Questions and answers on the financial turmoil - updated on 27 May 2009
Date
02/06/2009
The Riksbank has the primary responsibility for overseeing stability within the financial system and for taking measures when necessary. The Riksbank has compiled a number of questions and answers to explain our role in dealing with the financial unrest that now prevails, see below.
What do the other authorities do?
Finansinspektionen (the Swedish Financial Supervisory Authority) supervises the companies on the financial market and works to ensure that the financial system functions effectively with stable companies and a high level of consumer protection. The Swedish National Debt Office is responsible for the deposit guarantee system. See the links to the websites of Finansinspektionen and the Swedish National Debt Office below.
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Questions and answers published on 2 June 2009
What is the Riksbank's assessment of financial stability in Sweden?
The Riksbank’s assessment is that the loan losses of the major Swedish banks will increase over the coming years, in the wake of the very weak economic activity. In the Riksbank's main scenario, it is assumed that the major Swedish banks’ loan losses in 2009 and 2010 will total SEK 170 billion. The banks have sufficient capital to meet larger losses than this, and are well-capitalised in an international comparison. However, although the banks can cope with considerable loan losses, the measures taken by the authorities are an important precondition for the stability of the financial system in Sweden.
What can affect developments on the financial markets in the period ahead?
In this year's first Financial Stability Report, the Riksbank identifies three risks that, if realised, could lead to the situation for the Swedish banks deteriorating more than in the main scenario, which would result in larger loan losses. One such risk is that the recession and the recovery in economic activity will be more protracted than most economic analysts expect. Another risk is that the serious economic situation in the Baltic countries will continue to worsen. Both of these risks have increased compared with last November. At the same time, there are signs that some parts of the financial markets have begun to function more effectively recently. The assessment is therefore that the risk of disruptions in the functioning of the financial markets is unchanged compared to the Riksbank's assessment in November.
How does the Riksbank carry out its stress tests?
The Riksbank regularly carries out stress tests to assess how conceivable but unlikely negative events could affect the banks' resilience. At present, there is considerable uncertainty about future economic developments and their effects on the banks. In this report, the Riksbank has therefore tested the resilience of the banks to a scenario that would have a much greater negative impact on the banks' loan losses than the main scenario. The financial crisis has also led to a greater focus on the capital strength of the banks. Consequently, the test also covers how the loan losses affect the banks' capital adequacy. A detailed description of the design of the current stress test is included in Financial Stability Report 2009:1.
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Questions and answers published on 25 May 2009
Why does the Riksbank have a foreign currency reserve?
One of the reasons why the Riksbank needs a foreign currency reserve relates to the Riksbank's responsibility for ensuring that the financial system works safely and efficiently. An important component of this work is to be able, in a crisis situation, to provide liquidity assistance to the Swedish banks. As the Swedish banks fund a significant part of their operations in foreign currency, the Riksbank must have a sufficient reserve of foreign currency to be able to meet the needs of the banks when necessary.
Why does the Riksbank need to strengthen the foreign currency reserve?
During the financial crisis, the Riksbank has lent US dollars to Swedish banks. The Riksbank has also entered into so-called swap agreements with the Icelandic, Latvian and Estonian central banks. In addition, we have increased our commitments to the International Monetary Fund (IMF). These arrangements amount to foreign currency corresponding to approximately SEK 100 billion. It is important that we continue to be prepared for the fact that the financial crisis can be both severe and prolonged. This is why we now need to restore the level of the foreign currency reserve.
What will you actually do to strengthen the foreign currency reserve?
The Riksbank will borrow the foreign currency, that is we will not buy foreign currency for Swedish krona. In practice, the Swedish National Debt Office borrows the foreign currency on behalf of the Riksbank. This money is then deposited in one of the Riksbank's accounts.
Questions and answers published on 27 February 2009
Why has the Riksbank entered into an agreement with the central bank of Estonia, Eesti Pank?
It is important to point out that the agreement can be seen as a kind of insurance – in the event that problems arise in the Estonian financial sector, the Estonian central bank will be able to use the agreement. This will increase the bank's ability to safeguard financial stability in Estonia. The fact that the Riksbank has now entered into the agreement does not mean that the central bank of Estonia now has automatic access to Swedish krona.
How much will Eesti Pank be able to borrow from the Riksbank?
Under the agreement Eesti Pank will be able, if the need arises, to borrow up to SEK 10 billion against Estonian kroon.
