Stefan Ingves, governor of Sweden’s central bank, talks to Peter McGill about how coping with a series of crises has equipped him to share harsh truths with the banking industry.

Stefan Ingves

“A good part of my professional career has been spent dealing with things that went wrong,” says Stefan Ingves, governor of Sweden’s Riksbank, explaining why he is so tough on a banking industry generally considered among the best performing in the world. “It is important to be mindful of the fact that our banking system blew up on a grand scale in the early 1990s.”

Financial deregulation in the 1980s unleashed a frenzy of property lending by Sweden’s banks. When the bubble deflated from 1991 to 1992, the collateral behind these loans evaporated, and the banking system found itself to all intents and purposes insolvent. Sweden spent 4% of its gross domestic product (GDP), or SKr65bn ($7bn), on recapitalising the banks, which were told to write down their losses before coming to the state for help. The Swedish economy contracted for two years, after a long run of expansion, and unemployment quadrupled. The restructured banking system that eventually emerged was leaner and fitter, and sales of seized property collateral allowed the government to recoup most of the bailout money. As then head of the Bank Support Authority, it was Mr Ingves’s job “to do my best to clean up the mess”.

After a stint as deputy governor of the central bank, he spent six years at the International Monetary Fund. “In that capacity, I have dealt with banking systems falling apart many times in different parts of the world,” he says.

Crisis management

Mr Ingves had become Riksbank governor by the time of the global financial crisis of 2007 to 2009, which proved to be another formative experience.

“We were in a much better position economically than the rest of the world,” he remembers. “Nevertheless, given our banks’ exposure in the Baltic countries and to a much lesser extent in Iceland, our whole banking system was hit and the Riksbank balance sheet increased dramatically in a very short period of time because the banks could not fund themselves. Despite being domestically OK, their funding on the dollar market, and their involvement in the Baltic countries, created a perfect storm after we had been happily sailing along.” 

In response to the financial crisis, Sweden’s central bank became the first in the world to introduce negative interest rates, in 2009. The European Central Bank followed in 2014. The Riksbank now confronts an agonising dilemma. Keeping rates too low risks prolonging an asset bubble and aggravating household indebtedness, while raising too soon could tip the economy into recession.

Mr Ingves defends negative rates as a necessary evil. “We are a small, open economy with completely free capital flows, and it would be extremely difficult for us to substantially deviate from the general low level of interest rates all over the world,” he says. “Clearly, in terms of the housing market, for years it would have been better to have had a higher domestic policy rate than what has been possible.”

Sweden has counteracted “unwanted effects” of negative rates with such “macroprudential” measures as a loan-to-value cap, risk-weight floor and amortisation requirement for mortgages, as well as liquidity coverage rules and a “systemic risk buffer” for the four largest banks. Mr Ingves ruefully admits these took “many years to adopt”.

On the home front

Sweden’s acute housing problem is never far from his mind. “For young Swedish households, their only escape has been to borrow more and more money, and given that our housing market is dysfunctional, that has created an environment where we have more household debt than ever before,” Mr Ingves says with typical frankness. “The good news is that we have very low public sector debt compared with other countries. But that doesn’t really help when so many households have borrowed so much money, and most of it is in variable-rate mortgages, and at the end of the day, a very big chunk of those mortgages is being funded abroad in euros or dollars.”

Mr Ingves is dismissive of arguments that support the market-funding formula of Swedish banks.

“There are always many different arguments when people have too much debt about why it is a good thing to accumulate too much debt and why it is not dangerous. But I end up cleaning up the mess if things blow up,” he says, referencing Swedes’ tendency to hold so little of their assets in bank deposits.

Of the banks’ reliance on covered bonds, he is equally blunt. “That’s part of the way this system is set up, but it would be much better if a larger part would be long-term funding, not variable-rate mortgages,” he says. “I don’t know what the average duration is on these bonds, but keep in mind that only a few years back, many of these mortgages were without amortisation. They were running in some sense for ever. That means you have a sizeable maturity mismatch.”

He is critical of the banks’ property dependence, saying: “We have turned commercial banks into what are essentially mortgage banks, since I think more than 70% of bank assets are backed by real estate in one form or another. This is why our inability to create a functional housing market is so important [to fix].”

Diplomacy required

The Danske Bank money-laundering scandal in Estonia might appear to be of peripheral concern to Swedish regulators, but that is not how Mr Ingves sees it. Some €200bn of non-resident money flowed through the Danish bank’s Tallinn branch between 2007 and 2015, a sum nearly seven times Estonia’s GDP.

“All of us live in the same corner of the world, and all of us have substantial cross-border banking, and that means that in one way or another proximity to more disorderly parts of the world is always a headache,” he says guardedly, mindful perhaps of Swedbank’s status as the largest bank in the Baltics. “All of this reflects badly on all of us in the Nordic-Baltic region.”

A discussion of the Riksbank’s proposal for an ‘e-krona’ and the pros and cons of central bank digital currencies provides a respite for theorising, but one senses such topics are not where the Riksbank governor’s heart and mind usually dwell. In a February presentation to the Swedish parliament’s finance committee, Mr Ingves presented an alarming chart on Swedish ‘financial fragility’. One peak was for the 1991-92 banking crisis, another for the financial crisis in 2009: both were dwarfed by the current peak on the index.


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