I am therefore not particularly worried that the situation in the credit derivatives market could cause serious problems for financial stability. The important thing is that the systemically-important banks manage exposures to their counterparties – that is, that they take sufficient collateral, they have sensible limits and they are capable of managing potential liquidity problems. But the Riksbank will, of course, continue to follow developments and act to ensure that the risks I have mentioned today are managed properly. With regard to Sweden, the direct impact of credit derivatives on risk in the bank sector is currently small. But I assume that we will see increased activity among the Swedish banks, partly because the banks’ customers are calling for it and partly to manage the risks in their own balance sheets. The new capital adequacy rules may well contribute to this. It is therefore important that the Swedish banks report their management of credit derivatives in a way that makes both the trade and the total credit risk transparent. Here there is room for further development. So don’t forget credit derivatives – they will continue to increase in importance. And don’t forget that they are essentially insurances, neither simpler nor more complicated than a normal home insurance. Thank you. 6  BIS Review 24/2007
This is a reflection of the unusual and difficult economic conjuncture that we have been going through, combined with the challenge of determining the scale and nature of, for instance, loan forbearance. This is particularly evident in areas like commercial property lending where there is a hump of loan refinancing to come and a quite sharp tiering of performance among assets. Second, the euro area, and the possible impact of disorderly break-up, should that happen (and in saying this, I offer no view on whether it will happen), could have a sizeable impact on many banks. But here the FPC faces another very difficult judgement, namely what scale of so-called tail risk – the losses from low probability but high impact events – do we wish to see covered in the capital held now by banks? In other words, how much insurance should come from capital providers? The broad answer is a lot, but that does not tell us how much,  BIS central bankers’ speeches  3  and in the limit there are utterly catastrophic risks for which it is not sensible to hold capital as the answer. Third, when we look at the low market value of some banks relative to their book value, how much of this should we attribute to lending margins being considerably lower than they were expected to be? Net interest margins are squeezed in the current environment.