Financial stability report 2007:1 24 May 2007. CHAPTER 1 Financial markets

Financial stability report2007:1

24 May 2007

CHAPTER 1Financial markets

Ten-year government bond ratesPer cent

Chart 1:1 Source: Reuters EcoWin

2

3

4

5

6

7

jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06 jan-07 jan-08

Sweden Germany USA

Stock marketsIndex, 2 January 2002 = 100


0

40

80

120

160

200

jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06 jan-07

Sweden - OMXS30 Europe - Stoxx USA - S&P 500

P/E ratios


0

10

20

30

40

jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06 jan-07

Sweden - OMXS30 Europe - Stoxx

USA - S&P 500 Historical average: OMXS30, Stoxx and S&P 500

Implied stock-market volatility

Per cent

Chart 1:4 Source: Bloomberg

0

10

20

30

40

50

60


Sweden - OMXS30 Europa - StoxxUSA - S&P 500 Historical average, OMXS30

Global level of bankruptcies

Percentage of all companies rated Ba/BBB or lower


0

2

4

6

8

10

12


High-yield corporate bond spreads

in Europe and the United StatesPercentage points


0

3

6

9

12

15

18


Europe USA

Premia in CDS indicesBasis points


20

30

40

50

60

70

sep-04 dec-04 mar-05 jun-05 sep-05 dec-05 mar-06 jun-06 sep-06 dec-06 mar-07 jun-07

Europe North America

Households with payment problems

in the US house mortgage market

Per cent, seasonally adjusted

Chart B1 Source: Mortgage Bankers Association

0

2

4

6

8

10

12

14

16

dec-98 dec-99 dec-00 dec-01 dec-02 dec-03 dec-04 dec-05 dec-06

Total Subprime Prime

Premia for credit derivatives

on US house mortgage loansBasis points

Chart B2 Source: JP Morgan

0

400

800

1200

1600

2000

aug-06 sep-06 okt-06 nov-06 dec-06 jan-07 feb-07 mar-07 apr-07 maj-07 jun-07

Note. Loans classified as BBB?.Note. Loans classified as BBB−.

Credit spreads for bonds issued

by emerging-market economiesPercentage points


0

5

10

15

20


Europe Asia EMBI+

Oil price and commodity price index

USD per barrel and index, January 2002=100

Chart 1:9 Sources: Reuters EcoWin och The Economist

10

20

30

40

50

60

70

80

90


70

100

130

160

190

220

250

280

310

Oil price (left scale) Commodity price index (right scale)

GDP growthPercentage annual rate

Chart B3 Source: Reuters EcoWin

0

2

4

6

8

10

12

14

dec-99 dec-00 dec-01 dec-02 dec-03 dec-04 dec-05 dec-06

Estonia Latvia Lithuania

Balance on current accountPer cent of GDP


-30

-25

-20

-15

-10

-5

0

mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07


HICP inflationPercentage 12-month rate

Chart B5 Source: Eurostat

-3

0

3

6

9



Real interbank interest ratesPer cent


-6

-4

-2

0

2

4

6

8

10



Corporate loan stocks in the

Baltic states and SwedenPer cent

Chart B7 Sources: National central banks and Reuters EcoWin

0

10

20

30

40

50

60

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Estonia Latvia Lithuania Sweden

Household sector loan stocks

in the Baltic states and Sweden

Per cent

Chart B8 Sources: National central banks and Reuters EcoWin

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


CHAPTER 2The Swedish banks´

borrowers

Household borrowingPercentage 12-month change

Chart 2:1 Source: The Riksbank

-3

0

3

6

9

12

15

18

dec-95

dec-96

dec-97

dec-98

dec-99

dec-00

dec-01

dec-02

dec-03

dec-04

dec-05

dec-06

dec-07

Total Mortgage institutions

Duration of fixed interest periods

for new house mortgage loansPer cent


0%

20%

40%

60%

80%

100%

jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06 jan-07

Variable rate Fixed 3 months to 5 years Fixed >5 years

Household debt and post-tax interest expenditure in relation to

disposable incomePer cent

Chart 2:3 Sources: Statistics Sweden and the Riksbank

0

40

80

120

160

200

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

0

4

8

12

16

20

Debt ratio (left scale) Interest ratio (right scale)

