Svante Öberg: My views on the Riksbank and financial stability
Speech by Mr Svante Öberg, First Deputy Governor of the Sveriges Riksbank, at a meeting
with the Swedish Bankers' Association, Stockholm, 7 June 2011.
* * *
My term of office as Deputy Governor of the Riksbank is drawing to a close and I have
announced that I will not be available for a new period of office. After almost six years on the
Executive Board of the Riksbank, it feels natural for me to now reflect on the experiences we
have had and what these may mean for the future. Earlier in the spring, I presented my view
of the Riksbank and monetary policy. And now it is the turn of our other important main task,
namely financial stability.
In particular, there are three issues I would like to argue for:

The Riksbank and Finansinspektionen (the Swedish Financial Supervisory
Authority) should be merged

The Governor's role should be strengthened

The Riksbank should have a sufficient foreign currency reserve.
I will begin my speech by looking back on the years prior to the most recent financial crisis,
the risks we saw - and the ones we didn't see. I will continue by describing the financial
crisis and the measures we adopted during the crisis. I will then address the future and the
work that is underway as regards reforming the framework of the financial sector. Finally, I
will take up the three issues I have just mentioned and explain the reasons for my views on
these issues. For the sake of clarity, let me also add that the opinions I will be expressing in
this speech are my own. They are not necessarily shared by my colleagues in the Executive
Board of the Riksbank.
The years prior to the financial crisis
When I first arrived at the Riksbank, I did not suspect that we were about to experience one
of the worst international financial crises of our times. I had been through two previous
crises. The first of these was the deep recession at the end of the 1970s and start of the
1980s, when, through a series of devaluations, Sweden attempted to restore the
competitiveness it had lost due to the severe price and wage inflation of the 1970s. The
second was the crisis we experienced at the start of the 1990s. This was a fairly typical
financial crisis, starting with the deregulation of the credit market and leading to a banking
crisis, a deep recession and large public finance deficits.
The Riksbank had built up its analytical capacity
Its experiences in the Swedish banking crisis at the start of the 1990s had led the Riksbank
to build up its analytical capacity before my time at the bank started. In 1997, the Riksbank
started to publish a Financial Stability Report twice per year. This describes our assessment
of the stability of the financial system, as well as various risks and threats to this stability.
From an international perspective, the Riksbank's work on stability analysis has been at the
cutting edge.1 We were the first central bank in the world to publish a stability report, and we
were also among the first to carry out stress tests describing the banks' resilience to various
types of shock.2
Assessing the banks' credit risk, which is to say the risk that the banks would not recover the
money they had lent, was an important part of this analysis work. It was just this kind of risk
that had led to such large losses for the banks in the banking crisis at the start of the 1990s.
Consequently, the risks we emphasised in the stability reports were primarily associated with
credit risk.
We warned of the risks but missed the one that would give us problems
In the years leading up to the financial crisis, we made overall assessments along the lines of
"financial stability in Sweden is satisfactory" (Financial Stability Report, June 2008). The four
Swedish major banks (Handelsbanken, Nordea, SEB and Swedbank) were profitable and
hade enough capital to withstand possible shocks. However, we also pointed out risks,
sharpening our tone when the risks became more apparent, just before the crisis.
One risk we emphasised at that point was that of overheating in the Baltic countries. Two of
the Swedish banks had large and growing operations in these countries, meaning that a
sudden slowdown in the economies of these countries could have led to significant loan
losses for the Swedish banks. In particular, we analysed the banks' resilience towards a
sudden economic downturn in the Baltic countries. The stress tests we conducted indicated
that the banks had enough capital to cope with such a development.
Another risk we emphasised before the crisis was the rapid rates of increase in household
indebtedness and in housing prices. One repeated statement was that we did not regard this
as being an urgent problem, but that the development was not sustainable in the longer term.
At this point, we could observe that housing prices and household indebtedness had
increased by about 150 per cent over a ten-year period. At the same time, households'
disposable incomes had only increased by about 50 per cent. There may indeed be reasons
for household debt to increase significantly faster than income for a period, but, over the
longer term, this is not sustainable.
A third risk we emphasised was that the price of risk was very low in a historical perspective.
