The stability of the Swedish financial sector (2006:14) - a summary

The large banking groups have grown even stronger financially during 2005 and the first half of 2006. Credit losses are virtually zero. With general economic growth likely to continue to improve, risks to systemic stability are low for the foreseeable future.

In a longer perspective, however, expansion of business abroad and in
countries such as the Baltic states and Russia may suggest increased risk. Finansinspektionen (FI) will follow these developments closely and in collaboration with the supervisors in these countries.

Swedish life insurers, severely hit by declining equity prices and interest rates a couple of years ago, have improved their financial performance considerably during 2006, largely thanks to rising equity prices and long-term interest rates.

A number of new regulatory complexes have been implemented over the past couple of years, with more to come. The majority of regulatory changes involve portions of the EU's Financial Services Action plan, aimed at an integrated financial market within the EU. The new regulation on capital adequacy, known as "Basel 2", will be implemented by 2007. For banks and credit institutions this will have a number of important implications, not all of which will be foreseeable. Based on preliminary calculations, a reduction in the capital required by Swedish banks seems likely, mainly due to the large share of low-risk lending, such as mortgages, which constitute their loan portfolios.

During 2006, a small non-bank deposit-taking credit institution, Custodia, had its license withdrawn by FI, and went bankrupt a few months later. This event has raised a number of issues concerning the ways and methods for supervising small deposit-taking institutions, the legal framework for handling defaulting institutions
and the requirements for activating the deposit guarantee scheme, as well as concerning ways to improve consumer awareness of financial risk. FI has identified a number of regulatory measures that need to be taken and has also communicated this to the Government. At the same time it has begun to develop supervisory methods and indicators to achieve better monitoring of this type of institution.

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