Karolina Ekholm: Dealing with cross-border banking without rolling back financial integration Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, at the Bank of Greece, Athens, 11 June 2010. *  *  *  It is an honour for me to have been invited here to the Bank of Greece. Little did I know when I originally planned this visit that Greece would be the country on everyone’s lips by the time I got here, given that it is now at the centre of a fiscal crisis in the European Union. Considering that Sweden is one of the European countries that has previously carried out fiscal consolidation of the same order of magnitude as Greece is planning for the next few years, I might have chosen to talk about fiscal consolidation today. But it appears that there is no lack of good advice from the outside world on this topic. I will therefore talk instead about another issue that the financial crisis has revealed to be of some urgency – how to deal with problems arising from cross-border banking. The global financial crisis and the bailout and failure of several cross-border institutions have raised serious concerns regarding the regulation and supervision of such institutions and crisis management regarding institutions in distress. Possible policy responses to the problems arising from cross-border banking include various ways of limiting banks’ abilities to expand abroad. However, such responses would also reduce the potentially positive effects arising from financial integration.
In the conduct of monetary policy, we assess the objective of stabilising inflation at close to 2½ per cent over time against the objective of stabilising output and employment. Given the low inflation rate, we have decided to keep interest rates at a low level and at times considered an even lower interest rate. However, against the background of solid growth in the Norwegian economy since summer 2003, we have instead decided to use some time to bring inflation back to target. Household debt has risen sharply since the mid-1990s. At the same time, house prices have shown a marked increase. Debt developments through the 1990s can probably be viewed to some extent as a delayed adaptation to the deregulation of the housing and credit markets in the 1980s, after many households burned their fingers immediately after the deregulation. At the same time, the credit market has deepened. New loan products have emerged, and it is easier to raise loans. Borrowers can choose their repayment schedule. Credit and housing market liberalisation provides homebuyers with the opportunity to establish a high housing standard early in their adult lives and draw on this capital later in life. In recent years, household income growth has been solid, household confidence regarding the future has been strong and households probably perceive higher income levels as permanent. This may have resulted in a further rise in house prices and debt. In addition, low real interest rates are currently contributing to this.