For long periods, European banks have had problems obtaining funding on the market. This uncertainty is also reflected in the Riksbank’s calculations of the stress index for Europe. (Figure 1)  6  Credit Suisse (September 2011): “European Banks”. 7  IMF (September 2011): Global Financial Stability Report. 6  BIS central bankers’ speeches  Figure 1: European stress index  State support to the banking sector has been significant. In addition to EUR 90 billion in direct public expenditure, governments and central banks have paid out the equivalent of 13 per cent of GDP, EUR 1.6 trillion, in emergency liquidity assistance and support for the banks. The total commitments amount to triple this figure.8 The problems in the banking sector have still not been addressed The management of the present European banking problems can be contrasted with the way we handled the Swedish banking crisis twenty years ago. Of course, although we are often considered to have succeeded well in Sweden in 1992, this was due to a relatively beneficial political environment, rather than intellectual superiority. Even so, the differences illustrate an important insight from economics – more specifically, the significance of asymmetric information. Like other central banks, the ECB intervened in 2008 to support liquidity by various means, including offering loans at longer maturities. Unlike in Sweden, these extraordinary loan facilities continue to be available. Furthermore, the ECB has supported the markets for both covered bonds and government securities. In a crisis situation, it is necessary to maintain liquidity among the banks.
Before these problems are brought to light and dealt with, it will be hard to see any long-term solution for the European banking sector. A new framework – the way forward At the same time as the crisis has to be managed, those of us interested in financial markets must think ahead and build a more robust framework. The world doesn’t need a new 2008. Encouragingly enough, we have taken important steps towards creating structures that may prevent new problems. But there is still a lot of work to do. The crisis taught us lessons about risks in the financial sector Obviously, the experience of authorities around the world in the crisis will form the basis of a new and more secure financial framework. Academic research has also contributed valuable insights. It is obvious that risks in the financial sector were underestimated before the global financial crisis. One underestimation concerned the degree of correlation of risks in individual institutions. But it could also be argued that we, on the regulatory side, were a little naive regarding the risk of moral hazard in the governance of banks. To generalise slightly, it could be said that, before 2008, we felt quite safe when we saw that the risk in individual institutions looked manageable. Today, we know better. Even an individually well-diversified bank has assets that could be highly exposed to the same macroeconomic risk. In addition, as the banks largely act as each other’s counterparties, one bank’s problems can easily become another’s.