A certain increase in lending is normal in an economic upswing, when companies need to borrow in order to invest, while households borrow, for example, in order to meet rising house prices. In an economic boom, loan losses are also generally low, while they tend to be higher during a recession. The increased level of indebtedness has also come under discussion. The question has been raised of whether households and companies today borrow to such an extent that this could lead to problems in the banking sector when the economic cycle turns downward. History shows us that the factor which has triggered banking crises in modern times has often been extensive loan losses caused by changes in the macroeconomic environment. This was also the case during the Swedish banking crisis at the beginning of the 1990s. Is the growth in credit worrying? So what is the situation at present? Figures for April show that total lending to the general public is up 7.3% compared with April 1999. The main growth is in household lending, which has risen by 8.8%, while corporate lending has increased by 4.1%.1 A perspective on these figures can be obtained if we consider them in relation to GDP. This gives a measure of whether lending is growing at a faster rate than the economy as a whole, which provides us with an indication of whether imbalances are being built up.
First, the SNB must try – despite volatile risk premiums and interest rate expectations – to keep the targeted three-month Libor as close as possible to the desired goal. Second, with its operations and its choice of instruments, it must contribute to a well-functioning money market. Even though there have been several innovations in the area of monetary policy instruments, the SNB’s options in this complex environment are limited, however. In particular, there is no magic bullet with which central banks could restore the lost confidence among market participants. In dealing with the financial market crisis, therefore, banks and other financial market participants must also try to help restore the proper functioning of markets by implementing measures to shore up confidence. BIS Review 34/2008  1