OPINION OF THE EUROPEAN MONETARY INSTITUTE
on a consultation from the Swedish Ministry of  Finance under Article 109f (6) of the Treaty
establishing the European Community (the “Treat y”) and Article 5.3 of the Statute of the EMI as
elaborated in the Council D ecision of 22nd November 1993 (93/ 717/EC) on a draft proposal for
legislation (Law 1995/96:172) repealing the La w on State support for banks and other credit
institutions (Law 1993:765).
CON/96/03
1. The above consultation was initiated on 14th Ma rch 1996 by the Swedish Ministry of Finance
which requested an opinion by mid April 1996. For this purpose, it submitted the text of theabove draft legislation together with an explanatory memorandum (DS 1995:67) to the EMI.
2. The EMI’s competence to deliver an opinion is ba sed on Article 1, section 1, fifth indent, of the
Council Decision of 22nd November  1993 (93/717/EC), as the draf t legislation concerns the
termination of State support facilities for the Sw edish banking industry and may, thus, affect
the stability of financial institutions and markets.
3. In 1992 Sweden adopted emergency measures to, in ter alia, ensure that banks and certain other
credit institutions could meet their commitments  on a timely basis. This was introduced as a
result of a banking crisis which developed afte r a downturn in the real estate market, the
consequences of which became so grave that th ey threatened the stability of the financial
markets as a whole. These measures, laid  down in Riksdag Decision 1993:765, entailed the
possibility of State guarantees, loans, capital c ontributions and other instruments to safeguard
the interests of creditors of fi nancial institutions as well as to protect the functioning and
integrity of the financial markets.  They were intended to be of a temporary nature and to last as
long as the banking crisis would warrant their continued existence. After monitoring
developments in the financial markets in genera l and the situation with regard to individual
institutions in particular, Swedish financial au thorities have come to the conclusion that the
above emergency measures have fulfilled their function and may now be terminated. TheSwedish financial authorities concluded that the banking system has undergone a radicalfinancial and economic rehabilitation over the past two to three years. In particular, bad loans
have diminished, the capital adequacy of financia l institutions has strengthened and there is an
increased potential in profit growth as well as  improved financing conditions. In addition to
these macro-economic considerations which plead for an abolition of the above emergency
- 2 -
measures, review of the financial situation with regard to individual institutions also shows that
continued existence of the above emergency measur es is not warranted. It is therefore proposed,
through the above draft legislation, to re peal Riksdag Decision 1993:765 containing the
emergency measures, per 1st July 1996.
4. The EMI is not in a position to assess in deta il whether the effects of the banking crisis in
Sweden at the beginning of this decade have now diminished to such an extent that the
measures established through Riksdag Decision 1993:765 are no longer justified. This applies a
fortiori to the financial soundness of individua l credit institutions. The EMI does, at the same
time, not have any reason to question the consid erations of Sweden’s financial authorities with
regard to the abolition of the emergency meas ures. In addition, an undue continuation of such
measures may give rise to competition distorti ons. Moral hazard problems may in this case also
arise as financial institutions whose positions are covered by State guarantees may be inclinedto take more risks than those whose business is not. Hence, the abolition of the aboveemergency measures marks the financial system’s return to the undistorted working of an openmarket economy with free competition favouring an efficient allocation of resources. The EMI,therefore, welcomes the fact that the Swedis h financial authorities have, over the past few
years, closely monitored whether developmen ts warranted continued existence of the
emergency measures and now, on the basis of th eir observations, proposed termination thereof.
Finally, the EMI notes with interest the unde rtaking by Sweden’s financial authorities to
continue work on reshaping the organisation a nd functioning of prudential supervision and, in
particular, to focus on internal risk  management and control practices.
5. The EMI agrees that this opinion may be made public by the competent Swedish authorities at
their discretion.
12th April 1996