Value-at-risk calculations have become a crucial element of the standard approach used by market participants to evaluate the risk inherent in their market activities and to set up exposure limits. Of course, central banks and financial institutions should continue to encourage the use of these instruments. But, in times of financial turmoil, the growing use of sophisticated risk management techniques by financial intermediaries might have the paradoxical effect of amplifying the initial shock, exhausting liquidity and contributing to contagion phenomena. Regardless of the intrinsic qualities of these risk management tools, we see that their growing use in the same fashion by all market participants may have produced pernicious effects. When market players rely on converging risk evaluations, they tend to take the same decisions at the same time, thus amplifying initial shock to prices and trading volumes. Financial techniques can also reinforce the links between the various market segments. A striking feature of recent developments on financial markets is the quick spreading of disryptions from one market segment to another, especially between equity and credit markets. For example, the short selling of equities is sometimes used to hedge credit risk. The underlying reasoning is that if there is a credit default, the value of the equity will decrease symmetrically, and an equity gain will compensate the lender for the credit loss. As a result, the fall in the equity value, which is triggered by the credit default, is amplified by the short selling operation.

The Baltic region Denmark  Estonia  Finland  Latvia  Lithuania  Poland  Sweden  Germany   8  BIS Review 105/2009  Swedish banks in the Baltic states June 2009 Baltic operations’ share of lending and operating profit in each bank  Market shares public lending Population 1.3 million  Population 2.3 million  Lending  Population 3.4 million  SEB  100% 19%  80%  47%  14%  60%  24%  11%  39%  Swedbank 16%  10%  Nordea  29%  Operating profit, latest four-quarter period  3%  14%  40% 15% 43%  20%  25%  22%  Latvia  Lithuania  SEB  0% Estonia Swedbank  SEB  Nordea  Neg  Swedbank  Other  Neg Nordea 1% Sources: Bank reports and the Riksbank  Real GDP in the Baltic region and global Annual percentage change 6 4 2 0 00  01  02  03  04  05  06  07  08  09  10  -2 -4 -6 -8 Denmark  Finland  Sweden  Germany  World  Source: Reuters Ecowin  BIS Review 105/2009  9  Real GDP in the Baltic region Annual percentage change 15 10 5 0 00  01  02  03  04  05  06  07  08  09  10  -5 -10 -15 -20 -25 Estonia  Latvia  Lithuania  Poland  Source: Reuters Ecowin  Unemployment in the Baltic states Per cent 20 18 16 14 12 10 8 6 4 2  Latvia  sep-08  mar-09  mar-08  sep-07  mar-07  sep-06  mar-06  sep-05  sep-04  mar-05  mar-04  sep-03  mar-03  sep-02  sep-01  Estonia  mar-02  mar-01  sep-00  mar-00  0  Lithuania Source: Reuters Ecowin  10  BIS Review 105/2009  Current account in the Baltic states Percentage of GDP 5 0 -5 -10 -15 -20 -25  Estonia  Latvia  mar-09  sep-08  mar-08  sep-07  mar-07  sep-06  mar-06  sep-05  mar-05  sep-04  mar-04  sep-03  mar-03  sep-02  mar-02  sep-01  mar-01  -30  Lithuania  Source: Reuters Ecowin  Harmonised index for consumer prices Annual percentage change 20  15  10  5  0  -5 jan-01  jan-02  jan-03  Estonia  jan-04  jan-05  jan-06  Latvia  jan-07  jan-08  jan-09  Lithuania  Source: Reuters Ecowin  BIS Review 105/2009  11  Nominal wages in the Baltic states Annual percentage change 35 30 25 20 15 10 5 0 -5  Estonia  Latvia  mar-09  sep-08  mar-08  sep-07  mar-07  sep-06  mar-06  sep-05  mar-05  sep-04  mar-04  sep-03  mar-03  sep-02  mar-02  sep-01  mar-01  -10  Lithuania Source: Reuters Ecowin  Corporate debt, the Baltic states and Sweden per cent of GDP 70 60 50 40 30 20 10  Estonia  Latvia  Lithuania  2008  2007  2006  2005  2004  2003  2002  2001  2000  1999  1998  1997  1996  1995  1994  0  Sweden  Source: Reuters Ecowin  12  BIS Review 105/2009  Household debt, the Baltic states and Sweden Per cent of GDP 80 70 60 50 40 30 20 10  Estonia  Latvia  Lithuania  2008  2007  2006  2005  2004  2003  2002  2001  2000  1999  1998  1997  1995  1996  0  Sweden  Source: Reuters Ecowin  Apartment prices and number of transactions in Tallinn N umbe r of tr ansactio ns with apartme nts in T allinn and me d ian price 1 400  28 000  1 200  24 000  1 000  20 000  800  16 000  600  12 000  400  8 000  200  4 000  n u m b e r o f tra n s a ctio n s (lh s )  2009  2008  2007  2004  2006  0 2005  0  m e d ia n p rice (E E K /m 2 , rh s )  D a ta : L a n d B o a rd * f inal tra ns ac tio n data mus t be pu blis h ed late s t 10 day s af te r th e tr ans ac tion da te  Sources: Land Board and Eesti Pank  BIS Review 105/2009  13  Real prices of office premises in city centres, Sweden Index:1981=100 500 450 400 350 300 250 200 150 100 50 0 81  83  85  87  89  91  93  Stockholm  95  97  99  01  Göteborg  03  05  07  09  Malmö Sources: Newsec and the Riksbank  Average yield levels for modern office premises in city centres, Sweden Per cent 16 14 12 10 8 6 4 2 0 85  87 Stockholm  89  91  93  Göteborg  95  97 Malmö  99  01  03  05  07  09  Five-year government bond yield  Sources: Newsec , Reuters Ecowin and the Riksbank  14  BIS Review 105/2009  Real government bond yield, 5 years Per cent 10 9 8 7 6 5 4 3 2 1 0 -1 85  87  89  91  93  95  97  99  01  03  05  07  09  Sources: Reuters Ecowin, SCB and the Riksbank  Real house prices Index 1980=100 450 400 350 300 250 200 150 100 50 0 1980  Sweden  1985  1990  Denmark  1995  2000  2005  2010  Norway  UK  Spain  USA  Sources: SCB, OFHEO, Case-Shiller and Reuters Ecowin  BIS Review 105/2009  15  Basis spread The difference between three-month interbank rate and expected policy rate Basis points 400 350 300 250 200 150 100 50 0 jan07  apr07 USA  jul07  okt07  jan08  apr08  Euro-area  jul08  okt08  jan09  apr09  UK  jul09 Sweden  Sources: Reuters Ecowin and Bloomberg  16  BIS Review 105/2009