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.

The mission statement of the Eurosystem very well reflects this by stating that, beyond the overriding objective of maintaining price stability, “we aim to safeguard financial stability and promote European financial integration.” In the light of the recent events, the benefits of financial integration are sometimes put into question and it may look like that the two objectives – safeguarding financial stability and promoting financial integration – potentially conflict with each other. It is exactly because we live in an increasingly interconnected world that the crisis has been so severe and widespread. So why should we – after the recent crisis – still promote financial integration? And still believe in the reconcilability of financial integration and financial stability? I will argue that financial integration is not only a fact, it is absolutely necessary for the functioning of the euro area economy. It is an irreversible process which should be promoted. While it may be true that financial integration poses some risks to financial stability – such as contagion fostered by greater interconnectedness – the benefits stemming from financial integration far outweigh its costs. I will try to convince you that – instead of containing financial integration – our efforts need to be directed at a better understanding of the different forms of financial development, particularly related to two aspects, namely complexity and size. Opaque products, when difficult to understand, may lead to mispricing of risks and distorted allocation of resources.