Stefan Ingves: The need for a strengthened insolvency and resolution framework for banks – a central banker’s perspective Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the International Bar Association’s 14th Annual Global Insolvency and Restructuring Conference, Stockholm, 19 May 2008. *  *  *  As a central banker, the tasks assigned to me are to maintain price stability and to promote a sound and efficient payment system. In short, I deal with economics and finance. So what does this have to do with your business, insolvency law? What is a central banker doing opening this conference on insolvency and restructuring? Actually, there are more links between the fields than you might think. As I said, one of my tasks is to oversee the payment system. Without a functioning payment system, no modern economy is able to function for very long. But what we call the payment system is really not much more than a system where money is transferred electronically from one bank account to another, in a longer or shorter chain of intermediaries with the central bank as a hub. If there is a problem in one of those intermediaries, there is a problem in the payment system. And if the problem is not technical but financial in nature, this may lead you right into the area of insolvency law and bank restructuring regimes. But in fact, there is also a link of a more general nature.
The close and complex financial links between the banks also mean that a failure can have a knock on effect on the other banks in the system. Particularly problematic in this respect will be the failure of a bank which has a key position in the payment system. That is, a bank which many other banks use as their intermediary when making payments to one another. The mere rumour that such a bank is having problems can thus paralyse the payment system. A further complication is that banks are vulnerable in a special way. If confidence is shaken, deposits and other financing can usually be withdrawn at short notice. The assets can not be disposed of that easily. A bank may be forced to sell its assets at fire sale prices to meet a run; if the worst comes to the worst the bank may become insolvent. Banks are therefore very sensitive to a shift in confidence. A bank failure can thus affect the smooth functioning of the financial system. The more widespread the problem and the larger the risk of the crisis spreading through the system, the greater is the threat to financial stability – and in the end to the real economy. Clearly, the failure of a bank where a lot of people, companies and other banks have their accounts, and which is an important provider of credit and risk management tools, will normally be more problematic than the failure of a small bank.