Questions and answers published on 17 December
Why is the Riksbank granting loans to Latvijas Banka, the central bank of Latvia?
It is important that central banks cooperate and assist one another in times of financial crisis. There is also a risk that a financial crisis in Latvia could spread and create unease on the financial markets in Sweden and our neighbouring countries. Ultimately, it could affect the payment system and the Swedish economy. It is therefore in the Riksbank’s interests to help to avoid such a situation. The loan contributes to strengthening financial stability in Latvia until the International Monetary Fund (IMF) has decided on a programme for financial assistance.
The swap agreements give Latvijas Banka the right to borrow euro against Latvian lats if and when the need arises. The swap agreements of up to EUR 500 million being entered into by the Riksbank and by Danmarks Nationalbank (the central bank of Denmark) constitute short-term financing to help safeguard economic and financial stability in Latvia. The Riksbank’s share is calculated at EUR 375 million.
The Latvian parliament has decided on a number of measures to address the economic problems the country is currently facing. These measures are also a precondition for the programme for financial assistance from the IMF, which has been drawn up and is awaiting a decision by the Executive Board of the IMF shortly. The swap agreement will provide bridge financing until the programme is in place.
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Questions and answers published on 8 December
Why has the Riksbank reduced the interest rate to 2 per cent?
In the wake of the financial crisis we are witnessing an unexpectedly rapid and tangible dampening of economic activity. The Riksbank's assessment is that the economy will continue to weaken in the period ahead. Weak economic development throughout the world has led to a significant fall in the prices of oil and other commodities. In addition, we also expect to see a continuation of the situation in which the repo rate is having less of an impact than normal on the interest rates charged to companies and households. Our assessment is therefore that a considerable reduction in the interest rate is required to mitigate the effects of the financial crisis and reach the inflation target of 2 per cent. An unusual situation requires unusual measures.
Why has the Riksbank brought the monetary policy meeting forward?
In the current situation it is important to be able to make quick decisions. Our analysis clearly showed that we would need to reduce the interest rate more than we predicted in October. We had good information and data on which to base our decision and there was no point in waiting. Making the decision now means that interest rates for companies and households will also be reduced sooner. The crucial thing is to dampen the effects of the economic downturn as quickly as possible.
What has happened to change the picture since October?
Economy activity has declined much more rapidly than expected in Sweden and abroad. Most of the indications are that economic development in the period ahead will be weaker than the Riksbank predicted in October. We have downwardly adjusted the forecast for international growth next year by approximately 1 per cent. New information on the development of the Swedish economy indicates that economic activity will decline more rapidly than expected. Growth was somewhat weaker than expected during the third quarter. Production and employment will also fall more than the Riksbank expected in the period ahead.
In the wake of weaker economic development around the world, oil and commodity prices have fallen significantly. Lower energy prices together with considerably weaker economic development will lead to a very rapid fall in inflation. The Riksbank's assessment is now that prices will increase at a much slower rate in the year ahead.
How serious is the crisis?
Obviously we are in a worrying situation and this is without doubt one of the most serious global financial crises. Nevertheless, central banks and politicians have learned a great deal from previous crises. Many of the economic policy instruments available are now being used. In the Riksbank's assessment, these measures will have an effect so that the wheels of the economy will begin turning again in 2010 with increased production and employment.
In what way will today's interest rate cut ease the situation for the financial system?
Lower interest rate levels relieve the pressure on borrowers and this in turn reduces the risk of credit losses.
How does this new forecast affect your assessment of financial stability and developments for the Swedish banks?
As we have stated in the Financial Stability Report, a weaker development of economic activity is negative for the banks. It undermines their ability to earn money and makes it more difficult for the banks' borrowers to pay off their loans. Above all, there is a risk that companies will find it more difficult to pay. This means that the banks' expected credit losses will probably increase. A lower interest rate means, however, that this will partly be counterbalanced by the reduction in the companies' borrowing costs. All in all, the Riksbank's assessment is still that the resilience of the Swedish banks is good.
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Questions and answers published on 17 November
What was the sequence of events when the Swedish National Debt Office took over Carnegie?
Read more at the Swedish National Debt Office's website, www.riksgalden.se
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Questions and answers published on 31 October
Why are you accepting commercial paper as collateral for your loans to banks?