House prices and mortgage debt

Percentage annual change


0

3

6

9

12

15

18

mar-04

jun-04

sep-04

dec-04

mar-05

jun-05

sep-05

dec-05

mar-06

jun-06

sep-06

dec-06

mar-07

Loans from mortgage institutions House prices

Households below the margin, impaired loans and potential

loan lossesPer cent

Chart 2:5 Source: Statistics Sweden and the Riksbank

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006(forecast)

Households below the margin Impaired loans Potential loan losses

Proportions of debt, financial wealth and real wealth held by the indebted households

in each income groupPer cent


0

20

40

60

Income group 1 Income group 2 Income group 3 Income group 4 Income group 5

Share of debt Share of financial assets Share of real assets

Household sector loan stocks

in the Baltic states and Sweden

Per cent

Chart 2:7 Sources: National central banks and Reuters EcoWin

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


Nominal and real house price increases 2000 – 2006 in Nordic countries and the Baltic states

Per cent

Chart 2:8 Sources: National central banks and Reuters EcoWin

0

100

200

300

400

500

600

700

800

Finland Norway Sweden Denmark Lithuania Estonia Latvia

Nominal prices Real prices

Nominal and real house price increases 2000 – 2006 in Nordic countries and the Baltic states

Per cent

Chart B9

0

2

4

6

8

10

12

14

16

18 - 34 35 - 44 45 - 54 55 - 64 65+

Households below the margin Impaired loans Potential loan losses

Sources: Statistics Sweden and the Riksbank

Corporate borrowing from credit institutions

Percentage twelve-month change, moving three month average


-10

-5

0

5

10

15

mar-92 mar-95 mar-98 mar-01 mar-04 mar-07

Corporate loans from securities

markets and credit institutions

SEK billion


0

500

1000

1500

2000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Credit institutions Bonds and certificates

Ratio of debt to total assets in listed companies

Per cent of all listed companies

Chart 2:11 Sources: Bloomberg and the Riksbank

0

20

40

60

80

100

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

sep

-06

0-25 25-50 50-75 >75

Number of corporate defaults by company size

Twelve-month moving average

Chart 2:12 Source: Statistics Sweden

0

100

200

300

400

500

600

jan-83 jan-86 jan-89 jan-92 jan-95 jan-98 jan-01 jan-04 jan-07

1–9 employees 10–49 employees

Expected default frequency (EDF) by industry for listed non-

financial companiesPer cent

Chart 2:13 Source: Moody’s KMV

0,01

0,1

1

10

100


Manufacturing Construction IT-telecomServices Property management Transport

Expected default frequency (EDF)

for listed non-financial companies

Per cent

Chart 2:14 Source: Moody’s KMV

0,01

0,1

1

10


Sweden Norway Denmark

Finland Germany

Listed companies with a default probability of 1 per cent or more

Per cent of all listed companies

Chart 2:15 Sources: Moody´s KMV and the Riksbank

0

10

20

30

40

50

60

70

dec-01 dec-02 dec-03 dec-04 dec-05 dec-06 dec-07

Expected default frequency (EDF), outcomes

and forecast with the Riksbank’s main scenario

Per cent

Chart 2:16 Sources: National central banks

0,0

0,5

1,0

1,5

2,0

2,5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Corporate borrowing from credit institutions in the

