financial sector and identify and address barriers to information sharing between government agencies, financial authorities and the private sector; - (ii) The National Cyber Security Centre (NCSC) should engage fully with the financial sector, ideally via a case study on a simulated cyber-attack to coordinate responses and information sharing; - (iii) The Swedish Civil Contingencies Agency (MSB), and in due course the NCSC, should produce regular cyber threat intelligence reports available to all financial institutions; - (iv) FI should establish and maintain a central database of essential service providers and outsourced third-party arrangements and use the data to analyze and identify concentration risks. Respond and Recover - The financial authorities and relevant government agencies should formalize an operational and cyber incident response framework and exercise it regularly. Regulation and Supervision - FI should explore innovative means to augment supervision resources through secondments and increased use of existing powers to appoint auditors. ### Financial Market Infrastructures (FMIs) and payments landscape - Sweden has modern, stable, and well-developed FMIs with clear and public criteria for which FMIs are subject to regulation, supervision, and oversight; scope of FI and Riksbank responsibilities is clearly defined. - Digitalization and payment infrastructure overhaul: - Use of cash declining in favor of electronic means; payments ecosystem faces major transformations over the upcoming five years from local and EU initiatives. - Financial institutions, payment service providers, FMIs, and other entities increasingly outsource activities to reduce costs and improve flexibility; RIX-INST is operated and maintained by the Eurosystem while Bankgirot and P27 have outsourced maintenance and operations to private international companies, introducing risks tied to third-party service providers. - Key issues for authorities evaluating systemic risk from payment infrastructure: i. Joining Eurosystem operated platforms brings benefits and challenges related to governance, risk management, and representation of Swedish interests and oversight. ii. Bankgirot and P27 rely substantially on outsourcing core services; Bankgirot and future P27 services process a majority of retail payments in Sweden—given P27’s systemic importance, supervisory and oversight regimes should be enhanced. iii. Swish and BankID are widely used and critical to payments but are outside direct regulation, supervision, and oversight by FI; both exhibit high user dependency, high concentration, and very low substitutability. Authorities should consider establishing a new regulatory framework for these entities or include them in an existing framework with stringent requirements for operational resilience, contingency requirements, cyber security, data protection, and other key risks. *Source: 1sweea2023003 - Since the last FSAP in 2016, the authorities have adopted several regulatory reforms.* ### 62. Sweden has a strong AML/CFT framework, which it should strengthen further, with ### Sweden has a strong AML/CFT framework, which it should strengthen further, with respect to domestic and cross-border supervision of banks ### AML/CFT framework assessment and gaps - Sweden is cooperative internationally, and its legal framework largely complies with several elements of the AML/CFT standards. - Some gaps remain, evidenced by Sweden’s and the broader region’s exposure to high profile ML events in recent years, underscoring the importance of effective domestic and cross-border AML/CFT supervision. - Sweden’s AML/CFT framework was last evaluated by the FATF in 2016 (full report). ### Recommendations for FI on AML/CFT supervision of banks - FI needs to step up AML/CFT inspections based on improved understanding of ML/TF risks with a greater focus on cross-border dimensions. - FI should include in its analysis more granular data on: - cross-border (including intra-EU) transactions; - customer activity including in geographic terms; - more systematic assessments of the effectiveness of AML/CFT controls. - Expected improvements from enhanced data and analysis: - strengthen supervisory ML/TF risk assessment; - improve targeting of geographical, transactional, and customer risk; - improve selection of banks to be inspected and scope of inspections. - Current focus and concerns: - FI’s AML/CFT on-site inspections of banks were mostly focused on the largest banks due to their international businesses. - Attention paid to correspondent banking seems insufficient given Sweden’s risk profile. - In response to the ML events that occurred in 2019, FI in its inspection