In October we had revised down our growth forecasts for Sweden and abroad considerably and in December we revised the forecasts down by as much again; the economic slowdown had hit with even greater force than we had earlier expected. The weaker krona together with the fall in energy and food prices appeared to some extent to be able to counteract the severe slowdown in the economy. According to our forecast in December, Swedish GDP will decline by 0.5 per cent in 2009, but recover during 2010, when growth increases to approximately 2 per cent. We also revised down the inflation forecast substantially, primarily because of falling energy prices and declining interest expenditure for households. According to our assessment, CPI inflation will on average be just over 1 per cent in 2009. However, inflation will then rise towards the target level at the end of 2010, as economic activity improves and the effects of falling energy prices and interest expenditure no longer affect the inflation figures. The assessment in December was that resource utilisation would be lower than normal over the coming years, while inflation would undershoot the target for a while. Given this, we Executive Board members were agreed that a substantial and long-lasting cut in the repo rate was needed to avoid an unnecessarily long period of inflation undershooting the target and of weak real economic development. Nor were there any advantages to adjusting the repo rate in gradual stages.
This feeling that we’ve built a strong fortress able to withstand any onslaught may create a mood of complacency and detract attention from the dangers that could be growing within the walls of financial institutions. This problem is aggravated by the fact that the hard numbers studied by regulators and supervisors should look great when the economy’s doing well. Profits are high and loan losses low when the economy is humming along. But, strong numbers in a strong economy don’t give you the full picture. They can’t always tell you whether people are cutting corners, taking excessive risks, or violating rules and regulations. Even worse, they can distract you from digging into the truth and unearthing unethical business practices and misconduct that may hide below the surface. The well-known challenge with culture is that, in contrast with things like capital and liquidity, culture feels “softer” and, therefore, more difficult to measure. And often in finance there’s a tendency to disregard what can’t be quantified. But just because it’s hard to measure doesn’t mean we should ignore it or downplay its importance. As we heard throughout today’s conference, culture shapes every conversation, every decision, and every action; it is at the root of whether an organization performs in a manner consistent with its mission, or not. How to Achieve a Better Banking Culture This brings me back to the issue of culture as a long-term investment that can’t be “fixed” overnight.