The low risk premiums could indicate that the investors had not received sufficient
compensation for the risk they undertook in the purchase of various types of assets. Sudden
price adjustments could result in many investors simultaneously wishing to rebalance their
portfolios, for example by divesting higher-risk assets in favour of lower-risk ones. In turn,
this could create additional turbulence.
On the other hand, one risk that we did not foresee was the funding problems that the banks
would face during the crisis. We had certainly emphasised that the Swedish banks' unusually
large dependence on market funding was making the banking system vulnerable. But it came
as a surprise to find that the financial markets would be affected to such an extent that the
banks would have to borrow extensively from the Riksbank to manage their funding needs.
The financial crisis
The financial crisis hit Europe with full force in September 2008, when the US investment
bank Lehman Brothers filed for bankruptcy. The background to the crisis is well-known, so I
will not go into it here. The collapse of Lehman Brothers led to the financial markets ceasing
to function normally. Certain markets did not function at all. The banks became unwilling to
lend to one another, which, among other effects, manifested itself in the steep increase of the
interest rates that the banks had to pay when they borrowed from one another. (Figure 1)
Figure 1
Ted spread
Difference between interbank rate and treasury bill,
3 month maturity, basis points
Sources: Ecowin and Bloomberg.
The Swedish banks were quickly drawn into the crisis in the autumn of 2008. They certainly
did not have any great exposures towards the markets and institutions that were worst
impacted. But they were still affected by the global shortage of confidence. The Swedish
financial markets also functioned much less efficiently than normal. Two factors exacerbated
the problems for the Swedish banks: the large degree of market funding and the high
exposure towards the Baltic countries.
More than half of the banks' funding consists of borrowing on the financial markets and less
than half consists of deposits from the public. Furthermore, a substantial share of the banks'
funding is place in foreign currency. In conjunction with the crisis, a shortage of dollars arose
around the world and, when this shortage became acute, the Swedish banks were also
affected. They then faced problems in obtaining funding, particularly with longer times to
maturity. These problems rapidly became serious. (Figure 2)
The banks' funding December 2010
Per cent
Source: The four major banks' reports and the Riksbank.
At the same time, the Swedish banks' exposures towards the Baltic countries became
increasingly onerous. The global financial crisis became the factor to trigger an economic
crisis in the Baltic countries. Investors saw the Baltic as a high-risk region where the
devaluation of the currencies was also expected. Knowledge of these risks made
international investors increasingly unwilling to lend money to Swedish banks. Even the
Swedish banks that did not have any lending activities in the Baltic were affected by this, to a
certain extent.
The Riksbank's measures dampened the negative effects
When the crisis had finally struck with full power, we acted rapidly and forcefully. Over three
months, the Riksbank lent an amount corresponding to about SEK 500 billion to the banks.
This meant that the Riksbank's balance sheet increased from about SEK 200 billion to about
SEK 700 billion. We acted in our role as lender of last resort.3 All lending took place against
collateral. So as to avoid restricting the banks' opportunities to borrow, we eased the
regulations for collateral slightly. Among other changes, we accepted more types of security
than previously. However, these new types of collateral were also of very high quality. To
make it possible for several institutions to use certain of the Riksbank's lending facilities, we
also decided to increase the number of counterparties. (Figure 3)
The Riksbank's lending
SEK, billions
Source: The Riksbank.
We also provided special liquidity assistance to two smaller banks. When the Icelandic bank
Kaupthing was impacted by the problems in Iceland, the Riksbank provided its Swedish
subsidiary with liquidity assistance. Carnegie Investment Bank also received liquidity
assistance when it encountered problems with its funding shortly thereafter. It was against
this background of unease on the financial markets and the insufficient legislation we had at
that point for managing banks in distress that the Riksbank made the assessment that
defaults by any of the banks could give rise to serious problems for the financial system.
Under other circumstances, this assessment would probably have been different.
The Riksbank was also very active in the international cooperation to strengthen financial
stability in our neighbouring countries. Together with the central banks of Denmark and
Norway, we entered into a swap agreement with Iceland's central bank and, together with
Denmark's central bank, we entered a swap agreement with Latvia's central bank while
awaiting support from the International Monetary Fund (IMF). The Riksbank also entered into
a swap agreement with Estonia's central bank. In addition, the Riksbank contributed towards
strengthening the IMF's lending capacity. Sweden's commitments to the IMF increased
heavily during the crisis and now amount to a maximum of over SEK 100 billion. In addition,
the Riksbank entered into swap agreements with the central banks of the United States and
the euro area to increase our access to dollars and euros. I will return to this later.
