Many lending decisions are agreed weeks or months in advance and cannot be readily reversed. So the approach will not stem a very fast drainage of liquidity. Moreover, as one bank tightens lending conditions to restrict balance sheet growth, other banks facing similar pressure will react to limit any additional diversion of funding pressure onto their own balance sheets. The second is that a retrenchment in lending can have significant implications for the wider economy, as fewer funds are available to companies and households to support long-term investment and consumption. We are seeing some signs of that beginning to occur as highlighted in the most recent Bank of England Credit Conditions Survey. These defences suffer from a common shortcoming. While they may work well when one bank is facing funding pressure on its own, when liquidity pressures are widespread every bank will attempt to use them at the same time. The actions of one bank will work to negate those of a competitor in these circumstances as gains and losses of market share will net out. That implies an increase in the economy-wide costs of adjustment, posing increased risks to financial stability during the adjustment process. 2  See, for example, Bank of England: Financial Stability Report October 2007. BIS Review 50/2008  3  There is, however, one last line of defence left.
We have seen that the links to the central banks work best when the staff at the Swedish embassies in the respective countries are actively involved and regularly follow up what is happening in the respective banks. At the beginning of this year, Sida commissioned an evaluation of the Riksbank’s cooperation so far with Sri Lanka and Vietnam. The evaluation showed that the Riksbank’s efforts in these central banks had been both successful and appreciated by the recipients. The very fact that we are colleagues, that we do the same things, have the same responsibility, was one of the key factors. There are many  BIS Review 123/2006  1  consultants; colleagues are harder to find. The long-term thinking behind the cooperation is also an important factor. We do not merely make an analysis, write a report and disappear. We are still here and can continue the discussion whenever necessary. The problems that were indicated in the evaluation were more of an administrative nature. For instance, it is difficult to find a place in a foreign aid context for low-cost projects like this, as they do not really follow the set patterns for other aid efforts. Finally, I can mention that the Riksbank has allocated resources in our internal business plan for next year to extend our cooperation with some of the central banks in Sida’s cooperating countries.