The Icelandic bank Kaupthing experienced problems in Iceland and the Riksbank granted the Swedish subsidiary Kaupthing Bank Sverige AB liquidity assistance in October 2008. Carnegie Investment Bank AB also received liquidity assistance in October when it had problems finding funding. Given the financial market turbulence, the Riksbank’s assessment was that a suspension of payments by one of the banks could entail a risk of a serious disruption in the financial system and could undermine confidence in the payment system. Finansinspektionen (the Swedish financial supervisory authority) later revoked Carnegie’s licence to conduct banking activities. The Swedish National Debt Office took control over Carnegie and Finansinspektionen therefore changed its decision regarding the revocation of the licence to instead giving the bank a warning. The Riksbank’s liquidity assistance has been repaid. The Riksbank has also participated in the international cooperation to strengthen financial stability in Sweden's neighbouring countries. In May 2008, the Riksbank and the central banks in Denmark and Norway entered into a euro/Icelandic kronor swap agreement with the central bank of Iceland. The aim of this swap agreement is to support the Icelandic central bank in its efforts to safeguard macroeconomic and financial stability. Sweden's part of the swap agreement amounts to EUR 500 million. The agreement was extended in December after the IMF had drawn up a programme for financial assistance for Iceland. Latvia has negotiated a support package with the IMF and the EU which will make it possible for the country to retain its fixed exchange rate against the euro.

In order to solve this problem, central banks in many countries have provided the funding that the banks have not been able to acquire on the market. Several central banks have also actively handled problems in individual institutions. One example is the Bank of England, which in September 2007 provided liquidity assistance to the British bank Northern Rock. Another example is the Federal Reserve which granted an emergency loan to the US investment bank Bear Sterns in March 2008 when the bank experienced an acute shortage of short-term funding. It was, however, not possible to rescue Bear Sterns and the Federal Reserve helped to mediate the takeover of the bank by JP Morgan. During the autumn of 2008, the central banks also rapidly and significantly cut their policy rates, sometimes in coordinated actions, to dampen the effects of the crisis on macroeconomic development. Governments have offered guarantees and capital injections to minimise the risk of further bankruptcies in the banking sector. Concern over banks and other financial players going bankrupt has namely been a central component of the financial turbulence. Given the  BIS Review 7/2009  3  vulnerable situation that the global financial system is now in, it may be unwise to let systemically-important financial institutions go bankrupt. Several countries have also decided on a more expansionary fiscal policy to counteract the downturn in economic activity. During the spring and summer of last year, the US government began to issue tax rebate cheques.