In parallel with our liquidity assistance measures, we quickly reorganised our monetary
policy. The repo rate was lowered from 4.75 per cent in September 2008 to 0.25 per cent by
July 2009. Furthermore, our assessment in July 2009 was that the repo rate would need to
be kept at this low level for slightly more than one year. To emphasise this and also to hold
down the longer interest rates charged to households and companies, on three occasions
the Riksbank offered one-year loans of up to SEK 100 billion at interest rates of
0.25 per cent. All in all, the Riksbank earned SEK 2.3 billion on the measures adopted during
the crisis due to the interest rate differential between deposits and loans. Our primary
intention was not to earn money through our measures, but, at the same time, it was
important not to subsidise the banking system with public funds. (Figure 4)
The repo rate
Percentage points
Source: The Riksbank.
Other authorities also acted to safeguard stability
The Riksbank was not alone in adopting measures to safeguard the stability of the Swedish
financial markets. Other Swedish authorities also intervened to counter the effects of the
financial crisis. The Swedish National Debt Office issued treasury bills to meet the demand
that had arisen for liquid assets. Finansinspektionen amended the regulations for financial
companies (to make it easier for them to strengthen their capital bases) and for insurance
companies (to reduce shocks to the bond markets). The government and the Riksdag
decided to extend the deposit guarantee scheme and to introduce a comprehensive stability
plan. Important elements in the stability plan were a guarantee programme for the funding of
banks and mortgage institutions, a stability fund, and principles for the management of
capital contributions to credit institutions. The Swedish National Debt Office was given a
central role in this work as responsible authority for the new guarantee system, the stability
fund, and any capital contributions.
The extraordinary measures were phased out
The Swedish economy made a strong recovery in 2010 and the banks no longer needed to
borrow from the Riksbank to manage their funding needs. The Riksbank thus phased out its
comprehensive lending to the banks during the summer and autumn of 2010. This phasing
out was comparatively simple because, unlike many other central banks, we had not
purchased any securities. When the loans expired, the banks repaid their loans, with the
whole process taking place comparatively smoothly. The repo rate started to be raised in
July 2010. It has now been raised at six monetary policy meetings in a row, to its current
level of 1.75 per cent, and we expect that it will continue to be successively raised to a more
normal level.
Two conclusions
Now, after the financial crisis, I think we can draw two conclusions on our actions in
conjunction with the crisis.
Firstly, we did not see the crisis coming. As I mentioned previously, we wrote and talked
about the Swedish banks' increasing risk-taking in the Baltic, the rapid rates of increase in
household indebtedness and in housing prices, and the low price of risk. We also wrote
about the problems on the US mortgage market. But the crisis hit us from an unexpected
direction. We hadn't expected that the banks would face such comprehensive problems in
obtaining funding on the markets.
Secondly, the Riksbank reacted quickly and forcefully once the crisis hit Sweden. The
comprehensive lending to the banks, combined with the rapid and forceful lowering of the
repo rate, contributed to mitigating the impact of the crisis on the Swedish economy. One
fortunate circumstance was that lending to the banks is what a central bank is always
assumed to be able to do in its role as lender of last resort. The measures we needed to
undertake were thus within the framework of our remit. What was unusual this time was that
the Riksbank also needed to provide the banks with funding in dollars and to provide other
central banks with euros. I will return to this later.
The future
The financial crisis led to a global realisation of the need to reform the regulations governing
the financial sector. I will now give an overall description of some of the work currently
underway to reform these regulations. I will start with the international work, continue with the
Swedish regulations and then address our internal work at the Riksbank.
Wide-ranging international work on the prevention of new financial crises
At present, comprehensive international work is underway to adjust the framework of the
financial sector. The aim is to strengthen resilience towards similar financial crises in the
future. This work is being carried out by several different international bodies, for example
the G20,4 the IMF, the FSB,5 the Basel Committee and the European Union. The first three of
these are primarily focused on negotiation and agreements dealing with the direction of work,
while the latter two are focused on the formulation of regulations and decisions concerning
these. The Basel Committee has agreed to tighten the regulations for banks. The banks will
be required to maintain more and better capital than under previous regulations. One
important element of the new regulations is that the banks ought to build up capital in good
times that they can use to deal with losses in bad times. The banks will also be forced to
improve their liquidity through longer and more stable borrowing.