of a bank with foreign operations in the region placed emphasis on group level controls; this is welcome and should continue proactively. - Additional supervisory actions recommended: - Provide more guidance to regulated entities, especially for the identification of beneficial owners, to help mitigate private sector risks. - Pay more attention to correspondent banking and to group level controls, as FI has begun doing in response to the ML events that occurred in 2019. ### Supervision of VASPs (Virtual Asset Service Providers) - Sweden identified ML/TF risks of virtual assets (VA) activities at the national level as early as 2013 and has regulated VA exchanges for AML/CFT. - The framework has been aligned with FATF revised standards on VA. - FI should continue entity-level supervision of ML/TF risks of VASPs. - FI should collect more information about VASP activities and continue monitoring to: - strengthen FI’s understanding of ML/TF risks; - enable supervision to target higher risk VASPs. ### Integration of climate-related risks into supervision - FI actions taken: - Set up a Sustainability Committee to facilitate collaboration and experience sharing across supervisory sections (banking, insurance, and financial markets). - Set up a dedicated sustainability department responsible for sustainability-related analysis and developing regulations and processes. - Explicitly included climate risk in the SREP assessment of credit risk and Business Model Analysis (BMA), but climate risk currently does not impact the risk rating of an institution. - Conducted surveys assessing how financial institutions integrate climate risks into credit provision, corporate governance, and disclosures. - Riksbank actions: - Analyzed exposure of the Swedish banking system to firms that may be affected by climate transition risks and rising sea levels due to global warming. - Piloted a stress test of climate risks. - FI and the Riksbank jointly analyzed transition risks in banks’ corporate portfolios. - Timeline highlights (selected): - November 2015: FI examined banks’ internal rules for credit granting to companies. - February 2016: RB published report on the effects of climate change on financial stability with a focus on Sweden. - November 2018: FI analysed changes in the way banks take into account sustainability-related risks when lending to corporates. - March 2021: FI carried out survey on adherence to non-mandatory standards such as the TCFD. - April 2022: FI and RB measured transition risks in the Swedish banks’ credit portfolios using PACTA tool. - Gaps and recommended actions for FI to fully integrate climate risk: - Require banks to report their exposure to climate-related risks as part of supervisory reporting. - Broaden scope of assessments of impact of climate-related transition risks. - Clarify regulation and supervisory guidelines to set expectations for banks to manage climate-related financial risk. - Systematically integrate climate risks into the SREP, ensuring assessments appropriately impact the risk rating of individual institutions. - Implement supervisory approach in a proportional manner considering other vulnerabilities to the banking sector. ### Crisis management, resolution, and financial safety nets - Foundations and reforms: - Banking Recovery and Resolution Directive (BRRD) established a statutory regime for supervisory early intervention, crisis management, and resolution in Sweden. - Government implemented new EU regulations on recovery and resolution of CCPs via complementary Swedish legislation. - New Riksbank Act will provide explicit statutory basis for the central bank to provide liquidity support to avert “a serious disruption to the financial system in Sweden.” - Important considerations: - Historical use of public funds to manage a financial crisis in Sweden may no longer be a credible domestic crisis management strategy, given the growth in the size of the financial system relative to GGDP. - The resolution framework has imposed legal constraints on the use of public funds as a means for crisis management. - Strengthening crisis management capacity: - Develop shared operational plans, processes, procedures, and internal capacity across authorities to deploy crisis management and resolution tools quickly and confidently in a coordinated manner. - FI should: - formalize internal monitoring arrangements for identifying and intensifying supervision of banks at increased risk of failure; - develop and share its framework for bank viability analysis with the NDO and the Riksbank. - Clarify that the MoF’s role in approving NDO resolution decision-making that might have “direct budgetary or systemic