How would the Federal Reserve explain to the US public that, from the kindness of its heart, it was helping a little country in Europe whose banks have no noticeable influence whatsoever on the US financial system? I don’t think we should have any illusions about this matter, regardless of how strong our current cooperation is with the Federal Reserve. When there is a crisis, we must be prepared to deal with matters ourselves. This is my absolute conviction after almost thirteen years at the Riksbank. So what is the solution? If a bank in a crisis situation does not have any dollars of its own or is unable to obtain any on the market, and if the Riksbank does not have any to lend, naturally an uncomfortable situation will arise for that bank. It will be unable to fulfil its commitments (that is, pay what it  5  Banks are unwilling to take large currency risks, among other reasons because this requires large amounts of capital. So, to the extent that they purchase currency on the market, it is assumed that they will be able to mitigate currency risk by lending to customers. BIS central bankers’ speeches  9  has promised to pay others), which normally results in liquidation. This is hardly a risk that a well-managed bank wishes to take. Naturally, it could turn to the Ministry of Finance or the Swedish National Debt Office and apply for assistance under the Swedish Support to Credit Institutions Act.
Let us now examine the question of who is to pay for this “insurance”. So far, the Riksbank has done this, meaning that the taxpayers have had to foot the bill. The Riksbank pays its profit into the public treasury each year, and the smaller this profit is, the less the Riksbank contributes towards covering the state’s expenditure. But should the taxpayers really pay for the risk incurred by the banks when they borrow dollars? This is not the only thing that could be considered unfair. It also leads to risks becoming too high. As I mentioned earlier: when the costs for risk-taking are not carried by the party taking the risk, this usually leads to these risks becoming excessive from a macroeconomic perspective. The banks will borrow and lend more dollars that they would if they had to pay for the costs of managing the liquidity risk themselves. This cost is essentially an insurance premium, in which the banks are the  6  10  There are at least two other reasons for the Riksbank to maintain a currency reserve. One is to be able to fulfil Sweden’s commitments towards international bodies such as the International Monetary Fund (IMF), and the other is to be able to undertake interventions on the foreign exchange market when needed to influence the value of the Swedish krona. BIS central bankers’ speeches  insured party and in which the general public has so far paid the premium.