In the UK, the Financial Policy and Prudential Regulation Committees of the Bank of England annually test the core banking system against a very severe but plausible stress – a scenario in which banks have to withstand a combination of ‘tail risk’ domestic and global economic and financial market shocks.20 The scenario for the 2019 test, announced this week, includes a deep recession in the UK with GDP falling by 4.7 % from peak to trough, house price falls of 33%, falls in commercial real estate prices of 41%, recessions in the Euro Area, the US, and China and market stresses including a 41% fall in equity prices and a nearly 400bps widening of investment grade spreads.21 Last year, alongside the annual stress test, we also developed a worst case, disorderly Brexit economic scenario to give us confidence that the core banking system could withstand the losses and stresses that such a scenario would generate. We have also tackled the features of the financial system that amplified and spread the stress of the original losses. The systemic banks at the heart of the system have been capitalised to a higher standard, not because they are more risky but because of the impact on the rest of the system if they fail. In addition resolution regimes are being implemented to enable banks to fail safely, without disrupting the critical economic functions they provide – and without the taxpayer having to cover the losses.
One point worth noting to begin with, is that the Swedish nation as a whole has not increased its indebtedness in recent years. On the contrary, the large surplus on the current account indicates that external debt has declined. This should have contributed to making the economy as a whole less vulnerable to a rise in interest rates. In this respect we differ from a number of other countries, where household indebtedness has increased rapidly, while they have had a deficit in their current accounts for several years. This applies, for instance, in the United States, the United Kingdom and Australia. Developments in household indebtedness in Sweden are not remarkable when seen in relation to other OECD countries. It is clearly difficult to compare the level of debt ratios between different countries. Differences in taxation systems, credit terms and the percentage of the population that are home-owners are just some of the factors that complicate this analysis. On the other hand, a comparison of how much the debt ratio has increased in different countries in recent years can provide some perspective for developments in Sweden. It appears that developments in, for instance, the United Kingdom and Australia have been much more dramatic than in Sweden. Property prices have also risen more rapidly in these countries. However, in the United States, which deregulated its credit market at an earlier stage than the other countries, indebtedness has increased at a slightly slower rate, although it did not show any decline in the mid-1990s, as there was in Sweden.