irma rosenberg : monetary policy and financial stability – the riksbank's two main tasks speech by ms irma rosenberg, first deputy governor of the sveriges riksbank, at statistics sweden, stockholm. 2 october 2008. * * * many countries are currently in the midst of a financial crisis that has repercussions throughout the global financial system. headlines referring to problems in large us banks, to rising risk premiums, poorly functioning markets and other consequences around the world have been prominently featured on the first pages of many newspapers. sweden has so far been spared the worst. but now the financial markets here are also clearly affected by the uncertainty and lack of confidence, which thus also affects the swedish banks and other financial agents. the riksbank is working intensively on dealing with these events right now, like most other central banks. the riksbank ’ s task is to safeguard both price stability and financial stability. i am going to talk today about current monetary policy and the deliberations at our most recent monetary policy meeting in september. but the recent drama in the financial markets gives me reason to devote some time to explaining what our task of safeguarding financial stability concerns and to our assessment of the current situation. two tasks – monetary policy and financial stability some of the questions that have been the focus of attention are what the riksbank and other central banks can and should do about what is happening in the financial markets right now. it is not surprising that these questions arise. but if they are to be discussed, it is important to separate the two tasks the riksdag ( the swedish parliament ) has given us – monetary policy and financial stability. this may not be so easy, as the areas in many ways affect one another. however, i shall try to make things a little clearer. two different tasks … what is happening right now is important, both with regard to financial stability and monetary policy. the financial turbulence has also been included in our analyses of both areas, ever since the problems connected to the mortgage market in the united states became apparent last summer. however the perspectives are different. the stability perspective concerns how the banks, the payment system and the financial system in general are affected by the financial crisis. the monetary policy perspective concerns how inflation and developments in production and employment may be affected. … which are in many ways linked as i recently mentioned, our two fields of activity are closely linked. the financial turbulence that has spread around the world to a large

collateral for a covered bond is directly tied to a particular portfolio of mortgage loans with high collateral. this means that the credit granter is protected, even if the institution issuing the bond were to collapse. covered bonds are therefore good collateral and many other central banks accept them to a greater extent than the riksbank. in our case, the permitted share was raised from 25 per cent to 75 per cent. this measure meant, to put it simply, that participants in the rix system, were given the opportunity if necessary to use more collateral as a base for their loans from the riksbank. another preventive measure taken by the riksbank has been to establish, together with other central banks, a swap facility with the us central bank, the federal reserve. this agreement entails the federal reserve supplying us dollars in exchange swedish krona if the need should arise. but it should also be pointed out that the riksbank has a substantial foreign currency reserve. the agreement is not the only means for the riksbank to obtain loans in us dollars, but it makes it easier for us to take action quickly. right now, the situation regarding short - term funding in usd has been very strained on many markets. to increase access to liquidity in us dollars and to make the markets function more normally, several central banks, including the riksbank, have agreed on coordinated actions. the riksbank has decided to lend dollars to swedish banks in two auctions during october. the first was held yesterday and amounted to usd 7 billion. a second auction with loans extending over the turn of the year will be held on 22 october and amount to usd 15 billion. a large part of the collateral the banks pledge for these loans will probably be comprised of covered mortgage bonds. the measures should therefore also have a positive effect on the functioning of the mortgage market. together with the measures taken by other central banks, this should lead to better liquidity in the financial markets globally. a further measure is that the riksbank as recently as today decided to establish a loan facility in swedish krona to increase access to loans of longer duration. there have thus been disruptions in the financial markets, but the riksbank, other government agencies and central banks have taken action to improve the functioning of the markets. we will of course continue to follow developments very closely. we are constantly updating our analyses and we are prepared to take action if necessary. in addition, as i have already mentioned, we