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The Financial Stability Report of June 2008 highlights Sweden's satisfactory financial stability with good bank resilience despite increased contingent risks. The banks exhibit sound financial health, high profitability, and low loan losses. Borrowers, both companies and households, are financially robust. While Swedish financial markets have performed well amidst turmoil, risks have risen in financial markets, Baltic countries, and commercial property markets. The report emphasizes the risk of household debts outpacing incomes in the long term. The stress tests indicate banks can manage severe Baltic country deteriorations while maintaining resilience in credit cycles.
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Financial Stability Report 2008:1 • Financial stability in Sweden is satisfactory • Contingent risks have increased
Financial stability is satisfactory • The banks’ resilience is good • The banks are financially sound • Profitability is high and loan losses are low • Borrowers are financially strong, both companies and households • Swedish financial markets have functioned well during turmoil
The banks have good profitabilityResults before loan losses and loan losses, net, in the major bankstotalled over four quarters, SEK billion (IFRS: International Financial Reporting Standards) Chart 3:1 Sources: The banks’ reports and the Riksbank
Contingent risks have increased • Risks in the financial markets • Developments in the Baltic countries • The risk of larger price falls in the commercial property market • Risk that household debts will increase faster than incomes in the long term
High – but declining – credit spreadsDifference between corporate bonds and government bonds in the United States, per cent Chart 1:3 Source: Reuters EcoWin
Interbank rate in relation to expected policy rate 3 month basis spread Note: Interest rate spread between 3 month interbank rate and overnight index swap Chart 1:2 Source: Bloomberg
Contingent risks have increased • Risks in the financial markets • Developments in the Baltic countries • The risk of larger price falls in the commercial property market • Risk that household debts will increase faster than incomes in the long term
Lending SEB 11% Swedbank 16% Nordea 2.3% Results SEB 20% Swedbank 32% Nordea 1.8% Swedish banks in the Baltic countries Market shares for lending 2007Q4 Baltics’ share of lending and results 2008Q1 Total market according to Swedbank’s Fact Book 2007 Q4. SEB’s lending also includes credit exposures to off-balance sheet items.
Growth slackening in the Baltic countriesGDP growth, annual percentage change Chart 2:27 Source: Reuters EcoWin
Inflation increasing in the Baltic countriesHarmonised index for consumer prices, annual percentage change Chart 2:30 Source: Reuters Ecowin
Large current account deficitPercentage of GDP, totalled over four quarters Chart 2:29 Source: Reuters Ecowin
The stress tests show… • …that the banks can manage a severe deterioration in the Baltic countries • …that resilience to a turnaround in the credit cycle remains good
Contingent risks have increased • Risks in the financial markets • Developments in the Baltic countries • The risk of larger price falls in the commercial property market • Risk that household debts will increase faster than incomes in the long term
Rising commercial property prices Real prices for office premises in inner city locations, Index: 1981=100 Sources: Newsec AB and Reuters EcoWin Chart 2:21
Low earnings requirementsAverage direct earnings requirements for office property in city centre locations, Per cent Chart 2:23 Source: Newsec AB and EcoWin
Contingent risks have increased • Risks in the financial markets • Developments in the Baltic countries • The risk of larger price falls in the commercial property market • Risk that household debts will increase faster than incomes in the long term
Household debts increasing more slowlyAnnual percentage change Chart 2:3 Source: The Riksbank
Debts increasing in relation to incomeHousehold debts and interest expenditure in relation to disposable income, per cent Sources: Statistics Sweden and the Riksbank Chart 2:6
Financial Stability Report 2008:1 • Financial stability in Sweden is satisfactory • The banks’ resilience is good • Contingent risks have increased