Sweden: Selected Issues

This Selected Issues paper examines Sweden’s corporate vulnerabilities and focuses on commercial real estate (CRE). Liquidity premia on funding costs will undermine CRE profits and lead to the increase in credit risk premia, amplifying the original shock. Stress tests indicate that CREs face debt servicing pressures even under a mild scenario. The supervisory authorities and, potentially the Securities Market Association should encourage better disclosure. The bond issuance template should include disclosure on liabilities, especially those in foreign currency, and contingency plans when market funding dries up. The report suggests that the authorities should evaluate the need to raise capital requirements for banks for CRE exposures. The authorities should also plan now for what a potential crisis intervention might be. Such intervention should be designed to limit moral hazard. Plans to restore market functioning should aim to incentivize participants to re-enter the market, while considering the costs and risks to the central bank and concerns about moral hazard.