BIS Review 98/2009  1  The financial crisis has so far been less serious in Sweden than in many other countries. The Swedish banks are well capitalised. But they are also to a large degree dependent on the securities markets for their funding and they have expanded substantially in the Baltic countries. The greatest risk for Sweden therefore lies with the banks’ credit exposure to the Baltic countries. International developments Slow global recovery Over the past year, the global economy has been hit by the most rapid economic downturn since the Second World War. Economic developments abroad are very weak this year and much weaker than we had previously anticipated. Since September last year, the Riksbank has gradually revised down its forecasts for global GDP growth in 2009 from approximately 4 per cent to around -1 per cent (see Figure 3). The forecasts in the most recent Monetary Policy Report are no exception, but for the first time they only involve a minor downward adjustment. There are numerous indications that the severe economic downturn has now touched bottom. During the spring there were increasing signs pointing to a slowdown in the heavy fall in world GDP. At the same time the financial markets have begun to function more efficiently, which is an important condition for ensuring that the economic recovery will begin. World trade has also begun to show signs of stabilisation during the spring, after the earlier heavy fall in exports.
Loss of confidence in a bank sets in when depositors fear that this may not happen. An asset management contract is quite different because the promise is at its simplest to return the proceeds of the investment strategy, which may be more or less than the amount invested. It is cruel to remember the Woody Allen jibe at this point that a stockbroker is someone who invests your money until it is all gone. Economists might call the deposit and asset management contract “corner solutions” in that they have a robust definition and lie at opposite ends of a range. If so, With Profits falls in between, and it is in this ground that issues can arise. The proposition was essentially to offer investors a blended exposure to cash, bond, property and equity return with some degree of smoothing of overall returns, essentially at management’s discretion, to reduce market timing risk. The marketing tended to make much of these products’ potential to earn above cash returns without the volatility of pure equity exposure; and this in turn conditioned policy holders’ expectations, a fact first acknowledged explicitly in the UK’s prudential solvency regime for insurers in 1967 (bear in mind that this was not the original prudential regime, which was introduced in 1870).