Press Release No. 13/324

Press Release: IMF Executive Board Discusses Nordic Regional Report on Denmark, Finland, Norway, and Sweden

September 5, 2013

On August 29, 2013, the Executive Board of the International Monetary Fund (IMF) discussed the Nordic Regional Report on Denmark, Finland, Norway and Sweden, which complements the Article IV consultations for the countries concerned. The report is part of a pilot to cluster these consultations and assess spillovers across groups of interconnected countries, by examining the risks from common shocks, highlighting shared policy challenges, and identifying potential gains from policy coordination. This follows the recommendations of the 2011 Triennial Surveillance Review to strengthen work on interconnectedness and spillovers.

The recent crises have highlighted the strengths and weaknesses of the ‘Nordic model.’ Robust social institutions and sound macroeconomic fundamentals and policies helped the region emerge as a safe haven for investors and allowed it to outperform many other advanced economies during the recovery. At the same time, the development of a large and regionally integrated banking system while embracing trade and financial openness also meant that the four countries were vulnerable when global markets faltered early in the crisis.

The Nordic banking system, while well-capitalized by international standards, is highly integrated, large relative to the size of the region, concentrated, and heavily reliant on wholesale funding. National financial reforms continue and strong fiscal frameworks have helped create fiscal buffers. The Nordic countries cooperate closely on financial sector issues, but discussions on burden-sharing arrangements in the event of the failure of a systemic bank are at an early stage.

The mix of large and integrated banks, high household debt, and elevated property prices creates shared regional risks. Banks have been able to support large borrowing by households to finance house purchases, often at high price levels. This has boosted household debt in parts of the region to some of the highest levels within the OECD. At the same time, strong household net asset positions often mask a mismatch between liquid assets and outstanding liabilities. With a high degree of openness and close financial integration, shocks can diffuse rapidly across the region, feeding back between banks and households and on to the broader economy.

Executive Board Assessment

Executive Directors welcomed the Nordic Regional Report, which usefully complements the Fund’s regular bilateral consultations with Denmark, Finland, Norway, and Sweden (the Nordic-4). Directors commended the authorities and staff for their successful collaboration and looked forward to further discussions of country-specific policies in the relevant Article IV consultations.

Directors noted that the Nordic-4 share strong economic and social institutions, a track record of fiscal prudence, and a high degree of regional and global openness. At the same time, they observed important variations among the four countries, notably monetary and exchange rate regimes, and the degrees of political and economic integration with the European Union. Directors also pointed to the challenges arising from a combination of large, integrated, and concentrated banking sectors, highly indebted households, and close regional trade and financial linkages, as well as with the Baltic economies, which could reverberate shocks rapidly across countries.

Directors considered that sound national macroeconomic frameworks have provided valuable fiscal space, and welcomed the progress by all four governments in strengthening financial sector and macroprudential policies. They highlighted the benefits of further reinforcing national policies on housing and banking to preempt systemic risks that could arise from house price corrections and banks’ dependence on wholesale funding. In this regard, Directors supported ongoing efforts to raise risk weights for mortgages to ensure adequate capital buffers for banks while providing sufficient liquidity in the system. They stressed the importance of maintaining strong fiscal buffers to guard against costly tail events in the banking sector, restricting the availability of interest-only mortgages, and gradually phasing out preferential tax treatment of housing assets while considering alternatives in the context of broader tax reforms in individual countries.

Directors saw merit in deeper regional cooperation and greater clarity on common bank resolution procedures, even as the European financial architecture continues to evolve. In this regard, introducing binding macroprudential minima would help create a level regulatory playing field, while clear burden-sharing arrangements, with appropriate safeguards against moral hazard, would reduce uncertainty about the costs to taxpayers from large bank failures. Directors welcomed recent progress at the Nordic and European levels in setting up mechanisms to deal with distressed banks, which should help resolve many of the current differences in supervisory practices and resolution preferences. They noted that the development of a Banking Union at the European level provides a valuable opportunity for deeper regional coordination that is also in alignment with the broader European scheme.