Swedish deputy insists on stronger macro-prudential framework

Sveriges Riksbank's first deputy governor, Kerstin af Jochnick, today criticised proposals for an advisory council on macro-prudential policy and demanded a clearer decision-making framework, with the Riksbank at its heart.

Sweden's financial crisis committee, which reports to the Ministry of Finance, produced a report on January 23 on the prevention and management of financial crises.

The report suggests the current ‘council for cooperation' between the Riksbank and the Swedish financial supervisory authority should be embedded in law and expanded to include independent experts and a representative from the Ministry of Finance.

However, af Jochnick explained that the council would not be equipped with any powers of authority. Its objective would be to exchange information and discuss policy options, but the actual decision-making powers would remain with its two parent organisations.

The deputy governor advocated a more active structure, with a clearer mandate. "The Financial Crisis Committee's proposal does not go very far," she said.

She said it should involve a major role for the Riksbank, in line with systems implemented in the UK and Germany.

Monetary policy and macro-prudential policy have clear points of contact and affect the conditions one another face, including the levels of credit in the economy and asset prices.

It is important to ensure that decisions in each area do not counteract each other, af Jochnick said, and the Riksbank would be in a position to do so.

The deputy governor relished the prospect of divesting monetary policy of some of its responsibilities towards financial stability, in particular the need to manage the risks related to household debt and house prices.

She said the interest rate is too broad an instrument to address these risks, as its effects are transmitted through a number of different channels.

By comparison, macro-prudential instruments are better suited to address financial imbalances, as they can do so with precision, she said. This, in turn, frees monetary policy to focus on meeting the inflation-target.

This issue has been the source of conflict among members of the Riksbank's executive board, with the scale of the risks posed by household debt and the degree of responsibility monetary policy should take for them fiercely debated between the governor Stefan Ingves and his deputies.

Af Jochnick outlined a number of tools that could be used in place of the repo rate to reduce risks related to Swedish household debt, including the use of sector-specific risk weights. Such risk weights could be used like a counter-cyclical buffer for mortgage lending, she said.

However, for macro-prudential policy to work as intended, there must be a clear framework in place, af Jochnick said, with a "clear division of responsibility and which clarifies how the various instruments should be used".