The European Union has established a new authority, the European Systemic Risk Board
(ESRB) and three new supervisory authorities, the European Banking Authority (EBA), the
European Insurance and Occupational Pensions authority (EIOPA) and the European
Securities and Markets Authority (ESMA). The ESRB has the task of preventing crises in the
financial system. Its work aims to identify risks to the stability of the financial system and,
when necessary, to issue warnings or recommendations.6 One important element in the
4
The G20 (eng. Group of Twenty) is a group of nineteen major economies and the Europeiska unionen.
Sverige is not included in the G20, but participates indirectly in the group's work through its membership of the
EU.
5
Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the
global financial system. FSB was established in 2009 and replaced the Financial Stability Forum. The board
includes all countries in the G20, including the EU, and Hong Kong, Netherlands, Singapore, Spain,
Switzerland and a number of international organizations and groups.
6
The General Board of the ESRB consists of the central bank governors and the heads of the supervisory
authorities in the European Union. The Riksbank participates actively in the ESRB's work. The Governor of
the Riksbank, Stefan Ingves, has been appointed chairman in one of the two advisory bodies in the ESRB, the
Advisory Technical Committee. This means that he is also included in the Steering Committee that prepares
the General Board's meetings and monitors the ESRB's current work, and in the Advisory Scientific
Committee, which is the other advisory body.
continued financial stability work is formed by stress tests of the banks. During the financial
crisis, both the US and European authorities implemented and reported such stress tests.
Their aims were to increase transparency concerning the banks' risks, to increase
confidence in the sector, and to push the banks into increasing their capital bases. The next
European stress test will be reported this June.
The Swedish regulations for the financial sector need to be strengthened
The Swedish regulations for the financial sector also need to be strengthened. Consequently,
the Executive Board and General Council of the Riksbank have, in a communication to the
Riksdag, urged the Riksdag to assign the government to carry out a thorough review of the
regulations.7 The starting point for this is that we need a cohesive and effective regulatory
framework that allows us to better prevent and manage crises in the future.
Firstly, the mandates and roles of the authorities involved are unclear. As the regulations are
currently written, responsibility for financial stability is shared by the government,
Finansinspektionen, the Riksbank and the Swedish National Debt Office. But it is not
specified sufficiently clearly who is to do what or how the exchange of information and
knowledge is to take place. Not least, the Riksbank's responsibility for financial stability
should be clarified.
Secondly, we lack tools to prevent crises, a weakness that is partially connected with the
unclear allocation of roles. Although Finansinspektionen has the task of promoting stability
and efficiency in the financial system and has tools that can be used to influence the banks'
behaviour, it does not have the explicit task of counteracting macroeconomic risks. At the
Riksbank, we have interpreted the present laws relatively broadly to mean that we are to
safeguard the stability of the financial system, while, at the same time, we lack effective tools
to do this.
Thirdly, we need a new regulatory framework specifying how the central government is to
handle banks in crisis. Today, banks that cannot pay their debts are declared bankrupt - just
like any other company in the same situation. This is often a lengthy process and bank
customers may have to wait several years to get their money back. Furthermore, it is not
enough for each country to have its own solution. Banks are increasingly working across
national borders.
The government and Riksdag must also decide whether Sweden should have the same
regulations for the financial sector as other countries. Financial crises can lead to very high
economic costs and there are a number of risks that are specific to Swedish financial
stability, not the least of these being the Swedish banks' great dependence on obtaining
funding on the international capital markets. At the same time, we know that the
implementation phase of the new banking regulations will be lengthy. Consequently, there is
reason for Sweden both to proceed more rapidly than planned and to introduce stricter
regulations than required by Basel III.
