The repo rate, which is set on the basis of monetary policy considerations, indicates the level at which the Riksbank wants the overnight rate to lie. Interest rates with a slightly longer duration are determined in the financial markets and usually display a fairly stable relationship to the existing repo rate and expectations of its future level. During periods of financial turmoil and crisis, however, various risk premiums rise and this may disconnect the short-term market interest rates from their normal relationship to the repo rate. That weakens the impact of monetary policy Financial stability in terms of a functioning payments system and financial markets is thus essential for the Riksbank to conduct an efficient monetary policy. As can be seen, for a long time the Riksbank has been working intensively on issues relating to financial stability. This assiduous effort, which hardly attracts any attention under normal circumstances, provides a good foundation for crisis management. And this brings me to an account of all the measures taken over the past two months. 2  BIS Review 140/2008  Poorly functioning markets require special measures The crisis we are currently experiencing did not originate in the Swedish financial system. But the global financial turmoil has been imported to Sweden and has had repercussions on the Swedish financial system. As I already mentioned, these consequences became clear when the crisis escalated in the aftermath of the Lehman Brothers bankruptcy filing. Several components of the fixed-interest market have not been working as well as usual.

BIS Review 140/2008  3  The lack of trust between banks has complicated their long-term funding, including financing that only extends a few months into the future. The banks have therefore been forced to borrow in the market for shorter and shorter terms. Even though financing could be found, it has become much more difficult for the banks to manage liquidity and the risks also increased. In an effort to enable the banks to restore more normal conditions, the Riksbank has provided three- and six-month SEK loans so that funding is available at longer maturities than what the markets can currently provide and longer than what the Riksbank would normally offer. These loans will continue for as long as the need exists. The Riksbank is thus offering the banks an opportunity to replace short-term financing with the longer-term funding which the market normally provides. These measures are clearly aimed at improving the functioning of the fixed-income market. However, they should also help to ensure that short-term market interest rates revert to a more normal relationship with the repo rate, thereby strengthening the impact of monetary policy. Two institutions receive special liquidity assistance The Riksbank can also provide liquidity to individual institutions if extenuating circumstances are present. Such assistance has been given to Kaupthing Bank Sweden and Carnegie Investment Bank. These loans are against collateral and carry an interest rate that is higher than normal borrowing costs (penal rate). Both the Riksbank and Finansinspektionen (Swedish Financial Supervisory Authority) consider the banks to be solvent.