Confidence in the Swedish financial system could have been seriously damaged if a failure like the one at Lehman Brothers had been allowed to occur. The Riksbank’s assessment was that the two banks were experiencing temporary liquidity problems, but that their solvency was not threatened. Finansinspektionen later revoked Carnegie’s licence to conduct banking activities owing to serious deficiencies in the company’s risk management and violation of the law concerning asset management. The decision to revoke the licence thus had nothing to do with Carnegie’s liquidity problems or with the Riksbank’s loan. Carnegie is now owned by the Swedish National Debt Office and the Riksbank’s liquidity assistance has been repaid. The Riksdag (the Swedish parliament) has also introduced a new act concerning support to credit institutions, which will give the government the opportunity to take the necessary measures to strengthen stability in the financial system. For instance, a government guarantee programme has been presented to support the banks’ and mortgage institutions’ medium-term funding, and a stability fund has been established to manage potential future solvency problems in Swedish institutions. The current situation Despite the crisis in the global financial markets and the increasingly gloomy economic prospects, the assessment is that the Swedish banks still have good resilience to facing the situation that has arisen and future developments. 1 The losses arising from the international crisis have so far been limited, not least in an international perspective, and the Swedish banks have good financial strength.
The reason for the repo rate cuts was to alleviate the effects of the financial crisis on the real economy, while ensuring that inflation stabilised around the target of two per cent. Although monetary policy cannot be used to resolve the financial problems, it can help to dampen the negative effects on the real economy, without jeopardising the inflation target. The Riksbank’s assessment is that the financial crisis aggravates the ongoing economic downturn resulting in weaker growth, a deterioration in the labour market and lower inflation. The repo rate therefore needs to be cut by a relatively large amount during a short period of time. In addition to the cuts already made, the assessment at the most recent meeting was that the repo rate needs to be cut by a further 0.50 percentage points, to 3.25 per cent, over the coming six months. The repo rate is currently less effective than normal as a tool for influencing the economy. The repo rate cuts in October did not lead to an immediate fall in interbank rates. The confidence crisis in the financial system has meant that the normal link between market rates and the repo rate has been broken. Although market rates also declined, there remains an unusually large gap between the repo rate and mortgage rates in particular. The gap between the 3-month lending rate to households and the repo rate has been around 100 basis points in less turbulent periods than that we are experiencing now. At present the gap is around 200 basis points.