IMF urges Sweden to boost capacity to deal with property risks

THE International Monetary Fund (IMF) said Sweden might have to require banks to hold more capital and increase funding for its financial regulator, amid rising risks in the country’s property sector.

Swedish housing and commercial real estate have come into focus as the prices of homes have plunged in the last nine months, and property companies are facing a funding squeeze as large bond volumes approach their maturities.

Following an official staff visit, the IMF said that Sweden needed to be vigilant about risks to its financial stability, even as its banks had the strong capital and liquidity positions that would help it withstand severe macroeconomic shocks.

“As pockets of vulnerabilities exist in the face of higher interest rates, it is recommended that the frequency and intrusiveness of inspections be increased, for which more resources need to be made available to Finansinspektionen,” the IMF said, referring to the Swedish financial regulator. 

“Close attention needs to be given to residential and commercial real estate developments, which requires improving the collection of balance-sheet data.”

The development in Swedish housing, which reflects a broader international trend, started last year as inflation began to accelerate. The country’s central bank, the Riksbank, responded by increasing borrowing costs.

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While it has flagged an interest-rate hike of 25 basis points at its February meeting, most economists believe it will have to do more after December inflation rose to a three-decade high.

The IMF said it was better for the Riksbank to be safe than sorry when it came to charting the path for monetary policy.

“The potential costs of entrenched inflation due to under-tightening outweigh those of over-tightening,” it said. 

“The Riksbank should therefore continue to monitor developments and consider slightly tightening the announced interest-rate path, in order to increase the probability of comfortably achieving its desired inflation path.” BLOOMBERG