The Riksbank's work with financial stability
Perhaps the most important lesson of the financial crisis is that we must take a broader
approach to understanding and analysing systemic risks. Even if, before the crisis, we and
other central banks pointed out individual factors as possible threats to financial stability,
nobody really succeeded in predicting the situation that then arose. The traditional approach
of analysing institutions, markets and infrastructure separately was not sufficient. During the
crisis, problems in individual institutions and markets rapidly spread and had far-reaching
consequences for completely different markets in other parts of the world.
The financial crisis also revealed the strong link between the Riksbank's two main
assignments - monetary policy and financial stability. Without stability in the financial system,
it is difficult to conduct monetary policy, at the same time as price stability promotes financial
stability. Normally, we use different types of measure for each of these two tasks. However,
during the crisis, we needed to use both types of measure. The crisis also showed how
important it is that the two departments handling financial stability and monetary policy work
closely together. The prevention and management of systemic risks requires both
macroeconomic competence and knowledge of the financial system.
Stress tests will continue to form a central part of our work. In the autumn of 2010, we carried
out tests of the Swedish banks' liquidity for the first time. These showed that the Swedish
banks were exposed to greater liquidity risks than the European banks against which we
compared them. The greatest problem for the Swedish banks during the financial crisis was
not loan losses, of course, but a shortage of liquidity. The crisis has also shown that the
Riksbank's fundamental task as lender of last resort can no longer be limited to lending in
kronor. Consequently, stress tests of liquidity need to be developed so that they also show
what may happen if the banks are unable to obtain funding in foreign currency.
We also need to think through how the Riksbank could achieve greater impact for its
analyses and assessments. So far, we have primarily relied on what we usually call moral
suasion, which is to say making an impact through careful analyses and strong arguments.
But, despite the risks concerning developments in the Baltic that we drew attention to before
the crisis, too little was done to prevent the Swedish banks' rapid credit expansion in these
countries. Last autumn, we took a step in the direction of becoming clearer in our
communication by making direct recommendations in the Financial Stability Report to
participants in the financial system. It remains to be seen whether this will lead to better
results.
Three possible changes
After my nearly six years at the Riksbank, I think that there is reason for Sweden to think
through three changes that may increase the possibilities of preventing and managing
financial crises. Ahead of the investigations and deliberations regarding amendments to the
Swedish regulations that have just started, I shall here present my opinions on these three
points. At the same time, I would like to repeat that these are just my personal opinions and
are not necessarily shared by my colleagues on the Executive Board. These three points are
the ones I mentioned in my introduction:

The Riksbank and Finansinspektionen should be merged

The Governor's role should be strengthened

The Riksbank should have a sufficient foreign currency reserve.
The Riksbank and Finansinspektionen should be merged
One of the issues we highlighted in our communication to the Riksdag was the allocation of
roles between the bodies sharing responsibility for financial stability: the government,
Finansinspektionen, the Riksbank and the Swedish National Debt Office. Personally, I think
there is good reason to merge the Riksbank and Finansinspektionen.8
Firstly, a merger of the Riksbank and Finansinspektionen would give us an authority capable
of acting more forcefully to safeguard the stability of the financial system. Under the present
system, the Riksbank can only issue recommendations, while Finansinspektionen can issue
regulations and general guidelines. Through a merger, the recommendations that the
Riksbank issues in its Financial Stability Reports, which have no binding effect, could instead
be formulated as binding regulations.9
Secondly, and more importantly, there must be cyclical tools in the new regulations taking
form, such as capital requirements varying over time. Both these and interest rate decisions
influence the expansion of credit and thus growth and inflation. If these new tools are to be
handled by Finansinspektionen, this would give us, in practice, two central banks, one
subject to the government and the other independent of political bodies. A merger would
allow us to avoid having two central banks which, under unfortunate circumstances, could be
pulled in different directions.
Thirdly, there is the matter of macroeconomic expertise. As I mentioned earlier, both
macroeconomic expertise and knowledge of the financial system are needed to manage
systemic risks. Supervisory authorities are traditionally focused on monitoring individual
institutions and do not normally have the former type of expertise to any great extent. It may
also be difficult for a supervisory authority to build up and maintain a level of macroeconomic
expertise sufficient to make a difference in financial crises that only occur every ten or twenty
years. But such expertise always has to exist at the Riksbank.
