But the flow of general provisions moves in the opposite direction, acting as a countercyclical mechanism. In the last boom, the accumulated stock of total provisions grew steadily between 2005 and 2008, to a level which at the start of this year was twice as large as their non-performing loans. That figure has fallen sharply in recent quarters, in the face of fast-growing credit losses, but it did ensure that Spanish banks were better placed than their counterparts in other countries to absorb such losses without immediately eating into their core capital. The Bank of Spain estimates the current level of general provisions could absorb losses associated with a doubtful assets ratio of 9% (the current level is 1.5%). The general reserve is also substantial in comparison with the tier 1 capital ratios, representing 1.3% of the riskweighted assets. I know that general provisions fall foul of modern accounting practice and can be unpopular with tax authorities. But the Spanish example demonstrates that – despite all the technical arguments there might be about the details – a mechanism with broadly the right features is practicable and can generate worthwhile additional reserves against the losses which crystallise in cyclical downturns. It does not require precise estimates of the length of the cycle, or predictions of when the cycle will turn; and it can be capped, so that the reserve does not continue to grow inexorably in an extended upswing.
With regard to the outlook for Sweden, the Riksbank foresees an average annual growth rate of almost 3 per cent in the coming years. Looking at inflation prospects, the rate of price increases is expected to rise in the period ahead as resource utilisation increases in Sweden and abroad. However, a continuation of relatively weak labour market conditions and a favourable cost situation mean that the rise in inflation is expected to be relatively moderate in Sweden. Our forecast in the Report is for a risk-adjusted inflation rate of 1.1 per cent one year ahead and 1.8 per cent two years ahead, measured as UND1X inflation. Swedish housing finance On 1 July this year the Act on issuing secured bonds (2003:1223) will come into force. One of the main incentives behind the new Act is to offer Swedish mortgage institutions the same favourable financing opportunities that these institutions face in European countries that have already introduced similar legislation. So will this new legislation result in a new financing structure for Swedish mortgage institutions and in large issue volumes in the international markets? This remains to be seen. The Riksbank has, for reasons of principle, been hesitant towards the introduction of the legislation on secured bonds, primarily because the supervisory task charged to Finansinspektionen (the Swedish Financial Supervisory Authority) could be perceived as an implied government guarantee, but also because the legislation in this field entails a return to regulation in the credit market, which in itself can be questioned.