Riksbank cautious on plans for new macro-prudential tools

Sveriges Riksbank has offered a guarded response to government plans to give financial regulators new macro-prudential tools.

The government has proposed that financial supervisory authority Finansinspektionen (FI) be given a mandate to propose macro-prudential measures to counteract imbalances in credit markets. However, the proposals also require FI to seek government approval before implementing any measures.

In its response to the government’s consultation, published on April 18, the Riksbank said it “welcomes” the plans, noting the inadequacy of current arrangements.

However, it was critical of the requirement for regulators to seek consent before acting. “The Riksbank considers that there are better ways of meeting the government’s need for control as the proposal reduces the scope for flexibility and can make it more difficult for Finansinspektionen to take rapid action,” it said.

The Riksbank conceded it was important for the government to be able to determine whether regulations are “well balanced”, due to their “considerable potential impact” on the economy and on public sector finances.

But it also warned the field of macro-prudential policymaking  “has proved to be marked by difficulties in taking measures in time”. The tools tend to impose short-run costs in exchange for long-run gains, making their use politically sensitive.

As such, the Riksbank proposed that the government set the framework for which tools can be used, while leaving FI to decide on the manner of their application. This would be more in line with practice elsewhere, and indeed the Riksbank noted the approach would comply with a recommendation from the European Systemic Risk Board (ESRB) that macro-prudential policy be operationally independent from political bodies.

As they stand, the proposals would allow FI to tackle high household indebtedness, a major concern in Sweden that the Riksbank has been warning of for some time. Sweden’s credit-to-GDP ratio is close to historic highs, though it has flattened out in recent years (see figure 1).

The Riksbank suggested that in future, however, there could be a need for FI to tackle other areas of risk, such as systemic risk, an area the ESRB is currently investigating. This points to the need for flexibility.

Sweden’s coalition government has been struggling to clarify FI’s mandate since the regulator’s powers were challenged in 2015 by Swedish courts. The Riksbank’s aggressive monetary easing may have contributed to the build-up of imbalances.