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 Riksbank provided the liquidity assistance to Kaupthing because it wanted to prevent the crisis that has afflicted the Icelandic banking system from spreading to the Swedish financial system. Common to both instances of liquidity assistance is that they occur in a situation in which the entire global financial system is characterised by great uncertainty. Against this background the Riksbank has deemed it necessary to provide support to these institutions, which under normal circumstances would not receive it. In the current situation, suspension of payments by these financial institutions would pose a risk of serious disruption to the rest of the financial system and therefore lead to an undermining of confidence in the payments system. It is these assessments, not concerns about individual institutions, that motivated the Riksbank in granting the assistance for which the banks in question applied. With respect to Carnegie, a few days ago its operations were taken over by the Swedish National Debt Office, which granted a loan that replaces the liquidity assistance previously granted by the Riksbank. Financing assistance for companies Another problem begging for a solution is the financing situation of non-financial companies. As the financial crisis escalated, the credit supply to these companies has also become more troublesome, which could have strong repercussions on economic activity. To alleviate these problems, the Riksbank has temporarily offered banks the opportunity to borrow at three months against collateral comprising more commercial papers than usual.