At that time, loan losses among the Swedish banks were very large, as I clearly remember from my position as head of the Swedish Bank Support Authority then. The banks’ loan losses were from the commercial property sector, which was devastating for profitability; it was a solvency crisis rather than a liquidity crisis. During the most recent global financial crisis, loan losses on the domestic market were very limited; most losses arose on loans to the Baltic region. This time, the solvency of the banks was not threatened; instead, an acute  10  The average rate of inflation since 1995 has been 1.2 per cent, when measured in terms of the CPI. The interest rate situation was rather different when the inflation target was introduced than it is now. As household mortgage interest expenditure is included in the CPI, the large decline in interest rates has contributed to a lower consumer price index. Average inflation measured as the CPI with a fixed mortgage rate (CPIF) has been 1.6 per cent since 1995. BIS central bankers’ speeches  5  shortage of liquidity in the banks arose when the functioning of the capital markets deteriorated. This was managed by means of extensive loans from the Riksbank. Important lesson – financial stability and price stability are interlinked One major question after the financial crisis was whether monetary policy should give greater consideration to financial stability.
The participation of banks in the debt guarantee schemes is voluntary, and the very limited use of these guarantees may reflect a decline in the demand for credit and/or the desire of the banks to continue deleveraging their balance sheets. It is, however, important to ensure that other constraining factors are addressed, for example that the disincentives associated with the provision or pricing of these debt guarantees are promptly addressed, so as to help banks finance additional lending to the private sector. Possible further measures A relevant question is whether the tight financing conditions and the continuing stresses on the banking system require further measures by governments and central banks in order to help revive the extension of bank credit to the economy. The answer regarding the need and the nature of potential further measures depends on the causes or determinants of the prevailing financing conditions and on the structure of the financial system. To the extent that (i) financial market stresses, (ii) the deleveraging process, (iii) uncertainty about the economic outlook and about potential further bank losses, and (iv) low confidence impair the functioning of the credit and bank funding markets and the transmission of the effects of monetary policy, “non-standard” measures aimed at reducing funding uncertainty and enhancing the functioning of the credit market and, consequently, the monetary policy transmission mechanism, may represent possible courses of action.