Interest rates on longer-term loans between the banks; interbank rates, have been much higher than normal. The demand for safe assets, such as treasury bills, has been very high at the same time as the demand for mortgage bonds and high-risk assets has been very weak. Many interest rates, for instance, households’ mortgage rates, have risen much more than would normally be motivated by the Riksbank’s interest rate and forecasts of the future development of the repo rate. This means in practice that access to credit for households and companies is tightened even without the Riksbank having raised the interest rate. The fact that it is more expensive and more difficult to borrow affects economic activity. 2  BIS Review 138/2008  In a situation where the markets are affected by uncertainty, it is also possible that the interest rates faced by the general public do not follow suit when the Riksbank cuts the repo rate. One can say that the repo rate then becomes a blunter instrument than normal and that its impact is weaker. Such a situation could therefore require more powerful adjustments to the interest rate than would otherwise have been necessary. Measures to ensure the financial system functions more normally It is thus very important from several aspects that the financial system functions well. And it is the Riksbank’s task, as written in law “to promote a safe and efficient payment system”. This means in practice that the Riksbank regularly analyses risks and threats to the stability of the Swedish financial system.
Indeed, this became the norm across the income statement. Thus, ordinary profit rose by more than 30%8 year-on-year in the first quarter, with increases of 9% both in net interest income and fee and commission income. Meanwhile, impairment losses fell by 12.5% compared with March 2021. It must be noted, however, that the full economic and financial impact of the war in Ukraine did not materialise in the first quarter of the year. As regards the cost of bank funding, the average cost of liabilities9 has fallen since the onset of the pandemic, down to 0.5% at end-2021. The latest data available point to a change in trend, albeit with these costs holding below pre-pandemic levels (slightly above 1%) for now. In particular, wholesale market funding costs rose in the initial months of 2022. Indeed, expectations of interest rate rises have fed through to wholesale market interest rates on long-term bank debt (a measure of funding costs) more robustly than to the Overnight Index Swap (OIS) rate.10 Thus, banks’ credit risk spread has widened. Banks stepped up their debt issuance in 2021 to comply with prudential and resolution requirements, with issuances of Tier 2 instruments and contingent convertible bonds  8  By contrast, in 2022 Q1 net profit fell by 30% compared with the same period a year earlier, but this was due to the almost € billion recorded in extraordinary gains in March 2021 as a result of the merger at CaixaBank.