The accentuation of problems in financial markets has been accompanied by difficulties in the supply of credit to companies outside the financial sector. We aim to improve the opportunities for companies to borrow funds. This makes it easier for companies to obtain loans and increases the banks’ possibilities of providing companies with liquidity. In that way it also leaves resources for bank loans to smaller companies as well. The measure is to be seen as complementing the SEK and USD loans which the Riksbank is already providing.
Which companies may participate?
Swedish companies with a satisfactory credit rating may participate. More specifically, those companies with an external rating of A-2/P-2 or K-1. Companies without an external rating may also participate in the credit programme. To do so, the company's bank must confirm that the company’s creditworthiness complies with equivalent requirements. However, financial companies may not participate. It is important to underscore that the Riksbank is not lending directly to the companies. The money is being lent to the banks, which makes it easier for them in turn to lend to the companies.
Does this guarantee that the banks really will lend money to the companies now?
No, we cannot guarantee that the banks will do so, but we can make it easier for the banks by ensuring that they have the money they need to be able to lend money to the companies. We believe they will do so now.
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Questions and answers published on 30 October
Why did the Riksbank provide liquidity assistance of up to a maximum of SEK 5 billion to Carnegie Investment Bank?
Carnegie applied to the Riksbank for liquidity assistance. Short-term financing has become so strained that the bank may not be able to make its payments. Against the background of the prevailing unease in the financial system, the Riksbank decided to grant Carnegie increased liquidity assistance in order to reduce the risk of serious disruptions to the financial system. The Riksbank is prepared to provide the liquidity that is needed to safeguard the stability of the financial system.
Why is Carnegie having problems now?
It is more difficult for Carnegie to obtain short-term loans because of the difficulties obtaining what is known as securities lending. In addition, increased collateral requirements for transactions on stock exchanges have made the situation more difficult for Carnegie. A portion of Carnegie's own financing is based on using securities as collateral.
How large of a loan is the Riksbank prepared to give to Carnegie?
The Riksbank has granted liquidity assistance of a maximum of SEK 5 billion. The liquidity assistance is a loan for which Carnegie is providing collateral. The company will pay the Riksbank the repo rate plus 1.5 percentage points for the portion of the loan that is used.
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Questions and answers published on 20 October
What is the Riksbank's view of the government's stability plan?
The Riksbank welcomes the government's stability plan.
It is also positive that the National Debt Office will be given a central role as the authority responsible for both the guarantee system and the stability fund, as well as for any capital injections for the credit institutions.
What will this entail for the operations of the Riksbank?
The fact that regulations are now in place which will facilitate the long-term credit supply for Swedish credit institutions and mitigate any potential increase in solvency problems should contribute to creating confidence. We will continue to supply the financial markets with both kronor and dollars as long as this is needed.
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Questions and answers published on 13 October
Why is the Riksbank issuing Riksbank Certificates?
This is a means of offering the market an opportunity to invest its money in safe assets. The Riksbank has over a short period of time supplied the Swedish financial markets with Swedish kronor to a total of around SEK 166 billion. This means that there is currently a surplus of Swedish kronor in the market. By buying the Certificates, the banks can invest their surplus funds in a security that has been issued by the Riksbank.
What is a Riksbank Certificate?
A Riksbank Certificate is in principle the same thing as a treasury bill, but has a shorter maturity. The Certificate is issued by the Riksbank at an interest rate that is equal to the repo rate.
How large is the issue of Riksbank Certificates?
There is a general limit of SEK 600 billion. The amount can be portioned out over time. The size of the amount issued on each occasion will be determined at that particular time.
How does the issue of Riksbank Certificates affect the monetary policy repo transactions?
The monetary policy repo transactions will now cease. Instead of loaning money at the repo rate, the Riksbank will be borrowing at the repo rate. One can say that the situation is reversed.
Who may buy these Riksbank Certificates?
The Riksbank’s monetary policy counterparties can buy these Certificates. They will be sold by auction in the form of volume, that is, one says how many one wants to buy. The interest rate is set in advance and is equal to the repo rate. The auction will be held on Tuesday 14 October and on the following day the payments will be made. The results of the issue of certificates will be published on the day after the auction.
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Questions and answers published on 9 October
Why is Kaupthing receiving billions in assistance from the Riksbank?
