kerstin af jochnick : a springboard for the monetary policy meeting in september speech by ms kerstin af jochnick, first deputy governor of the sveriges riksbank, at a meeting at danske bank, stockholm, 21 august 2012. * * * it has become something of a tradition for us members of the executive board of the riksbank to hold a speech at the end of august about the current economic situation and developments during the summer. i think that this is a tradition worth upholding. true, not many people here today manage to completely cut themselves off from world events during their holidays. we still manage to maintain a watchful eye on the inflow of news and statistics. however, although i believe that many of us follow the economic news coverage during the summer months, it may be useful to have a round - up of what has happened. it provides an overview and can act as a “ springboard ” for starting work in the autumn. a natural starting point for me is the assessment of economic developments described by the riksbank in the monetary policy report published in early july. i therefore intend to run through this assessment briefly and comment on my own thoughts at the meeting in july. i shall then try to summarise developments since then. of course, this concerns to a large extent the crisis in the euro area, although some interesting statistics have also been received. i will also mention the on - going discussion on libor and stibor as this has been a major news item during the summer. i have chosen to call this a “ springboard ” for the monetary policy meeting in september. this is not intended to direct one ’ s thoughts to sporting achievements, which can easily happen, given that the olympics are still fresh in our minds. what i mean to indicate is that this is a status report on which to base the start - up of a new process, which for the riksbank is a process that will lead to a new joint economic assessment. i will not be presenting this type of assessment today. this will be released in connection with the next monetary policy meeting on 5 september. the assessment in the july monetary policy report great uncertainty over future developments perhaps the most difficult question we had to deal with at the most recent monetary policy meeting was how an unexpectedly strong outcome in sweden at the beginning of the year should be viewed in relation to increased concerns over poorer developments in the euro area. when we executive board members gathered

loans. as the ratings have set the tone for how the instruments are assessed, the downgradings have meant that the financial markets more or less lost confidence in anything that might contain subprime loans. finally the banks were also affected but it was not only hedge funds that had invested in subprime loans. the banks ’ investment companies had also done so to a great extent. the buyers of the investment companies ’ certificates are usually risk averse investors who are choosing between buying short government securities and corporate certificates. when it became clear, or even when there was reason to suspect, that subprime loans were among the investment companies'assets, the demand for certificates fell drastically. investors instead chose to buy short government securities, which meant that interest rates on these fell. one could say that the investment companies suffered a classic bank run. the parent banks were now forced to fulfil the liquidity guarantees they had made earlier. at the end of july the german bank ikb announced that it had suffered major losses through an investment company that had invested in subprime loans. some weeks later another german bank, sachsen landesbank, experienced similar problems. see also the committee on the global financial system ( 2006 ) : “ housing finance in the global financial market ”, cgfs papers, no 26. subprime loans comprised an estimated 13 per cent of the total mortgage stock in the united states in 2006. the banks then began to hoard liquidity and distrust spread throughout the bank system. banks that had investment companies did not want to lend money as they might need it themselves to meet their own guarantee obligations. even banks without investment companies were unwilling to lend money as it was uncertain where in the bank system the credit risk was actually located. it was impossible to gain a clear insight into the complicated cdo structures. consequently the interest rates on the interbank markets soared. parallel to this, scepticism towards the credit rating agencies'ability to grade structured products increased, and this concerned not only products containing subprime loans. several central banks decided at this point to intervene in different ways in the interbank market. in general, the interventions contributed to reducing interbank rates towards desirable levels for shorter durations. for the longer durations the difference between the interbank rate and the risk - free rate remained substantial. the unwillingness to lend money was a hard blow to institutions dependent on financing from the market. for example, the british mortgage lender northern rock