effect” be limited to resolutions that require funding from government budgets only, and communicate this in public policy. - Public funds should not be considered at risk when NDO’s preferred resolution strategy can be implemented in an orderly manner, such as when the bail-in of “own funds and eligible liabilities” (MREL) is sufficient. - Authorities need to consider challenges from new types of financial institutions, including providers of intermediary services (such as deposit aggregators with cross-border activities). - Cross-border cooperation: - Continued need for close cross-border cooperation among Nordic-Baltic states and Banking Union authorities. - In 2016, the NDO established resolution colleges for the four major Swedish banking groups. - Swedish authorities should focus on developing crisis management capacity via supervisory and resolution college arrangements, including playing an active host authority role on the Nordea resolution college. - Resolvability and reporting improvements for banks: - Banks should remove known barriers to resolvability and enhance reporting capabilities with respect to: - resolution valuation; - funding in resolution; - operational services dependencies. - NDO, in coordination/consultation with other financial authorities, should: - develop fully operational bank-specific resolution plans; - require banks to remove all known barriers to resolvability under the bail-in resolution strategy; - refine its minimum requirement for MREL policy and ensure Swedish banks comply with recently expanded resolvability expectations by the 2024 deadline. - NDO should develop capacity to manage failure of domestic CCPs by setting resolvability expectations. - Resolution tool usability and enhancements: - Statutory resolution tools need to be usable at speed and with confidence to impose losses on banks’ creditors by applying bail-in or transfer tools. - NDO should develop resolution tools to support effective crisis response involving failing systemic financial institutions, for example by prioritizing development of an “open bank” bail-in mechanic that relies on the suspension of liabilities and interim instruments. - Role of Riksbank and liquidity in resolution: - Riksbank should be transparent to the market that it is the lender of last resort in crisis response under the Swedish crisis management framework, including resolution, rather than the NDO. - NDO should not be considered a primary source of liquidity for bank crisis management purposes. - This clarification will enable the Riksbank to invest in internal crisis lending and credit assessment capabilities. - Within the resolution regime, the Riksbank needs to be able to provide funding in resolution to banks recapitalized by the NDO’s resolution action. - Riksbank should establish ex-ante operational capacity to take swift, decisive, and well communicated collateralized lending decisions in a crisis. ### Authorities’ views and responses - Authorities broadly agreed with the IMF team’s assessments and recommendations and found guidance on timing and priority helpful. - Authorities welcomed IMF’s positive endorsement of Sweden’s progress since the last FSAP in 2016. - Authorities’ acknowledgements and positions: - Noted their determined efforts to bolster financial sector oversight and crisis preparedness, including large capital and liquidity buffers and public support measures that helped weather the global COVID-19 crisis. - Agreed on the importance of ensuring the regulatory framework and supervisory capacity keep pace with the evolving landscape. - Agreed with IMF team’s risk assessment that highly leveraged commercial real estate companies constitute a key risk, and noted measures taken: - introduction of risk weight floors on CRE and residential real estate exposures; - reciprocation of measures by Norway and Denmark. - FSAP bank solvency stress tests indicate banking system appears resilient against potential CRE shocks; higher impact on banks heavily exposed to CRE warrants monitoring. - Agreed with FSAP assessment of household risk given households’ high indebtedness level. - Agreed some data gaps remain, particularly for households’ balance sheets, but disagreed that important data gaps exist for other sectors; cited mortgage survey, consumer loan survey, commercial real estate loan survey, and KRITA as examples of high-quality micro data. - Agreed on need for vigilance regarding growing financial technology sector and increased cyber risks; noted need for a framework for comprehensive operational and cyber resilience. - Committed to strengthening legal framework for FMIs to enforce compliance with PFMI and manage outsourcing