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.
If it should suddenly become difficult or very expensive for the bank to borrow money, it may experience difficulty in meeting its payments. The terms for the more long-term lending are largely restricted. In such a situation the Riksbank can help to manage the bank’s financing problems by granting liquidity assistance. But we only do this on condition that the terms I recently mentioned are met and if our assessment is that the stability of the financial system would be jeopardised if the bank in question failed. Another fundamental function that it is important to mention in this context “to keep the different tasks separate” is that the Swedish banks can borrow overnight from the Riksbank against collateral at an interest rate of 0.75 percentage points above the repo rate. They always have this possibility and this is not what we mean by liquidity assistance. But what if the bank suffering problems does not have larger assets than liabilities? Should the Riksbank provide liquidity assistance? No, in such a situation it is a question for the government, not the Riksbank, to decide. What the Riksbank can do is provide additional liquidity under certain conditions. We do not have the task of managing a bank’s problems with its creditworthiness. Even in this hypothetical reasoning it is important to point out, that in principle all those who have deposited money in the bank are protected by the deposit guarantee in the event that a Swedish bank should default.