Some of these problems are dealt with by the new capital adequacy rules in Basel II. Nevertheless, it is essential that the authorities play an active role to ensure better insight. And this is also very much in the market’s own interests. The uncertainty remains The outcome of the current information will depend on how subprime loans are valued in the long term. If interest rate payments from the underlying loans are received as calculated, there is no need to write down the value for this reason. However, it looks as though there will be more defaults on payments than originally feared. In addition, it takes several months from the time that a household defaults on payment of a loan until it reaches the minus side of a balance sheet. Although a number of banks have already made major losses when forced to write down the value of their assets, it will be a long time before all the cards are on the table. There are also considerable problems with valuations. Banks and other investors are to write down the value of their assets, but there are rarely any market prices for the structured products containing mortgages. The valuation problems may force the banks to take bigger write downs than what is motivated by the underlying credit quality. An important factor in all of this is US economic activity.
Lars Nyberg: The financial market turmoil Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, to the Riksdag Committee on Finance, Stockholm, 22 November 2007. *  *  *  I would like to begin by thanking you for the invitation to come here to discuss how we at the Riksbank view the recent unrest in the financial markets. I shall begin by talking about the background to the market turbulence and about the spark that ignited the actual chain of events. Then I shall go on to discuss developments during the autumn and what we can learn from what has happened – as far as is possible at this early stage. In conclusion, I shall talk about the risks we see before us. Rapid changes in the credit market In recent years there have been major changes in the international credit markets. New agents have entered the market at the same time as new instruments have been introduced at a rapid pace. At the core of the changes in the credit market is a phenomenon called securitisation. This has to a great extent been practised by US mortgage institutions and banks since the 1970s. So it is not a new phenomenon. In brief, securitisation entails a number of loans, such as mortgages or credit card accounts, being placed in a specially-created company, which is then financed by issuing bonds on the market. These bonds are usually called Asset Backed Securities (ABS). Managed properly, there are considerable advantages to securitisation.