MNI POLICY: Riksbank Warns Banks May Struggle To Supply Credit

-Riksbank Financial Stability Report Highlights Property Risks

By David Robinson

     LONDON (MNI) - The Riksbank has warned that if the economy evolves in line

with its gloomier scenario banks may struggle to maintain the supply of credit,

risking a downward spiral.

     The central bank's Financial Stability Report highlighted the danger

lenders, and borrowers, face from a fall in previously elevated property prices.

Major Swedish banks are heavily exposed to both the commercial and residential

property sectors, and survey evidence finds declining prices are now widely

anticipated.

     The following are points from the Riksbank analysis:

     -In the Riksbank's Scenario B, its darker scenario where GDP falls by about

10% and unemployment rises to over 11 per cent in 2020, the updated stress tests

show banks struggling to supply credit.

     "The banks' leverage ratio falls to such low levels that the banks may have

problems maintaining credit supply in the economy," the report said.

     "If banks' capital ratios were to fall to the level described in Scenario

B, it is likely that both the authorities and the banks themselves would take

measures to improve the capacity of the banking sector to maintain credit supply

to the economy," it said.

     -The property sector, frequently highlighted by the Riksbank and supervisor

Finansinspektionen as a vulnerability, again emerges as a key risk.

     "There are structural vulnerabilities in the Swedish financial system that

could exacerbate the crisis. These include high household indebtedness and

banks' large exposures to property," the report stated.

     -FI has eased some of its requirements in response to the spread of

coronavirus including allowing banks to exempt mortgage borrowers from the

previously mandatory amortisation requirement, a stipulation that barred minimal

interest only payments.

     Riksbank said it supported the FI move but stressed that the risk to banks

from the property sector was substantial.

     "Reduced rent revenues and increased funding costs are impacting property

companies and contributing to increased uncertainty over property prices. This

sector is particularly important to financial stability as the banks have large

exposures to it," it said.

     -The Riksbank also warned of a feedback loop, with households facing

falling property prices reining in consumption, which in turn slows economic

activity, with data showing housing prices fell in March and that further falls

are anticipated.

     "A sharp fall in prices could lead to a decrease in consumption among

heavily-indebted households, which would further worsen the situation for

companies and the Swedish economy," the report said.

     -While the Riksbank has extended its asset purchases to the covered bond

market, the report noted the usage of uncovered bonds to raise funds and that

firms that have struggled with funding having increasingly fallen back on the

banks, adding to the latter's risks.

     The central bank emphasised that it was ready to take further action to

support the economy and financial stability.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com