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Growth and renewal in the Swedish economy

The 2012 McKinsey Global Institute report Growth and renewal in the Swedish economy shows that the nation can’t afford to coast on its achievements. Sweden’s economic growth mainly reflects productivity gains in the areas most exposed to international competition: manufacturing and business and financial services, which together account for only about one-third of the nation’s economy. In its two other main components—the public sector and local services—economic growth has been much slower, at a pace comparable to that of the rest of the EU-15.

Swedish Riksbank: Repo rate held unchanged at 2.0 per cent

The concern over public finances abroad has increased and global growth prospects have deteriorated. The slowdown in the Swedish economy is thus expected to be more pronounced than was forecast in July. The Executive Board of the Riksbank has therefore decided to now hold the repo rate unchanged at 2 per cent and to postpone continued increases slightly.


Unrest in the financial markets

The Swedish banks should be subjected to higher capital adequacy requirements than those stipulated in Basel III

Stefan IngvesSwedish banks’ earnings have improved and loan losses have declined. The banks have good access to market funding and are well-capitalised in an international comparison. The Riksbank therefore assesses that the Swedish banks’ resilience to a poorer economic outcome is good.

The Riksbank: Basel III - tougher rules for banks

The Basel Committee recently presented a new regulatory framework for banks, the so-called Basel III. Essentially, it covers new and tougher rules for capital and liquidity in the banking sector. These more stringent rules are aimed at strengthening banks’ capacity to absorb risks and reduce the risk of new banking crises arising in the future. This box presents Basel III, together with the findings of two studies regarding the macroeconomic consequences of the more stringent regulations. The new regulations entail that the banks must maintain more and considerably better capital and that rules covering banks’ liquidity will be introduced. The main message of this box is that the Swedish banks are well-capitalised and are already complying with the new regulatory framework, in all essentials. Consequently, the implications of the new regulations for both the macroeconomy and monetary policy in Sweden will be minor.

The financial crisis exposed a series of shortcomings in existing regulations and in the supervision of thefinancial sector, as well as in financial companies’ ability to bear and manage risks. Above all, this was a matter of the banks having neither sufficient high-quality capital to cover the losses in their operations nor sufficiently extensive liquidity buffers to manage their funding in a period in which confidence in the banks was being questioned and several financial markets had collapsed. In addition, supervision and regulation previously paid too little attention to systemic risks. This means that supervision and regulation were excessively focused on ensuring that individual financial companies were sufficiently capitalised and resilient. However, this was not enough to capture the overall risks that had built up in the system as a whole. In September 2009, the Basel Committee therefore initiated extensive efforts to strengthen capital requirements for banks, to introduce minimum liquidity requirements for banks, and to formulate new regulatory tools to manage systemic risks. The Basel Committee on Banking Supervision is a committee under the Bank for International Settlements (BIS) which, among other tasks, develops international standards for the regulation and supervision of banks. The BIS has no mandate to introduce regulations, but coordinates the regulatory frameworks of the 27 participating countries, including Sweden.

Basel III, what is currently being implemented?

In September of this year, the Basel Committee reached agreement on the principles by which the new, more stringent minimum regulations for banks’ liquidity should be formulated, as well as a timetable for the introduction of the new regulations. The new regulations will be phased in gradually. The new, more stringent capital requirements will be introduced successively, starting in January 2013, and are to have been fully introduced by January 2019. The start of the introduction of the liquidity regulations is planned for 2015, and these are to have been fully introduced by 2018.

Swedish Banking Lessons

There are models out there for how to fix the financial system. The big crisis, in the view of many, had its roots in the extensive deregulation of the financial sector and expansive monetary policies. The tax system favored borrowing and the loosening of credit markets led to a dramatic expansion in the stock of debt.

Swedish Riksbank's Persson: don't shoot CDS "messenger"

The Swedish central bank uses CDS spreads as an indicator of financial stability

Credit default swaps (CDSs) have been widely blamed for exacerbating the eurozone debt crisis, and few people will have wept on May 18 when Germany's financial regulator tried to rein the market in.

One of those who may have felt a sting of sympathy is Mattias Persson, head of financial stability at the Sveriges Riksbank, Sweden's central bank.

"We shouldn't shoot the messenger," he told Risk in an interview at the start of this month. "In Europe, the net open position in CDSs is much smaller than the amount of sovereign debt outstanding." In other words, the CDS tail isn't wagging the bond market dog – it just gives you an idea of the animal's general health.

For that reason, Persson argues the CDS market can play a useful function for anyone interested in financial stability. The Riksbank, for one, keeps an eye on CDS spreads as an early warning indicator, he says: "Looking at this crisis, I think the CDS market was actually a bit slow to react to some things that turned out to be amiss – but there was some foresight in it and it's something we follow quite carefully, along with bond spreads and a series of other metrics."

US calls on Sweden's "Mr Fix It" Bo Lundgren

Bo Lundgren, the steely-eyed head of Sweden's National Debt office, played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990s.

FT Insight: US is ready for Swedish lesson on banks

By Gillian Tett, The Financial Times, March 12, 2009. Next week, Bo Lundgren, the head of Sweden’s debt office who played a central role in resolving his country’s banking mess in the early 1990s, will embark on a striking mission.

Washington’s Congressional Oversight Panel has summoned Mr Lundgren and others to explain how they fixed Sweden’s banks – presumably to glean tips on what Washington should do next.

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