A new indicator of risks and vulnerabilities in the Swedish financial system – the systemic risk indicator – is presented in a new Staff Memo. The indicator shall primarily be used to measure and illustrate risks and vulnerabilities that can build up in the Swedish financial system and may thereby fulfil a purpose in the Riksbank’s oversight and analysis activities. According to the authors’ analysis, the systemic risk indicator signals that imbalances have accumulated in the Swedish financial system for a long time, making it potentially vulnerable in the current situation.
For an economy to function smoothly and grow sustainably, stability is needed in the financial system. Stability is usually taken to mean that the financial system is functioning as it should and also has resilience to shocks that threaten these functions. The problem is that banks and financial markets are vulnerable, which makes the financial system as a whole vulnerable and sensitive to shocks. In addition, various parts of the system are closely interconnected, which means that problems in one part of the system can easily spread to other parts. The combination of vulnerability and interconnection means that the financial system is very susceptible to systemic risks.
The systemic risk indicator presented in this Staff Memo is an aggregation of five separate indicators for the various sub-markets that reflect development in the banking sector, household sector, non-financial corporate sector, property market and in a group of variables referred to as external factors. As the systemic risk indicator combines a large amount of information from several different parts of the financial system, it can provide a composite picture of financial stability and its development over time. The indicator is constructed so that a higher value signifies higher risks and vulnerabilities.
The new systemic risk indicator is not a perfect measure of risks and vulnerabilities. Neither has it been designed to be able to predict crises or identify current stress levels in the financial system. It shall primarily be used to measure and illustrate risks and vulnerabilities that can build up in the Swedish financial system and thereby fulfil a purpose in the Riksbank’s oversight and analysis activities. Economic and financial crises are often triggered by shocks that are difficult to predict, but risks and vulnerabilities can also build up over a long period of time. If any type of shock occurs, the consequences can be deeper and more prolonged if risks and vulnerabilities are elevated.
The Staff Memo is only available in English and has been written by Dominika Krygier and Peter van Santen, both of whom work in the Financial Stability Department.