This would be bad for financial stability. The general view has now shifted and speaks clearly in favour of countries implementing an explicit deposit guarantee system, inscribed in legislation with all its terms and conditions. Such a system should focus on the small depositor. A major reason for such systems, apart from the aspect of protecting the small depositor, is that they greatly facilitate the resolution of problem bank situations and they may even prevent problems from occurring. In a situation where depositors hear negative rumours about their bank, guaranteed deposits might make them less inclined to “make a run on the bank” - to withdraw their cash and thus exacerbate the bank’s problems. A further major reason for introducing explicit guarantee systems is that experience from many banking crises has shown that the authorities feel obliged to reimburse depositors anyway, for political reasons. This is often done in an unpredictable and sometimes unfair manner favouring certain segments of the population. The cost of such implicit deposit protection is often higher than that of explicit guarantees. A guarantee system makes it easier for the authorities to close problem banks. Where such a system is lacking, the authorities tend to delay the unpleasant decision of closing a bank since they are afraid of the negative repercussions on depositors and other counterparties. But such supervisory forbearance only leads to growing problems and costs. It will always be difficult to close banks, but with a deposit guarantee at least the issue of the depositors is partly solved.

Equity and bond financing have gained in importance relative to lending from banks. This diversification of funding is positive for financial stability, since the dominating role of the banks in providing loans is reduced. From the issuers and also the investors’ viewpoint the existence of active markets ensures good competition, leading to efficiency and favourable loan terms. To sum up, the Swedish financial sector contains many different types of institutions and markets and competition is strong. This is fine, because our crisis taught us the problems of being overly reliant on the banking system. The tendency is that the other institutions take markets shares from the banks, for instance in providing channels for saving. But since many of those institutions form part of bank groups, the bank groups’ overall share of the financial system is not reduced to the same extent. Recent developments in the composition and structure of financial services In addition to the developments in the institutions and markets, we are also witnessing new trends in financial services. Mutual funds, money market funds, equity funds etcetera are growing rapidly. Depositors seek higher yields than those offered by bank deposits and they invest in various securities and asset funds. Banks and other asset managers, including hedge funds, make large profits from this business. The effects on financial stability are unclear. On the one hand, the growth of the funds means more liquidity to the equity and securities markets so they can provide more financing of investments hence reducing the reliance on bank lending.