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FINANCIAL CRISIS

Riksbank under fire amid pension fund fears

A former Riksbank official has criticized the bank’s slow reaction to the current financial crisis as concerns mount about the vulnerability of Sweden’s pension funds to a continued drop in the stock market.

Published: 9 October 2008 10:48 CEST

So far, Sweden’s large pension companies – public funds charged with managing the pension savings of Sweden’s taxpayers – have weathered the recent wave of falling stock prices.

Sweden’s Financial Supervisory Authority (Finansinspektionen – FI), which tracks the funds’ performance, believes the pension companies continue to fulfill their solvency requirements in accordance with Swedish law.

However, the agency notes that lower stock prices and falling interest rates have had a negative impact on the companies’ capitalization.

Despite the fact that the pension companies all had substantial buffers at the start of the current wave of economic turmoil, the persistence of uncertainty in the markets and dropping share prices has made the companies more vulnerable, according to FI.

“A continued sharp drop in stock prices and interest rates could alter the current assessment of the companies’ resistance [to continued turbulence],” said the agency in a statement, referring to the pension companies’ limited capacity to lower their risk profiles by selling off risky assets in the short term.

Meanwhile, Kerstin Hessius, current head of the 3rd AP Fund pension company and a former vice-governor with the Riksbank, slammed the bank for taking its time in reacting to the current crisis.

In an article published in the Svenska Dagbladet (SvD) newspaper, Hessius said it was time for her former colleagues to wake up and take action.

“Hello, my dear former colleagues, have you gotten stuck in your models and the old national accounts built on historical information?” she writes.

Hessius thinks Wednesday’s 0.5 percent repo rate cut, which brought Sweden’s benchmark interest rate down to 4.25 percent, was too little too late “and wasn’t even initiated by the Riksbank”.

Instead, she calls upon the Riksbank to drastically cut interest rates down to 2.25 percent, and to propose to the government that it set up a public guarantee for the Swedish banking system.

She also believes the recently doubled savings guarantee of 500,000 kronor ($71,000) is insufficient.

Moreover, Hessius urges the Riksbank to take a stronger leadership role to head off problems before they occur.

“The reaction has been reactive, they alleviate problems after they’ve materialized…in this situation someone must dare to lead, be proactive, and not lay blame on the crisis being global,” she writes.

“It’s the Riksbank which has the responsibility and the knowledge. Take responsibility and act swiftly! Other countries in Europe will follow.”

ECONOMY

Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

Published: 16 March 2023 16:20 CET
Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview. 

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken. 

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.” 

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.” 

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said. 

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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