Maintaining Financial Stability in an Open Economy. Sweden in the Global Crisis and Beyond

Ralph C. Bryant Dale W. Henderson Torbjörn Becker

A research report entitled Maintaining financial stability in an open economy - Sweden in the global crisis and beyond analyses how Sveriges riksbank dealt with the financial crisis.

maintaining.pdf 4.4 MB PDF

The authors of the report are two US researchers, RALPH BRYANT, senior fellow at Brookings Institution and DALE HENDERSON, professor at Georgetown University, and a Swedish researcher, PhD in economics TORBJÖRN BECKER, SITE (Stockholm Institute of Transition Economics), formerly at IMF. The US researchers have worked at the US central bank, the Fed, for many years.

A short summary of the contents of the report
SWEDEN IS PARTICULARLY VULNERABLE. Swedish financial institutions are strongly dependent on international borrowing and lending. This means that a large share of the transactions and entries on the balance sheet are in foreign currency. The banking system is also strongly dependent on short-term borrowing in order to finance loans with longer duration. This combination might be dangerous in periods of global financial unrest, as shown by the situation in the fall of 2008.

EXTENSIVE CRISIS MEASURES. During the crisis, both Sveriges riksbank and The Swedish National Debt Office had to support the Swedish financial system with extensive measures that did, among other things, include loans in Swedish kronor and foreign currency, guarantees for banks’ debts, takeovers of insolvent institutions and infusions of capital into a solvent bank. A large part of those measures that were taken were directly motivated by the international connections in the banking system.

THE RESEARCHERS GIVE THE RIKSBANK THE GRADE PASS. The report considers that the various support measures were largely implemented in a swift and efficient way and mitigated the effects of the crisis on the Swedish financial system.

LESSONS FOR THE FUTURE. The authors also emphasize a number of lessons on how the policy for dealing with shocks to the financial system could be improved in the future.

HOW TO COMMUNICATE UNCERTAINTY ABOUT THE INTEREST RATE PATH? In times of crisis, historical data tend to be less suitable for making forecasts. Thus, a larger share of special evaluations is needed. At the same time, it is easy to underestimate the uncertainty. One kind of assistance might be to also supply the alternative scenarios of the Riksbank with uncertainty intervals. A clearer communication that these are very uncertain evaluations might be needed to increase the awareness of the general public about various risks.
HOW TO COORDINATE THE POLITICS? The report illustrates the question of how the responsibility for financial stability is to be best dealt with by the responsible institutions (Ministry of Finance, Swedish National Debt Office, The Swedish Financial Supervisory Authority and Sveriges riksbank). Merging the Riksbank and The Swedish Financial Supervisory Authority is one alternative that would have obvious efficiency gains. But the authors still conclude that the indication is that the current structure for government authorities should be maintained, but that the coordination should be improved and the minutes be made public (with a lag).
HOW TO DEAL WITH THE DOLLAR RISK IN SWEDISH BANKS? The authors find two possible ways of dealing with those risks that are related to the dependence of the Swedish banking system on short-term loans in dollar. The first is to require that the banks decrease their risk exposure. Here, the Basel Accord gives Sweden complete freedom to make special demands on its banks. The second path is that the Riksbank has a considerable dollar reserve and acts as a ”lender of last resort”. The latter solution is efficient if the banks’ needs for liquidity in dollars are independent in relation to each other. But history shows that the banks’ needs for dollar tend to covary.
IMPROVE THE MODELS. It is good that the Riksbank is now working at developing the monetary policy models in order to also take into account effects via the financial markets. It is also important to improve the analyses of how new macroprudential regulations affect the economy, in particular how they work over time.
Director of Research
STEFAN SANDSTRÖM,, Director of Research.

TORBJÖRN BECKER, Director of SITE (Stockholm Institute of Transition Economics)
RALPH BRYANT, Senior Fellow, Brookings Institution
DALE HENDERSON, Professor, Georgetown University