risks in payments area; noted insights on CBDC work. - Welcomed recommendations on banking supervision, regulation, and crisis management; confirmed bank supervision is efficient given available resources and agreed efforts to optimize supervisory processes and tools could be warranted. - Confirmed continuing to strengthen the AML/CFT regime is a priority. - Shared view that progress has been made on crisis management but further efforts are needed to get new framework fully operational, including bail-in mechanism and policy for funding in resolution. - Welcomed IMF’s pilot climate review and FSAP focus on managing climate-related risks; plan to implement a sequenced work program guided by recommendations. *International Monetary Fund, Sweden: Selected excerpts from the 2023 Financial Sector Assessment Program chapter on supervision, crisis management, AML/CFT, VASP supervision, and climate-related risks.* ### Appendix IV . Risk Assessment Matrix (June 2022) ### Appendix IV . Risk Assessment Matrix (June 2022) ### Major geopolitical and macro-financial risks - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions; sanctions on Russia are broadened to include oil, gas, and food sectors; Russia is disconnected almost completely from the global financial system and large parts of the trading system. Combined with Russian countersanctions and secondary sanctions on countries and companies that continue business with Russia, this leads to even higher commodity prices, refugee migration, tighter financial conditions, and other adverse spillovers, which particularly affect LICs and commodity-importing EMs. - Likelihood of Risk: H - Impact of Risk: Medium - Key impacts: - A negative shock would hit exports if demand from Europe declines—particularly those on Sweden’s vehicles and machinery exports—would dampen exports and investment and weaken growth. - Higher funding costs impact corporate borrowers, reducing credit availability, including from non-bank financial intermediaries. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies. Worsening supply-demand imbalances, higher commodity prices (in part due to war in Ukraine), and higher nominal wage growth lead to persistently higher inflation and/or inflation expectations, prompting central banks to tighten policies faster than anticipated. The resulting sharp tightening of global financial conditions and spiking risk premia lead to lower global demand, currency depreciations, asset market selloffs, bankruptcies, sovereign defaults, and contagion across EMDEs. - Likelihood of Risk: M/L - Impact of Risk: High - Key impacts: - Market losses in banks’ unhedged fair value portfolios as asset prices fall. - Potential significant liquidity impact on banking sector, given high reliance on wholesale funding, including in FX. - Higher funding costs impact corporate borrowers, reducing credit availability, including from non-bank financial intermediaries. - Higher retail interest rates worsen household financial situation. Further pressure on banks’ capital adequacy. Adverse spillover to other (viable) sectors through lower incomes and intermediate input demand. Higher unemployment due to bankruptcies. - Significant property price decline in Sweden due to structural changes. Price declines could possibly affect commercial property markets and/or residential property. - Likelihood of Risk: L - Impact of Risk: Medium - Key impacts: - Investment and collateral values for lending could be undermined by sizable falls in commercial property prices. - Loan quality impacted, primarily of firms serving domestic market. Lending could be curtailed if doubts about the quality of covered bonds rise elevating bank funding costs. - Geopolitical tensions and deglobalization. Intensified geopolitical tensions, security risks, conflicts, and wars cause economic and political disruptions, fragmentation of the international monetary system, production reshoring, a decline in global trade, and lower investor confidence. - Likelihood of Risk: H - Impact of Risk: Medium - Key impacts: - Higher disruptions and barriers to trade would dampen exports and investment and weaken growth. - Cyberthreats. Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability or widespread disruptions in socio-economic activities. - Likelihood of Risk: M - Impact of Risk: Medium - Key impacts: - Disruption is widespread including to supply of essential goods, payments systems, and financial market infrastructure. *Source: Appendix IV . Risk Assessment Matrix (June 2022)* ### Appendix V. Stress Testing Matrix ### Banking Sector: Solvency Stress Test — institutional parameters and methodology - Institutions: - The 5 largest Swedish banks (Swedbank, SEB, Handelsbanken, SBAB Bank and Länsförsäkringar Bank), to cover about 75 percent of banking system assets. - Cut-off date: - December 2021 - Data: - Quarterly supervisory data (COREP, FINREP) and reporting on Interest Rate Risk in the Banking Book (IRRBB), at the highest level of consolidation, complemented by survey data on mortgages and securities holdings collected by the FI and the Riksbank. - Methodology and risk drivers: - Semi-static balance sheet approach: annual GDP growth for year when positive, no change in recession time. - Scenario-conditional forecasts combined for drivers underlying headline capitalization metrics, including: - credit risk (through loan loss provisions): structural model based on copula for HH mortgages, granular CRE stress test, BMA for corporate exposures. - interest rate risk: projection of effective interest rate for 7 types of interest bearing assets and liabilities. - Net fee and commission income: granular projection based on past variation (1 std deviation shock). - Market risk: repricing of securities based on a modified duration — granular data on bond holdings aggregated by issuer type, country and maturity. Change in yields derived from the scenario. - Tax rate: 20.6 – effective rate in 2021. - Dividend payout: Dividends are assumed to be paid out of current period net income after taxes by banks in compliance with supervisory capital requirements. A maximum allowed dividend payout is assumed to be equal to the dividend payout ratio (dividends over net income after taxes) in 2021, with a cap at 40 percent. - Scenarios: - Baseline scenario aligned with Spring 2022 WEO. - Bespoke adverse scenarios addressing geopolitical tensions, war in Ukraine and COVID-19 pandemic, sharp rise in global risk premia, exchange rate depreciation, financial institutions’ funding cost pressure, etc. - 3-year horizon. - Policy and sensitivity analysis: - Sensitivity analyses on CRE exposures. - Hurdle rates: - The hurdle rate for CET1 do not include capital conservation and countercyclical buffers. Banks that end the stress test horizon with a capital level below the relevant hurdle rates, are considered to have failed the test. ### Commercial Real Estate Stress Test - Institutional parameters: - Institutions included: 3,800 firms (total assets amounting to 90 percent of GDP). - Data: Data on firms sourced from Orbis (No.68 Real estate activities under the industrial classification (NACE) Rev. 2 main section L: Real estate activities). Data availability as of 2020. - Methodology and risk drivers: - Scenario-based forecasts of income statement and balance sheet items. - Calibration of interest rate, FX, and revenue shocks. - Scenarios: - Baseline, and Combined Adverse scenarios in line with the bank solvency stress testing. - Reporting: - Output presentation: Impact on solvency (ICR) ratios; Debt-at-Risk measure. ### Contagion Analysis - Institutional parameters: - Institutions included: Exposure based bilateral domestic interconnectedness will include bilateral exposures between Swedish banks (same sample as in bank ST). - Data: Domestic bank interconnectedness analysis as of end-2021. - Channels of risk propagation: - Methodology: Network contagion based on Espinosa-Vega and Sole (2010), which allows default cascade simulations at different loss given default (LDG) rates for exposure-based bilateral domestic and cross-border interconnectedness analyses. - Reporting: - System-wide capital shortfalls (with min, max, and the median in the case of bilateral domestic bank contagion, without identifying individual names). ### Banking Sector: Liquidity Stress Test - Institutional parameters: - The largest 5 Swedish banks (Swedbank, SEB, Handelsbanken, SBAB Bank and Länsförsäkringar Bank). - Methodology and scenarios: - A cash flow-based liquidity stress test (LST) and a standardized Basel III-Liquidity Coverage Ratio (LCR) test assess banks’ ability to cover net cash outflows using their counterbalancing capacity. - Scenario analysis covers risks from: (i) asset price falls, (ii) run on retail deposits, (iii) run on wholesale funding, (iv) foreign and domestic investors different behavior, (v) run on FX deposits, (vi) scarce access to FX funding, for example via swaps. See Appendix VI for details on the scenarios. - Liquidity support from the Central Bank through emergency liquidity facilities was not factored in, to assess banks’ liquidity coverage profiles in the assumed absence of liquidity support from the central bank. ### Investment Funds Liquidity Stress Testing - Institutional perimeter: - Institutions included: 171 Fixed-income, alternative and mixed funds. - Market