Macroprudential policies in a low interest rate environment

Jun. 23, 2015

On June 22, 2015 the Swedish House of Finance together with the Riksbank, the Swedish Financial Supervisory Authority and Vinnova organized a seminar about macroprudential policies in an economy with low interest rates. Professor Per Strömberg moderated a discussion between Amir Sufi, University of Chicago, Martin Flodén, the Riksbank, and Douglas Diamond, University of Chicago in the Aula of the Stockholm School of Economics.

Macroprudential policy is a hot topic since the financial crisis but it is an area that is still in development. The Riksbank has taken the initiative for a new annual conference on macroprudential policy gathering leading academics, policy makers and representatives from the private sector. The open seminar on June 22 was the start of this conference.

– Macroprudential policies means thinking about the big picture. I don’t think that macroprudential regulation necessarily contains a different set of tools than other economic policy. The goal is to have the right amount of stability in the financial system and a focus on indirect effects of any intervention. In practice, a lot of macroprudential policies have meant thinking about how the economy should handle problems associated with too much short-term debt, says Douglas Diamond.

– People didn’t think enough about these interactions before the financial crisis but it is getting much more attention now. Like in many other countries, we are struggling in Sweden with how to deal with the regulation of the financial system, says Martin Flodén.

Martin Flodén also talked about the introduction of a loan to value-restriction that was implemented in Sweden in 2010. It did have some initial effects with stabilizing debt ratios but there are signs now that it is increasing again. The problem is that when house prices increase you can borrow more. To combat this, Martin Flodén mentioned that you need to use a combination of different policies and a restriction imposed directly on banks, as opposed to households, could be more politically acceptable. No household would be directly affected by a bank restriction; there would be room for exceptions and thus a slightly softer limitation, according to Martin Flodén.

– Rapid increases in the debt to income-ratio tend to predict pretty bad things. What is interesting in Sweden is that there is a very high level of debt to income-ratio but the increase has been gradual and slow so it is kind of an interesting experiment to see what will happen here, says Amir Sufi.