Baltic statesPercentage 12-month change

Chart 2:17 Sources: National central banks

-10

0

10

20

30

40

50

60

70

80

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


Expected default frequency (EDF)

for listed property companies

Per cent

Chart 2:18 Source: Moody´s KMV

0,01

0,1

1

10


Sweden Norway Denmark Finland Germany

Real prices for office premises in central locations

Index 1981 = 100

Chart 2:19 Sources: Newsec AB and the Riksbank

0

100

200

300

400

500

dec-81

dec-83

dec-85

dec-87

dec-89

dec-91

dec-93

dec-95

dec-97

dec-99

dec-01

dec-03

dec-05

dec-07

Stockholm Göteborg Malmö

Vacancy rates for office premises in central locations

Per cent

Chart 2:20 Sources: Newsec AB and the Riksbank

0

5

10

15

20

25

dec-90 dec-92 dec-94 dec-96 dec-98 dec-00 dec-02 dec-04 dec-06

Stockholm Göteborg Malmö

Average direct yield required for office premises in central

locationsPer cent

Chart 2:21 Sources: Newsec AB and EcoWin

0

2

4

6

8

10

12

14

dec-81

dec-83

dec-85

dec-87

dec-89

dec-91

dec-93

dec-95

dec-97

dec-99

dec-01

dec-03

dec-05

dec-07

Stockholm Göteborg Malmö 5-year treasury bond rate

Chapter 3Developments in the

banks

Composition of pre-tax return on equity

Percentage points

Chart 3:1 Sources: Banks reports and the Riksbank

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

Pre-tax profit margin Risk-adjusted income Level of risk Leverage

Profit before loan losses and net

loan losses in the major banks

Four-quarter totals, SEK billion, 2007 prices


-20

0

20

40

60

80

100

de

c-9

0

de

c-9

2

de

c-9

4

de

c-9

6

de

c-9

8

de

c-0

0

de

c-0

2

de

c-0

4

de

c-0

6

Profit before loan losses Loan losses Profit before loan losses using IFRS

Implied volatility of bank equity

Per cent, moving 10-day average

Chart 3:3 Sources: Bloomberg and the Riksbank

0

20

40

60

80

100

jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06 jan-07 jan-08

SEB Handelsbanken Nordea Swedbank

The major banks’ securities-related commission income and Stockholm

Stock Exchange turnoverSEK million and index: 1997=100

Sources: Banks reports, Reuters EcoWin and the RiksbankChart 3:4

0

1000

2000

3000

4000

5000

6000

kv1 kv2 kv3 kv4 kv1 kv2 kv3 kv4 kv1 kv2 kv3 kv4 kv1 kv2 kv3 kv4 kv1

0

100

200

300

400

500

600

Brokerage income Capital management income Stockholm Exchange turnover (index, right scale)

2003 2004 2005 2006 2007

Cost efficiency of the major Swedish banks

Per cent


40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

C/I ratio C/I ratio using IFRS

Net interest margin and spreads for the major banks

on deposits, bank loans and mortgage loans

Per cent, moving 4-quarter average

Chart B10 Sources: Banks reports and the Riksbank

0,0

0,5

1,0

1,5

2,0

2,5

3,0

dec-97 dec-98 dec-99 dec-00 dec-01 dec-02 dec-03 dec-04 dec-05 dec-06 dec-07

Net interest margin New mortgage loansBank deposits Bank loans

Lending by credit institutions to

the corporate sector in Sweden

Per cent, moving 4-quarter average


-15

-10

-5

0

5

10

15

20

dec-97 dec-98 dec-99 dec-00 dec-01 dec-02 dec-03 dec-04 dec-05 dec-06 dec-07


Geographical composition of lending December 2006, per cent


0

20

40

60

80

100

Handelsbanken Swedbank SEB Nordea

Sweden Other Nordic countries Baltic states Germany Other

Lending to the general public

in Sweden and abroadPercentage annual change, 2007 Q1


0

10

20

30

40

Swedbank Handelsbanken Nordea SEB

Total In Sweden Abroad

Provisions for incurred and

probable loan lossesPer cent of loan stock, accumulated over four

quarters


0,0

0,2

0,4

0,6

0,8

1,0

1,2

mar-97 mar-98 mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07


Tier 1 capital ratios of the four major Swedish banks

Per cent


4

6

8

10

12

mar-97 mar-98 mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07


The major Swedish banks’ deposits,

lending and deposit deficitSEK billion


0

1000

2000

3000

4000

5000

6000

mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07

Lending Deposits Deposit deficit

Interest-bearing assets and liabilities

December 2006, SEK billion


-600

-400

-200

0

200

400

600

SE

K

EU

R

US

D

Oth

er

SE

K

EU

R

US

D

Oth

er

SE

K

EU

R

US

D

Oth

er

SE

K

EU

R

US

D

Oth

er

Net lending Security portfolio Interbank net Issued securities Other, net

Handelsbanken Swedbank Nordea SEB

The lowest Tier 1 capital ratio among the other three major Swedish banks if the fourth