share: Varies by type of fund. - Data and baseline date: - Portfolio reporting date: Dec 31, 2021 or later. - Portfolio holdings: Confidential supervisory data. - Flows: Sourced from Morningstar, time interval 2008-2021. - Assets’ characteristics: Sourced from EIKON. - Channels of risk propagation and methodology: - Several calibrations of redemption shocks compared to level of highly liquid assets at the fund level. - Redemption shocks based on historical net fund flow data using VaR and Expected Shortfall methodologies with multiple thresholds. - Stress test horizon: Weekly data frequency, instantaneous shocks. - Tail shocks and scenarios: - Pure redemption shock: severe outflows based on historical distribution. - Risks and buffers: - Risks assessed: Liquidity risk: severe redemption shock. - Buffers: Level of highly liquid assets. - Reporting format: - Output presentation: - Number of funds with a redemption coverage ratio (ratio of highly liquid assets to redemptions) below one. - Liquidity shortfall amount for individual funds after redemptions. - Price impact on domestic corporate bonds issued in SEK. *Source: Appendix V. Stress Testing Matrix (sections and descriptions as provided)* ### Appendix VI. Liquidity Stress Testing Scenarios — stress factors and counterbalancing capacity ### Outflows — stress factors within stress horizon (applicable within stress horizon) - LT unsecured issuances = 020+030: 0% 30% 70% 100% 100% - Secured issuances = 040+050+060: 0% 10% 20% 30% 30% - ST paper due = 070: 0% 30% 70% 100% 100% - Repo's against 0% RW securities = 120: 100% 100% 100% 100% 100% - Repo's against 20% RW securities = 130: 100% 100% 100% 100% 100% - Repo's against covered bonds = 140 + 180: 100% 100% 100% 100% 100% - Repo's against corporate bonds = 220: 100% 100% 100% 100% 100% - Repo's against RMBS = 260: 100% 100% 100% 100% 100% - Repo's against other CB eligible assets = 270: 100% 100% 100% 100% 100% - Repo's against non-CB elig. equities = 300: 100% 100% 100% 100% 100% - Repo's against other non-CB elig. assets = 310 + 320 (or 290-300): 100% 100% 100% 100% 100% - Retail deposits: stable: 0% 3% 5% 10% 15% - Retail deposits: unstable: 0% 5% 10% 20% 25% - Corporate deposits: operational: 0% 10% 15% 20% 30% - Corporate deposits: non-operational: 0% 20% 30% 40% 50% - Central Bank dep. outflows = 380: 0% 0% 0% 0% 0% - Other dep. outflows = 390: 0% 20% 30% 40% 50% - Fin. inst. (not within IPS) dep. outflows = 420 - 470: 0% 30% 65% 100% 100% - IPS outflows = 470: 0% 15% 30% 50% 50% - FX-swap outflows = 490: 0% 15% 30% 50% 50% - Derivative outflows = 500: 0% 100% 100% 100% 100% - Other outflows = 510: 0% 30% 65% 100% 100% ### Inflows — stress factors within stress horizon (applicable within stress horizon) - Rev. repo's against 0% RW securities = 580: 100% 100% 100% 100% 100% - Rev. repo's against 20% RW securities = 590: 100% 100% 100% 100% 100% - Rev. repo's against covered bonds = 600 + 640: 100% 100% 100% 100% 100% - Rev. repo's against corporate bonds = 680: 100% 100% 100% 100% 100% - Rev. repo's against RMBS = 720: 100% 100% 100% 100% 100% - Rev. repo's against other CB eligible assets = 730: 100% 100% 100% 100% 100% - Rev. repo's against non-CB elig. equities = 760: 100% 100% 100% 100% 100% - Rev. repo's against other non-CB elig. assets = 770 + 780 (or 750-760): 100% 100% 100% 100% 100% - Retail inflows = 810: 0% 0% 0% 0% 0% - Corporate inflows = 820: 0% 0% 0% 0% 0% - Central Bank inflows = 840: 0% 100% 100% 100% 100% - Other entities inflows = 850: 0% 0% 15% 20% 30% - Fin. Inst. (not within IPS) Inflows = 880 - 930: 0% 100% 40% 70% 0% - IPS inflows = 930: 0% 15% 30% 50% 50% - FX-swap inflows = 940: 0% 15% 30% 50% 50% - Derivative inflows = 950: 0% 100% 100% 100% 100% - Other inflows = 970: 0% 100% 100% 100% 100% ### Counterbalancing capacity — usable fractions within stress horizon - Cash = 1040: 100% 100% 100% 100% 100% - Central Bank exposures = 1050: 100% 100% 100% 100% 100% - 0% RW securities = 1070: 100% 100% 99% 98% 98% - 20% RW securities = 1140: 100% 100% 98% 95% 95% - Covered bonds = 1200 + 1240: 100% 97% 95% 93% 93% - Corporate bonds = 1280: 100% 95% 90% 85% 85% - RMBS = 1320: 100% 85% 75% 65% 65% - Other CB elig. assets = 1330: 100% 68% 68% 68% 68% - Non-CB elig. equities = 1350: 100% 75% 50% 25% 25% - Other non-CB elig. assets = 1340 - 1350: 100% 0% 0% 0% 0% - Undrawn committed credit lines (not within IPS) = 1370 - 1380: 0% 0% 0% 0% 0% - Undrawn committed credit lines from IPS members = 1380: 0% 0% 0% 0% 0% *Source: Appendix VI. Liquidity Stress Testing Scenarios (stress factors, inflows, and counterbalancing capacity as provided)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023003.pdf_