The Riksbank and Finansinspektionen (the Swedish Financial Supervisory Authority) consider Kaupthing Sverige AB to be solvent, but that the bank has liquidity problems. The Riksbank has therefore decided to give special liquidity assistance of up to five billion Swedish krona to Kaupthing Bank Sverige AB. This loan may be used to pay both depositors with accounts in the Icelandic bank Kaupthing Bank hf, Iceland, Swedish office (Kaupthing Edge) and depositors and other creditors of the Swedish bank Kaupthing Bank Sverige AB. The Icelandic central bank has provided the Icelandic bank Kaupthing Bank hf with liquidity support of EUR 500 million.
Are my savings safe in Kaupthing?
Deposits in the Swedish bank Kaupthing Bank Sverige AB are covered by the Swedish government deposit guarantee for up to SEK 500,000. Deposits in Kaupthing Bank hf, Iceland, Swedish office (Kaupthing Edge) are covered by the Icelandic deposit guarantee, which has an agreement with the Swedish government deposit guarantee to ensure that savers will have the same protection as savers in Swedish banks. The new rules that apply from 6 October 2008 mean that the Government can decide that the Swedish deposit guarantee will apply to the entire amount of the savings, up to SEK 500,000, if the Icelandic deposit guarantee is unable to pay.
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Questions and answers published on 8 October
Why have you cut the repo rate?
The global financial crisis is reinforcing the current slowdown in economic growth with diminished inflationary pressures as a result. Several central banks have today announced reductions in policy rates in a coordinated action to dampen the consequences of the ongoing financial crisis.
In what way will a reduction in the interest rate alleviate the problems on the financial markets?
The main aim of the rate cut is to mitigate the consequences of the financial crisis for the real economy, that is the economic effects for companies and households, not to solve the crisis on the financial markets. We have taken several other measures to do that.
Why is the cut as high as 0.50 percentage points?
Economic prospects have deteriorated significantly and this means that it is appropriate to adjust the repo rate a little more than we usually do.
What will happen with the interest rate path?
We will get back to the direction of the interest rate path following our next ordinary monetary policy meeting, which will take place on 22 October 2008.
Would you have reduced the interest rate if the other central banks had not done so?
When the situation is as uncertain as it is now we are constantly prepared to make quick decisions. This also applies to decisions to reduce the interest rate. But it is positive that this has been done jointly.
Will the credit that you have now decided on be enough or will there be more?
The Riksbank takes ongoing measures to facilitate the supply of credit and is prepared to supply the liquidity that is needed in the Swedish financial system. We follow developments closely.
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Questions and answers published on 8 October
Why is the Riksbank giving liquidity assistance to Kaupthing Bank Sverige AB?
Kaupthing Bank Sverige AB is a Swedish subsidiary to the Icelandic bank Kaupthing hf. The conditions in the Icelandic bank sector have recently made it difficult for the Swedish subsidiary to borrow money. This meant there was an impending risk that the bank would suffer serious liquidity problems. The Riksbank has therefore decided to grant liquidity assistance to Kaupthing Sverige to safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets.
Isn’t Kaupthing an Icelandic bank?
Kaupthing Bank Sverige AB is a Swedish bank and is under the supervision of Finansinspektionen, the Swedish Financial Supervisory Authority, although the owner is the Icelandic bank Kaupthing hf. It is natural that the Riksbank should take action here and not the Icelandic central bank.
Is Kaupthing Bank important to Sweden?
Kaupthing has a relatively small share of the market in Sweden and the aim of the Riksbank's actions is to avoid Kaupthing in Sweden suffering problems.
To which banks does the Riksbank supply liquidity assistance?
The Riksbank can assist banks suffering temporary liquidity problems, but which are essentially robust, that is solvent.
Do the Swedish taxpayers have to foot the bill?
No, when Kaupthing Bank Sverige AB borrows money from the Riksbank it has to provide collateral for the loan and pay interest to the Riksbank.
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Questions and answers published on 6 October
Why are you increasing today’s auction to SEK 100 billion?
The decision to raise the amount in today’s auction from SEK 60 billion to SEK 100 billion was taken as a preventive measure. The reason is that the international financial turbulence is clearly affecting Swedish banks and other financial market participants in Sweden. It is difficult for them to find financing that is not of a very short duration. If this development continues, there is a risk that it will have negative effects on the credit supply for companies and households in Sweden. The Riksbank has therefore decided to offer further loans.
Why do you intend to lend a further SEK 100 billion over six months on Wednesday?
