V. Vasiliauskas visiting Washington, DC: Risks from Sweden alarming, but Lithuanian financial sector ready

Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, who is participating in International Monetary Fund (IMF) and World Bank meetings, will join Martin Cihak, the Head of the IMF and World Bank Financial Sector Assessment Program (FSAP) assessing Sweden’s financial sector, in a discussion held in Washington, DC. Housing price trends in Sweden and the risk to the financial system of Lithuania, driven by their rise, are to be discussed during their meeting.

‘IMF experts expressed their concerns and submitted recommendations with regard to greater risks in the Swedish financial sector, which is closely tied with the major banks in our country,’ said Vitas Vasiliauskas. Should the Swedish property market suffer an unfavourable shock, he noted, e.g. if housing prices plummet, undesirable effects might also be felt in Lithuania’s financial system and the domestic economy. For instance, a strategic decision to mitigate risks and lend less, taken on a banking group level, might have an impact on business velocity in Lithuania and dampen its economic growth.

Over the last decade, housing prices in Sweden soared. In 2015 housing in this country was almost 50 per cent more costly than in 2007. High household indebtedness and rapid price developments increase the risk of their sudden drop as well as the related possibility of losses inflicted on the financial system, real economy and households.

Recently the IMF completed their FSAP mission to Sweden and, in summarising its results, noted that risks in the financial sector have grown since 2011, i.e. the previous FSAP mission, especially with regard to housing prices and household indebtedness. The IMF recommends Sweden to strengthen systemic risk oversight and macroprudential framework.

‘We are keeping a close eye on the developments in Sweden’s financial sector and property market, as its risks are relevant to Lithuania, thus causing concerns. Nevertheless, the fact that banks operating in Lithuania are now much less dependent on Swedish parent banks in terms of funding helps assessing the situation cautiously. Having joined the euro area, banks operating in Lithuania can take advantage of the euro system refinancing possibilities,’ said V. Vasiliauskas.

The Chairman of the Board of the Bank of Lithuania is a member of the Board of Governors of the IMF. During the visit to Washington, DC, he attended the meetings of the IMF’s International Monetary and Financial Committee as well as the meetings of the Nordic-Baltic constituency. He also discussed relevant issues linked with the developments in the euro area and world economy with the representatives from the IMF and the governors of other central banks.