Ingves: Coming stronger out of a crisis: lessons from Sweden
Governor Stefan Ingves gave a speech on Wednesday at the Brussels Economic Forum. He spoke about the impact of the recent financial crisis on the Swedish economy and how a number of factors affected the development of the crisis in Sweden. He noted that the sharp decline and subsequent recovery in GDP was in part due to the fact that Sweden is a small, open economy and was therefore strongly affected by the decline and recovery in global trade relative to other countries. In addition, Sweden was able to recover strongly from the crisis as it had strong public finances going into the crisis. The sound public finances in Sweden were in part due to the fiscal policy measures put in place in response to the financial crisis in the early 1990s.
Mr Ingves also highlighted a number of vulnerabilities which could have increased the severity and length of the downturn in Sweden. The major Swedish banks heavy reliance on international funding meant they had liquidity problems in the crisis that had to be resolved using extraordinary loans from the Riksbank and the same banks were exposed to credit losses through their activities in the Baltic region. These vulnerabilities were not spotted or dealt with sufficiently in the build-up to the crisis. As a result, Mr Ingves argued that national authorities need to put macro-prudential policy frameworks in place. However, there are a number of challenges to putting an effective framework in place including handling the interaction of macro-prudential and monetary policy and dealing with cross-border issues. He also argued that macro-prudential policy should be supplemented by sound crisis resolution regimes. Resolution regimes are important as they provide a useful guide and provide the legal power to authorities in order to deal with failing banks.
Mr Ingves also summarized the ongoing work in Sweden on policy reform in response to the recent crisis. This includes the implementation of the new capital and liquidity rules included in Basel III and the review by the Financial Crisis Committee on the current regulatory framework and the handling of the crisis. It was argued that it is important that regulatory and institutional reforms capture the key lessons from the crisis so they are not quickly forgotten. He summarized by saying three factors are vital for mitigating future crises: fiscal sustainability, stable prices and sound financial stability policies.
Read the speech in full in the PDF below.