The purpose is to increase access to loans with even longer maturities. The international financial turbulence has led to a deterioration in the functioning of the markets for long-term loans. This means that an increasingly large share of the Swedish bank's financing is much shorter-term than normal. In that the Riksbank lends money for a period of six months, the access to longer-term loans increases.
How do you view the Swedish Government’s actions?
Many countries are currently in the midst of a financial crisis that has repercussions throughout the global financial system. Now the financial markets in Sweden are also clearly affected by the uncertainty and lack of confidence, which thus also affects the Swedish banks and other financial market participants. We and other government agencies have therefore taken various actions, but for the same purpose, namely to prevent the international financial crisis from having excessively negative consequences of companies and households in Sweden.
What does it mean that the deposit guarantee is raised?
In 1996 the Swedish government introduced a guarantee covering SEK 250,000 for transaction accounts. The proposal to extend the deposit guarantee means that the amount is raised to SEK 500,000 and that it covers all types of deposits in accounts regardless of whether the savings are tied-up or can be withdrawn freely.
The extended deposit guarantee comes into force today, 6 October 2008.
See also the Government’s website, www.regeringen.se .
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Questions and answers published on 2 October
What does the decision imply?
It gives Swedish banks an opportunity of borrowing Swedish kronor, against collateral, from the Riksbank for a period of 3 months. The loans will be auctioned on two occasions: 6 and 27 October. On the first occasion a total of SEK 60 billion will be auctioned. The auction procedure determines the interest rate that banks will pay for these loans, except that the lowest acceptable rate is 25 basis points above the current repo rate.
Which banks have access to this loan facility?
The Riksbank’s monetary policy counterparties, that is, institutions that are entitled to utilise the Riksbank’s standing facilities. A total of 14 financial institutions have this entitlement.
Which collateral is eligible as security for 3-month loans?
The same collateral as is eligible in the RIX system.
Why is the Riksbank doing this?
During the autumn the international financial turbulence has clearly affected Sweden’s financial market. Swedish banks have adequate capital and their loan losses are low but the markets for long-term credit are functioning increasingly poorly. Continued difficulties for bank funding would also have negative consequences for Swedish firms and households. That is why the Riksdag decided today to provide banks with an opportunity of borrowing Swedish kronor and thereby increase their possibilities of borrowing for the longer term.
Have the problems in Sweden become worse?
It is evident that even Swedish banks are having greater difficulties in obtaining long-term funds. At present, almost all funding is arranged on very short terms. Any longer loans that are available at all are very expensive. The banks’ funding difficulties impede the supply of credit to firms and households. If this development continues, the increased cost of borrowing by firms and households in Sweden could have major consequences.
How can you say that the situation is stable now that so much is happening in financial markets which shows that it is far from stable?
The financial position of our Swedish banks is very sound. Their capital cover is high and their loan losses are low. The unrest and the problems in Sweden have their origins abroad. Thus, the financial crisis has not arisen in Sweden.
Are there reasons for starting to worry about the Swedish banks?
Today there are no grounds for believing that any of the Swedish banks will have serious problems. Our Swedish banks have had very high profits in recent years and accordingly have comfortable margins for managing the unrest and the costs it entails. Moreover, the opportunity which banks have now been given of borrowing Swedish kronor for a longer period will help the markets to function better.
Will the Riksbank now lower its repo rate?
The major problem in credit markets at present is not that our policy rate (the repo rate) is too high. Obtaining long-term credit is difficult in general, regardless of the interest rate. Market rates have shot up relative to our repo rate. What we are doing now is intended to lessen the problems with the supply of credit.
Our next monetary policy meeting is due in three weeks’ time. An overall assessment of the economic situation will then be made; at present it is not possible to tell what this will be.
How do you assess the situation right now?
Many countries are currently in the throes of a financial crisis that is having repercussions throughout the global financial system. In Sweden, too, financial markets, Swedish banks and other financial participants are clearly affected by uncertainty and a lack of confidence. We and other authorities have therefore taken a variety of measures to enhance the availability of credit in Swedish kronor as well as in US dollars.
Does this imply a new assessment of Swedish banks?
No. We believe and have consistently believed that the solvency of our Swedish banks is sound (assets exceed liabilities). Our Swedish banks are stable and are in a good position to cope with the increased costs associated with the international financial unrest. There are good margins between the assets of Swedish banks and their liabilities.
