One cannot rule out the possibility that investors might reduce their holdings or perhaps no longer wish to own Swedish mortgages through covered bonds when housing prices are falling heavily. Although the risk of direct loan losses on the banks’ mortgages is initially small, investors who perceive the uncertainty to be great and who have poor knowledge of the credit risk might wish to sell their holdings. If a general expectation of increased sales pressure also builds up, a large number of more well-informed investors 4  BIS central bankers’ speeches  might choose to sell their holdings of Swedish covered bonds to avoid large falls in value. This type of herd behaviour could create very negative price fluctuations on the bond market and perhaps even disrupt the functioning of the market. The stress tests carried out by both the Riksbank and other analysts indicate that the Swedish banks would be able to cope with a large fall in housing prices without the earmarked collateral declining significantly. But regardless of this, we can be sure that the uncertainty regarding the covered bonds would increase if housing prices were falling and it is always international confidence in the Swedish housing market that is important here. However, it is difficult to predict at what loan-to-value ratio the Swedish covered bonds would begin to be perceived as less safe by the market. Perceptions of what is acceptable may suddenly change.
I would say that market confidence is essential for the stability of the financial system. 1  The Riksbank usually discusses household indebtedness from a financial stability perspective in its twiceyearly Financial Stability Report. See, for instance, Financial Stability Report 2013:2. Sveriges Riksbank. 2  Previously, mortgages were often financed through housing bonds, which had maturities of around 30 years. Today, covered bonds are used instead, where newly issued covered bonds had an average maturity of around 4 years in the autumn of 2013. At that time, the average maturity of the outstanding covered bonds was approximately 3 years. BIS central bankers’ speeches  1  We saw in the most recent financial crisis that high indebtedness in the household sector can create problems, with some countries suffering a severe fall in house prices. When the value of houses declines, households begin to save more. When savings increase, consumption decreases and thus demand in the economy falls. Ultimately, this can lead to lower production and higher unemployment. We do not want to see this kind of development in Sweden. It is also important to remember that there is interplay between developments in the financial markets and developments in the real economy. If we were to experience a fall in housing prices during a recession and thus similar problems to those experienced by other countries, it is likely that we would suffer both a decline in demand in the economy and that the banks would experience greater difficulty and greater cost in obtaining market funding.