But has the development of the derivative markets and the often sophisticated derivative instruments really led to better risk management? I believe it has. Derivatives redistribute risks to other risk-takers. These risk-takers may, of course, be better-equipped or more poorly-equipped to manage risks than a bank. If the risk is realised, it may lead to large losses in other parts of the financial sector, for instance, the insurance companies. However, if the risks are really diversified to a large number of agents, this should on the whole be positive from a macroeconomic perspective. One could say that we will all bear a small part of the gain or loss on our future pensions, but we hopefully avoid financial and macroeconomic costs from banking crises of the type we experienced in Sweden at the beginning of the 1990s. Given the significance of risk management for society and for financial stability, it is natural that the Riksbank should carefully follow developments in this field. During the era of regulations, we were the authority with the task of monitoring that the banks observed credit policy restrictions in their operations, but we now have a completely different direction. We closely follow - and sometimes even try to influence - how risks are managed in the financial sector. Risk management should be governed primarily by the needs of the customers, markets and intermediaries. It is only necessary for authorities to intervene with regulation and other means of control where there is a risk of market failure, i.e.
There were also inadequacies with regard to credit granting. Large loans were made to new customers, new sectors and new geographical areas. This type of lending strategy is not wrong in itself, but it requires that the credit-granter has done his homework and is aware of the possible risks. In some parts of the banking world, they talk about credit-granting according to the church tower principle, i.e. that loans should be primarily made to customers living and active close by. How this principle was applied in connection with investments in Atlanta or Brussels is not easy to see. In addition, the banks contributed to their customers building up a comprehensive credit exposure in foreign currencies, regardless of whether or not they had matching income in their loan currency. As the krona exchange rate was high, some borrowers chose to take out loans in foreign currencies that had a lower nominal interest rate. The risks with this strategy became evident after the krona’s rapid fall of almost 25 per cent in six months, calculated from when the krona was allowed to float in November 1992. When the banks’ borrowers found that their debt amounts had increased by up to 25 per cent, calculated in kronor, many of them were unable to meet their obligations and the banks’ loan losses increased further. These actions by the banks are actually quite remarkable.