Do you no longer think that stability is satisfactory?
Not at all. The solvency of our banks is sound; capital cover is high and loan losses are low. It follows that financial stability continues to be satisfactory. At the same time, we are keeping a close eye on developments and see that the financial market and Swedish banks are now more clearly affected by the international financial unrest.
In what ways do you see that the financial crisis is now clearly affecting the financial market and the Swedish banks?
Today it is very difficult, internationally as well as in Sweden, for banks to obtain funds with longer maturities. One consequence which leads to increased costs for the banks is that interbank rates (the interest that banks charge for lending to other banks) have recently becoming even higher. At the same time it is important to say that Swedish banks are in a good position to cope with the increased costs associated with the international financial unrest. There are good margins between the assets of Swedish banks and their liabilities.
What are the signs of a lack of confidence?
Borrowing at longer maturities has become even more difficult, internationally as well as in Sweden. This is also something that is affecting Swedish banks more than before. On the plus side it can be noted that Swedish banks are still prepared to lend to each other, though only for very short terms just at present; the situation in many other countries is more troublesome. This is not a question of a shortage of funds; instead it is entirely a matter of the prevailing uncertainty and the associated lack of confidence between creditors and borrowers in the financial markets here in Sweden as well as internationally.
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Questions and answers published on 30 September
Why is the Riksbank lending dollars?
The Riksbank has decided to lend dollars to Swedish banks to deal with the strained situation in the market for funding in US dollars. Together with the measures taken by other central banks, this should lead to better liquidity in the financial markets globally.
How much will the Riksbank be lending in USD?
The Riksbank decided on 29 September to offer the Swedish banks the possibility to borrow a maximum of USD 22 billion. This will occur on two occasions. On the first occasion, 1 October, the Riksbank will lend a maximum of USD 7 billion. On the second occasion, 22 October, the Riksbank will offer the Swedish banks the opportunity to borrow a maximum of USD 15 billion. The latter loan will run over the turn of the year. More information on the exact design of the loans can be found on the Riksbank’s website, www.riksbank.se, see below.
Will you be lending more US dollars to Swedish banks?
No, there are no plans to do so at present. The Riksbank is closely following developments and can – if the situation requires – implement a number of different measures. The lending facility now decided on amounts to a total of USD 22 billion. The swap facility between the Riksbank and the US central bank, the Federal Reserve, covers a total of USD 30 billion. In addition, the Riksbank has a foreign currency reserve.
Why are you doing this now?
In times of uncertainty and financial crisis it is important that the central banks cooperate to ensure that the global financial systems function smoothly. The timing of this type of coordinated action which was made on 29 September is not something that the Riksbank can decide alone, it is decided in consultation with the US Federal Reserve and the other participating central banks.
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Questions and answers published on 26 September
What impact will the economic slowdown in the Baltic countries have on the Swedish banks?
After several years of dramatic economic expansion and signs of overheating, growth in the Baltic countries is now slowing down rapidly. In such circumstances, the credit losses of the banks generally increase and their earnings decline. However, a slowdown in the economies of the Baltic countries has been expected and the banks have included this in their forecasts of earnings and credit losses.
The two banks in Sweden that have lent most money in the Baltic countries are Swedbank and SEB. Tests conducted by the Riksbank show that both SEB and Swedbank would be able to cope with a sharp downturn in the Baltic countries and that the resilience of the banks is satisfactory. This applies even if we assume a situation in which there are very high credit losses and a dramatic fall in earnings.
What do you mean when you say that the stability of the financial system is satisfactory?
The Riksbank, as always, bases its assessment on an analysis of the four major Swedish banks. The Swedish banks are financially robust with considerable equity, good profitability and limited credit losses. Our assessment is that there is a high degree of resilience to the international turmoil that has prevailed for some time now.
In recent weeks the international markets where the banks finance themselves by taking bond loans have functioned less and less effectively. This is the case throughout the world and is due to the developments in the USA. Borrowing has become more expensive and more difficult. The Swedish banks have also been affected by this, although to a lesser extent than in many other parts of the world. The fact that the international markets have been functioning ineffectively does not, however, affect the Riksbank's assessment that the stability of the financial system in Sweden is satisfactory. The Swedish banks are highly resilient to disruptions of this type.
Why is the market functioning less effectively than normal?
