One important dimension of the risk is determined by the ability of the countries in which the banks are active to cooperate in a crisis, and the subsequent division of burdens. This issue deserves a lecture all of its own, so I will spend no more time on it today. Another dimension is that of funding, particularly how much funding is borrowed outside the countries in which the banks operate. And this is the aspect to which I would now like to return. 6  BIS central bankers’ speeches  What matters are how the banks borrow and how they use this money Of course, not all borrowing in foreign currency is a cause for concern – on the contrary. In many cases, it forms a natural part of traditional banking operations. And neither is it particularly remarkable to borrow in one currency and then exchange this for another on the market. But one of our experiences from the crisis is that it does make a difference both how you borrow and how you use this money. Let me start with how borrowing is conducted. Put simply, it could be said that the Swedish banks borrow over the short term in dollars and over the long term in euros (see Figure 7). The market for short-term borrowing is very large in the United States and, both before and after the crisis, the Swedish banks have been able to obtain significant volumes of funding on this market at favourable conditions.
As the Swedish banks have grown so rapidly in recent decades, mostly by expanding overseas, it would not be out of place to ask whether they have become too large for Sweden. Is there, perhaps, a limit for how large a banking system can be in relation to the total production capacity and fiscal capacity of one country? The risks for society may, quite simply, become too high. Experiences from Iceland and Ireland during the last crisis undeniably suggest this. And the Swedish banks are certainly large. The combined balance sheet totals of the major banks are equivalent to slightly more than four times GDP (Figure 6, left-hand diagram). This multiple is among the highest in Europe, in the same order of magnitude as the United Kingdom and the Netherlands (prior to the crisis, Iceland was in ninth place). However, I think that we should perhaps be cautious in assessing the risks in a banking system merely on the basis of the size of its balance sheets. For example, imagine that Nordea moved its head office from Stockholm to Helsinki, suddenly becoming a Finnish bank. This would take Sweden below the European average (Figure 6, right-hand diagram). Would the level of risk in the Swedish banking system then have decreased considerably? I don’t think so. The risks in a large banking system have many other dimensions than just balance sheet total in relation to GDP. Large banking systems can be associated with low risks and small banking systems can be associated with high risks.