Eva Srejber: The divorce between macro financial stability and micro supervisory responsibility - are we now in for a more stable life? Speech by Ms Eva Srejber, First Deputy Governor of the Sveriges Riksbank, at the 33rd Economics Conference of the Oesterreichische Nationalbank (Austrian National Bank), Vienna, 13 May 2005. *  *  *  Introduction I hope I won’t disappoint our kind hosts who asked me to deliver this address but I have a confession to make – in Sweden, macro financial stability and supervision are not divorced. They have never been married. Indeed, it is only quite recently that the Riksbank and the FSA (Financial Supervisory Authority) have started to acknowledge – operationally in their respective policy frameworks – the link between macro financial stability and micro supervisory issues. Whether we just got divorced or are soon to get married, the relationship between financial stability and supervision is highly relevant. I will structure this address in the following way. First, I will give a brief description of how the relationship between supervision and financial stability has developed in Sweden. Then, I will move on to the financial sector developments that now challenge the ways supervisors and central banks have been working. The process of internationalisation, in general, and cross-border integration, in the EU, will force both supervisors and national central banks to focus on their core tasks and to a certain degree invent new ways to perform those tasks.
For example, when discussing lender of last resort in crisis management and burden sharing in crisis resolution we now talk about home and host central banks and finance ministries, respectively. This is natural, since legally the financial liabilities for a group are ultimately carried by the parent bank. Of course, a parent can choose to default a subsidiary, but it will then have to bear the capital loss. Subsequently, in practice, the ultimate public responsibility over a group rests with the home country. … comes under strain… At first glance, the home country principle seems very neat. But take a closer look and you will see signs that this set-up was not designed for a fully integrated market. Essentially, there is a gap between, on the one hand, legal powers and mandates and, on the other hand, de facto abilities and responsibilities. Home countries are given powers over branches and subsidiaries but might be unable or unwilling to use them, while host countries are losing powers that they have been willing to use. 4  BIS Review 35/2005  This gap becomes a problem once you have a banking group or bank that is systemically relevant in a host country (see table 1). Even if there are not so many of these cases yet, I am convinced that the number will increase. The potential conflicts of interest and coordination problems are of many kinds.