”Conduits” are the more common of the two and account for almost 80 per cent of the outstanding stock of asset-backed commercial paper. An SIV has a more advanced construction than a “conduit”. It is usually highly leveraged, 15-20 times the equity capital. It is not necessarily tied to a bank and the financing is largely for longer durations. But the need for financing in the short-term money market is nevertheless crucial. Although the investment companies in themselves are not banks, they conduct bank-like operations; they have their own balance sheets and names and are in principal independent of the banks. But if an investment company is for some reason unable to issue new corporate certificates when the old ones fall due for payment, the bank guarantees the ability to pay, wholly or partly. The guarantees may be of a formal nature, where the bank commits itself to redeeming the certificate if the investment company is unable to do so. But a guarantee can also be of a more informal nature and based on the bank being unwilling to abandon its investment company in order to protect its name and reputation. Whichever is the case, it means that if an investment company linked to a bank faces financing difficulties, the problem is referred back to the bank, which must provide the company with sufficient liquidity for a short period of time. This is to some extent reminiscent of the situation during the Swedish financial company crisis, which started the 1990s bank crisis.
It was impossible to gain a clear insight into the complicated CDO structures. Consequently the interest rates on the interbank markets soared. Parallel to this, scepticism towards the credit rating agencies' ability to grade structured products increased, and this concerned not only products containing subprime loans. Several central banks decided at this point to intervene in different ways in the interbank market. In general, the interventions contributed to reducing interbank rates towards desirable levels for shorter durations. For the longer durations the difference between the interbank rate and the risk-free rate remained substantial. The unwillingness to lend money was a hard blow to institutions dependent on financing from the market. For example, the British mortgage lender Northern Rock was forced to seek help from the Bank of England to manage its acute liquidity problems when it could no longer obtain financing. The market turbulence during the autumn had relatively limited effects on the Swedish banks. The main effects were higher financing costs, some changes in the value of bond portfolios and less activity on some markets. Here an important factor was the fact that the Swedish banks did not have any significant exposure to securitised subprime loans, neither directly nor indirectly through investment companies. Deficiencies in the functioning of the credit markets have been exposed The rapid developments in the financial system over the past decade have essentially been beneficial. There is no reason to wish we were back in the financial iron age of the 1980s.