has suspended paymentsPer cent


2

3

4

5

6

dec-99 dec-00 dec-01 dec-02 dec-03 dec-04 dec-05 dec-06

Post-tax returns on equity in the major Swedish and other Nordic

banksPer cent


0

5

10

15

20

25

dec-01 dec-02 dec-03 dec-04 dec-05 dec-06 dec-07

Major Swedish banks Other major Nordic banks

Net interest and commission incomes for the major Swedish

and other Nordic banksPercentage annual change, accumulated over four

quarters


-5

0

5

10

15

20

25

30

dec-05 mar-06 jun-06 sep-06 dec-06 mar-07Net interest income, major Swedish banksNet commission income, major Swedish banksNet interest income, other major Nordic banksNet commission income, other major Nordic banks

Net loan losses in relation to loan stocks for the major Swedish and

other Nordic banksPer cent


-0,4

-0,2

0,0

0,2

0,4

0,6

Jyske Bank Nordea DanskeBank

DNB NOR Swedbank Handels-banken

SEB

2003 2004 2005 2006 2007

Tier 1 capital ratios of the major Swedish and other

Nordic banksPer cent


0

2

4

6

8

10

12

Jyske Bank SEB DNB NOR DanskeBank

Nordea Swedbank Handels-banken

2005 2006 March 2007

Bank profits with the scenario

for the Baltic statesExpected profit less the change in expected losses, SEK

million


0

2000

4000

6000

8000

10000

jan-00 jan-00year 1 year 2 year 3

SEB Swedbank

year 1 year 2 year 3

Cover for credit risk with the scenario for the Baltic states

Per cent


0

50

100

150

200

250

jan-00 jan-00

SEB Swedbank

year 1 year 2 year 3 year 1 year 2 year 3

Bank profits in the scenario with a turn in the credit

cycleExpected profit less the change in expected losses,

SEK million


0

4000

8000

12000

16000

jan-00 jan-00 jan-00 jan-00Year1

Year2

Year3

Year1

Year2

Year3

Year1

Year2

Year3

Year1

Year2

Year3

SEB Swedbank Nordea Handelsbanken

Cover for credit risk in the scenario

with a turn in the credit cyclePer cent


0

50

100

150

200

250

300

jan-00 jan-00 jan-00 jan-00

SEB Swedbank Nordea Handelsbanken

Year1

Year2

Year3

Year1

Year2

Year3

Year1

Year2

Year3

Year1

Year2

Year3

CHAPTER 4The financial infrastructure

Evaluation of the financial infrastructure

Figur 4:1

RIX VPC SB BGC

Legal risk

Transparency

Financial risks

Settlement risks

Operational risks

Efficienty

Access

Control

Observed Partially observed

Broadly observed Non-observed

ARTICLETrading activity in credit

derivatives and implications for financial stability

Outward and inward integration in the EU25 bank

sector at end 2005

Chart 1 Source: ECB and the Riksbank

0,0

0,2

0,4

0,6

0,8

1,0

Belgiu

m

Cypru

s

Denm

ark

Estonia

Finla

nd

France

Greec

e

Irela

ndIta

ly

Latvi

a

Lithuan

ia

Luxem

bourgM

alta

Nether

lands

Poland

Portugal

Slova

kia

Slove

nia

Spain

UK

Sweden

Czech

Rep

ublic

Germ

any

Hungary

Austria

Outward Inward

Documents

Financial stability report 2007:1 24 May 2007. CHAPTER 1 Financial markets