As a result of the crisis in the US financial system, international investors and bankers are uncertain about what may happen in the near future. They do not know how much money they will need to meet their own commitments. They are therefore choosing to hold on to their money instead of lending it as they usually do in normal circumstances. Even if they do lend, they only lend small sums at high prices. This affects the banks and other financial companies whose operations are dependent on regular borrowing.
Why is the housing bond market functioning less effectively than normal?
When investors are worried and cautious, many of them prefer to buy secured securities and sell those with a higher level of risk, even though the latter may provide a higher return. They therefore buy short government securities, for example treasury bills, and sell securities that are less liquid and associated with a higher risk. In the USA, housing bonds have been sold to a great extent as, following the crisis on the US housing market, they are believed to entail a particularly high risk.
In Sweden too, there has been a high demand for short government securities and a corresponding increase in the supply of housing bonds. This is despite the fact that the creditworthiness of the Swedish housing bonds (so called covered bonds) is very high and the fact that they normally have an interest rate that only marginally exceeds the interest rate for government securities with an equivalent duration. In order to alleviate the problems in Sweden, the National Debt Office has conducted a number of auctions to increase the supply of treasury bills and has also repurchased an equivalent number of housing bonds. For the same reason, the Riksbank has decided to accept a higher percentage of covered bonds as collateral in the RIX-system.
The Swedish market for housing bonds has remained open throughout the financial turmoil. This is not the case on many other international markets. The Swedish market participants have shouldered a great responsibility in this respect.
What is a covered bond?
Covered bonds are bonds issued under special legislation, where the credit provider is more protected than in the case of ordinary bonds. Collateral for the bonds is provided by a defined number of Swedish (not foreign) mortgages. The mortgage institutions are obliged to check that all the mortgages included are healthy in the sense that the mortgage payments are being met faultlessly. Otherwise the mortgages must be replaced by others where the interest payments and amortisations are being made according to plan. Finansinspektionen supervises that this is done correctly. The value of the mortgages included should also exceed the value of the bonds by a broad margin. This means that there is a significant buffer here. If anything should happen to the mortgage institute that has issued the mortgages, the holders of the bonds are entitled to their share of the collateral volume. This is not available to the other creditors of the mortgage institute.
It must be said that the Swedish covered bonds are among the most creditworthy in the world. It is hard to believe that the current pricing of these bonds reflects the long-term valuation of their credit risk.
Do we have a financial crisis in Sweden?
No, there is no financial crisis in Sweden but the Swedish banks and the Swedish markets have of course been affected by the international financial crisis that has now prevailed for more than a year. The Swedish banks are still earning money and making profits.
Banks, just like many households, need to borrow money in various ways and for different durations in order to manage all their payments and make sure that they can meet the demand for loans from households and companies.
The Swedish banks, just like all the other banks throughout the world, have been affected above all by the fact that it has become more difficult to borrow money for long periods on the international markets. Those who normally lend money on the international markets have become more uncertain and therefore prefer to invest in secured securities. This has made it more expensive for the banks to borrow money as there are fewer who want to lend money to all the banks throughout the world. But none of the Swedish banks have or have had liquidity problems in the way that banks in other countries have had.
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Questions and answers published on 24 September
Why has the Riksbank been given the possibility to borrow USD 10 billion from the Federal Reserve, the central bank in the United States?
Together with the central banks in Denmark, Norway and Australia, the Riksbank has set up a swap facility (swap agreement) with the US central bank, the Federal Reserve. A swap agreement is an agreement in which two parties agree to first buy and then, at a later date, sell back the same currency. Both the purchase and the sale are decided on at the same time, which means that a swap agreement can also be compared to a currency loan. It can therefore be said that the agreement with the US central bank means that the Riksbank will be able to borrow US dollars in exchange for the Federal Reserve borrowing Swedish kronor. The agreement does not mean that any transactions will be carried out today but simply that the Riksbank and the Federal Reserve have agreed that they can conduct such transactions, and on how any such transactions would be carried out. The agreement is valid until 30 January 2009.
Do the Swedish banks need dollars?
No, our assessment is that this is not the case at the moment. The agreement with the Federal Reserve is a preventive measure that gives the Riksbank the possibility to borrow dollars from the US central bank if the need arises. It should also be pointed that the Riksbank has a considerable currency reserve, so this agreement is not the only way for the Riksbank to acquire US dollars.
