In addition, trading income recovered strongly as financial markets rebounded after the first quarter of 2009. Finally, revenues from fees and commissions held up remarkably well throughout the financial turmoil. At the same time, a number of significant risks remain and some may have even increased. First, the slowdown in the growth of assets held by euro area banks limits their future earning capacity in terms of interest and investment income. Second, a deterioration in the credit quality of borrowers may put a drag on banks’ future earning capacity. In fact, while large and complex banking groups seem to be gradually absorbing the losses they suffered on their securities holdings, driven in part by the reclassification of assets, they have reported sharply higher provisions for loan losses. Let me now turn to capital ratios. The recovery in the earnings of large and complex banking groups in the euro area, together with a slowdown in the growth rate of both risk-weighted and total assets and an increase in capital, from both public and private sources, has meant that the capital ratio of the average banking institution has typically been relatively stable. There is, however, considerable divergence between groups. A somewhat reassuring finding is that the institutions which reported the largest increases in loan loss provisions also seem to have the highest capital buffers. This may mitigate the solvency risks originating from deteriorating asset quality in the future.
The costs of higher capital adequacy requirements are limited and largely private, as opposed to the true economic costs. The advantages in the form of a safer banking system are considerable. A reduced risk of financial crises is good for the real economy, good for taxpayers and also good for the banks’ shareholders. The Riksbank will soon present a report that clearly shows that the benefits of higher capital adequacy requirements exceed the costs. An increased capital adequacy requirement may also need to be matched by a tighter leverage ratio requirement. The European Systemic Risk Board (ESRB) has recently submitted recommendations covering lending in foreign currency. We could see the risks of this type of lending to households at close quarters in the Baltic countries a few years ago. A few of the ESRB’s recommendations are (i) better consumer information and credit reviews of borrowers, (ii) taking exchange rate risk into consideration in the national capital adequacy requirements, and (iii) supervision of the risks in liquidity management. Swedish banks need to limit these risks better in the future. The Swedish banks’ liquidity measures need to take into account that it can be difficult to obtain certain currencies in stressed situations. Basel III’s short-term liquidity requirements also need to be met on a per-currency basis. Furthermore, we are examining whether the Riksbank’s reserve requirement can play a part in this regard. The low Swedish risk weights are a cause for concern.