Stability in the Financial System (2019:2)

The low interest rates are expected to remain low for a longer period of time. It could lead to greater risk-taking among various actors, and increased challenges for insurance undertakings.

The long-term low interest rate level has led to greater risk-taking among various actors. It has contributed to the upward pressure on prices of shares and other financial assets as well as homes and real estate. Households and firms have also taken out larger loans. Lower economic growth could now slow risk-taking. At the same time, many market participants expect that the low interest rates will remain for a longer period of time. That creates incentives in the opposite direction, which could lead to even higher asset prices and debt. If participants on the market were to suddenly become less willing to take risks, this could cause prices to drop sharply in the financial markets. In the long run, such a course of events could threaten financial stability in Sweden.

The resilience among Swedish insurance undertakings still appears to be good, but FI makes the assessment that this in part is due to the solvency regulatory framework not fully reflecting the risks associated with today's very low interest rates. FI considers the insurance undertakings' resilience to have decreased, and prolonged low interest rates could lead to solvency issues and a greater risk for procyclical behaviour during periods of greater uncertainty in the financial markets.

FI considers the resilience of the major Swedish banks to be satisfactory in general, with adequate capital and liquidity buffers. The banks have good profitability, but this could deteriorate when economic growth slows. However, a considerable amount of the banks' lending is to the commercial real estate sector. FI considers this sector to be vulnerable, and, in the presence of extreme financial stress, it could cause significant credit losses for Swedish banks. In the presence of such stress, the capital held by the banks to cover risks in their lending to commercial real estate could be lower than the losses they may incur. FI therefore proposes an additional Pillar 2 capital requirement that corresponds to the difference between a risk weight specified by FI and a bank's actual average risk weight for such exposures.

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