Why has the Riksbank decided to change the collateral requirements for credit in the RIX system?
When the banks (and certain other large financial agents) have to make payments to each other they use the Riksbank's RIX system. Payments made by private individuals and companies that go from an account in one bank to an account in another bank are also grouped together and finally paid in the RIX system. This system therefore acts as the central point of the Swedish payment system and is thus of central importance to the continued smooth running of the Swedish economy. The Riksbank decided to make it easier for the banks to make their own payments, and make payments on behalf of others, in the RIX system. This will be done by increasing the opportunities for the banks to borrow from the Riksbank during the day. The banks and the other participants in the RIX system can now to a greater extent use their own covered bonds, or those issued by an institution with close links, as collateral in the system. Covered bonds are bonds with a special status, where the credit provider is more protected than in the case of ordinary bonds. The permitted percentage of these covered bonds was increased from 25 to 75 per cent. In simple terms this means that the participants in the RIX system will have a little more collateral to borrow against if necessary.
Why is the Riksbank doing this now?
At the end of last week, it became apparent that the Swedish financial markets were clearly being affected by the global financial unrest. For example, a shortage of treasury bills arose and the National Debt Office, following consultation with the Riksbank, took measures to increase the supply of treasury bills. Given the ongoing financial unrest, we also now have reason to examine whether certain forms of collateral can be accepted in the payment system to a greater extent in order to increase access to credit in the system and thus make it easier for the banks to make their own and others' payments in an effective way.
The decision will come into force immediately. Does this mean that the banks are facing acute problems?
No, our assessment is that financial stability is still satisfactory, that the banks' earnings are high and that the banks are solvent. The fact that the Swedish financial market is now being more noticeably affected by the international financial turbulence does not therefore mean that the Riksbank has changed its assessment of financial stability. The decision was made for preventive reasons to make it easier for the banks to make their own and others' payments and thus help the financial markets to run smoothly. It is therefore natural for the decision to come into force immediately as it may mean that the banks will find it easier to pledge collateral to the Riksbank. So far, however, we have not seen any signs that the banks have too little collateral with the Riksbank.
Isn't changing the collateral requirements a rather dramatic measure?
No, it is not dramatic at all. The Riksbank reviews its collateral requirements from time to time and the most recent change was made in December last year. This is when the possibility to use this type of collateral in the system at all was first introduced. Reviews are conducted for various reasons. One reason may be that other central banks have changed their requirements and the Riksbank feels that it does not want to create significant differences between different central banks. Many central banks now accept covered bonds to 100 per cent. Another reason may be that the Riksbank discovers that the regulations are having unintended effects. Or, as in this case - when on our own initiative and for preventive reasons, we want to increase access to credit in the payment system in the wake of the international financial turbulence; all with the aim of making it easier for payments to pass through the system smoothly.
Who has ultimate responsibility if a bank collapses?
Today, there is very little risk that one of our Swedish banks will face the threat of bankruptcy. The banks are making good profits and are solvent. Bankruptcy is therefore not a probable scenario. If a bank should nevertheless become insolvent then this is a matter that the government would have to decide on. If a bank becomes bankrupt the deposit guarantee applies. The Riksbank has the task of promoting financial stability and can help to handle financing problems by providing emergency liquidity assistance.
In what situation would the Riksbank contribute liquidity to banks and other financial companies?
This is a hypothetical question and the Riksbank does not comment on how it would act in various situations. It is important to remember, however, that the banks can borrow money from the Riksbank overnight at an interest rate that is 0.75 percentage points above the repo rate.
In order to safeguard the stability of the financial system, the Riksbank can, under exceptional circumstances, also grant emergency liquidity assistance to banks and other financial companies that are creditworthy and under the supervision of Finansinspektionen. The Riksbank can therefore act as the lender of last resort. This means that the Riksbank can contribute liquidity to a bank that is solvent but has liquidity problems if the situation could potentially threaten the ability of the financial system to function.
What role does the Riksbank play with regard to financial stability?
The Riksdag has given the Riksbank the task of “promoting a safe and efficient payment system”. It is important that the financial system is stable for many reasons, as it fulfils a number of functions of fundamental importance to society. The financial system is a prerequisite for people and companies being able to make and receive payments in an effective way. Those who wish to do so can also save through the financial system – money that others can then borrow. It is also possible to get help through the financial system in managing risks that may arise in the financial markets.