Fourthly, there is the matter of resources. For many years, Finansinspektionen has had too
few resources to carry out its tasks. This has been pointed out by the IMF most recently. A
merger would probably mean that more resources would be allocated for
Finansinspektionen's tasks. Merging the authorities would also allow us to avoid duplicating
work and to achieve synergies such as a joint macroeconomic analysis and shared support
functions and databases. It should also be noted that increased resources for this activity
would not have to burden the taxpayers, as the financial sector would fund the activity via
charges.
The role played by the state in financial stability is currently being strengthened in several
areas of the world. In the United States, which frequently has a large number of authorities
acting within one area, a council with overall responsibility for financial stability has been set
up. In the United Kingdom, responsibility has been assumed by the Bank of England. The
new EU authority, the ESRB, has been moved to the ECB. It has its own board and its own
secretariat, but it will also have the ECB's resources at its disposal. In the next section, I will
return to the possible structure of the managerial organisation of such a merged authority.
Naturally, there would also be objections to merging the Riksbank and Finansinspektionen.
One of these is that a great deal of power would be gathered in the Riksbank. However, this
should be weighed against the fact that Sweden would be gaining a powerful actor able to
safeguard financial stability. Another objection is that the Riksbank's reputation may be
marred by criticism of decisions in individual cases. I think that this could be avoided if these
decisions are taken by a separate board of committee. No doubt there are also a great
number of other issues that would need to be solved in a possible merger, for example the
possibility of appealing against decisions in certain cases. I think that, in an unbiased
investigation, the advantages of a merger would be shown to outweigh the disadvantages.
The Governor's role should be strengthened
The Riksbank is governed by an Executive Board of six persons, with the Governor as
chairman. This is an unusual form of management in Swedish public administration.10 It is
mostly justified in terms of monetary policy. But it is not an appropriate way of leading an
authority. Quite simply, I believe that the managerial structure has been the product of faulty
logic, right from the start. With the benefit of my years at the Riksbank, I think that the role of
Governor, as head of the Riksbank, should be strengthened to correspond with the role
played by a normal agency head. Of course, there is a degree of variation among the
managerial structures of the public authorities, but this is not an issue I intend to address
today.
Today, there is broad agreement that central banks should be independent of political bodies
when it comes to monetary policy. Somewhat simplified, this is because it is more popular to
lower the interest rate than to raise it, and there thus exists a risk that, over time, the interest
rate will become too low and inflation too high if the government takes responsibility for
monetary policy.
Furthermore, there is support in economic research for the argument that, in the long run,
monetary policy decisions taken by several people are better than those taken by one
person. It is also common in central banking for monetary policy to be determined by a
monetary policy committee. My experience is also that the arrangement with six people
taking decisions works well for monetary policy. There are effective routines for producing
bases for monetary policy decisions and the reasons behind the different members' positions
are clearly given in the minutes from the monetary policy meetings.
For these reasons, monetary policy decisions should continue to be taken by a monetary
policy committee at the Riksbank which is independent of political bodies. For the same
reasons, decisions on the application of the new tools for safeguarding macroeconomic
stability should also be taken by this monetary policy committee. It is as yet unclear what
these will be. They may include capital requirements, liquidity requirements, risk weightings,
loans ceilings etc. that vary over time.
But this arrangement doesn't work well in other areas. When six people, all of whom have
the individual responsibility of leading the Riksbank, are to decide on issues where opinions
are divided, the preparatory processes can easily become prolonged. It can also lead to a
complete inability to act. If one or more members strongly oppose a decision, this can lead to
the issue not being taken up for decision at all.
Being six people can be particularly problematic when it comes to financial security. In these
issues, we have striven to agree. Frequently, of course, we have had to take decisions to
strengthen financial stability in a reality marked by a financial crisis. In such cases, it would
not have been appropriate to show disunity over the best course of action. Reservations
regarding such decisions could have the opposite effect to that desired. Instead of
strengthening financial stability, we could weaken it. Despite this, our concrete measures
functioned well during the financial crisis.
At the Riksbank, we have, in practice, successively moved away from the principle of all six
members of the Executive Board needing to be involved in and decide on all issues. Just
over ten years ago, the five Deputy Governors were responsible for preparing matters within
one or more departments. This was changed even before I came to the Riksbank, six years
ago, when they were given preparatory responsibility for certain specific areas. Eventuall