Review 1, 2013 , The globalisation of the financial...

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sveriges riksbank economic review 2013:1

* ThisisaslightlyrevisedversionofasubmissiontothefinalreportoftheSwedishFinancialMarketsCommitteeEfter finanskrisen – några perspektiv på finansmarknaden [After the financial crisis – some perspectives on the financial market](Reportno.12).TheopinionsexpressedinthisarticlearethoseofKarolinaEkholmandarenotnecessarilysharedbytheRiksbank.ShewouldliketothankHansDellmo,JyryHokkanenandSofiaPossnefortheirhelpinproducingthestatisticalmaterial,aswellasClaesBerg,JoannaGerwin,CeciliaRoos-Isaksson,PerSonnerbyandLarsE.O.Svenssonfortheircommentsonthearticle.

TheglobalisationofthefinancialmarketsfollowingtheglobalfinancialcrisisKarolina EKholm*Professor,DeputyGovernor.

The global financial crisis seems to have led to a break in the trend in recent decades

toward a closer international integration of financial markets. To a certain extent, this

relates to the effects of the ongoing euro crisis, which can be expected to diminish as the

crisis subsides. However, new regulations probably also have a role to play and these may

have a more lasting effect. Greater fragmentation of the financial markets would result

in costs in the form of poorer capital allocation, risk diversification and competition on

the banking market. At European level, a properly structured banking union could help

to prevent such outcomes. The Swedish banks currently enjoy a favourable competitive

situation, partly because they are seen as safe counterparties compared with many

other European banks. Nevertheless, stronger European banks outside Sweden are also

preferable from a Swedish perspective, since they improve competition and reduce the risk

of pressure on the financial markets.

Introduction

WhenLehmanBrothersfiledforbankruptcyprotectionon15September2008,the

internationalfinancialmarketshadalreadybeenshowingsignsofstrainforoverayear.

Thespreadsontheinterbankmarketshadbeenincreasedsincesummer2007,notjustin

theUnitedStates,butalsointheeurozoneandtheUK.Spreadsalsobegantoincreasein

Swedeninsummer2007.Duringthisperiod,itwasstilluncleartomostpeoplejusthow

muchimpactproblemsonthefinancialmarketswouldhaveontheglobalrealeconomy.

However,thefallofLehmanBrotherstriggeredanexceptionallyrapidreductionin

economicactivityinlargepartsoftheworld.Thefinancialdisruptionhaditsoriginsin

problemsontheUShousingmarket,butitquicklyaffectedtherealeconomyaroundthe

worldasaresultofthestrongglobalisationofthefinancialmarkets.Globalisationhadbeen

underwayforseveraldecades,drivenbyacombinationofpoliticaldecisionstofacilitate

tradinginfinancialassetsandtechnicalprogresswithininformationandcommunications.

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Thefactthattheshockspreadsorapidlyandhadsuchmajorconsequencesforthereal

economy,hasledtotheglobalisationofthefinancialmarketsbeingviewedtosomeextent

inanewlight.Theefficiencygainsofmoreintegratedmarketshavecometobeweighed

againstpossiblerisksintermsofmaintainingthestabilityofthefinancialsystem.Policy-

makershavebecomeconsiderablymorescepticalaboutfinancialintegration.Particularly

incountrieswithlargefinancialsectors,thepositiveviewoftheirownbanks’international

competitivenesshasbeentemperedwithconcernaboutwhatabankingcrisiscandotothe

economy.TheexperiencesofcountriessuchasIcelandandIrelandarealarming,wherea

collapseofthebankingsystemwreakedhavoconpublicfinances.

Thisarticlediscusseshowtheprosandconsoffinancialintegrationcanbeviewedin

lightofthefinancialcrisisandhowthecrisishasaffectedtheintegrationprocess.The

articlealsoconsiderswhatchangesnewregulationsforfinancialinstitutionsmaybring.

Swedenisacountrywithalargefinancialsectorrelativetotheeconomyasawhole.The

Swedishauthoritieshavethereforeactivelysoughttotightenuprequirementsonthebanks.

TheSwedishbankshavealsobeenquicktomeettheserequirements,evenwherethey

haveonlybeenissuedintheformofrecommendations.Theirgoodlevelofcompliancealso

seemstoprovidesomecompetitiveadvantages,whichimprovethebanks’abilitytoexpand

abroadandthusgrowevenlarger.

Thearticlebeginswithadiscussionoftheprosandconsoftheinternational

integrationofthefinancialmarkets.Thisisfollowedbyasectiononhowthefinancial

crisishasaffectedthelevelofinternationalintegrationonthesemarkets.Insomeareas,

integrationseemstohavedeclinedbutitisdifficulttoknowwhetherthisisatemporary

ormorelastingeffect.Followingthissection,thereisadiscussionofnewregulationsand

frameworkswhichhavebeenintroducedorareabouttobeintroduced.Finally,Idiscuss

whattheconsequencesofthechangedconditionsonthefinancialmarketscanbeexpected

toinvolveforSweden.

Prosandconsoffinancialintegration

EFFICIEnCyGaInSanDIMPROvEDRISKDIvERSIFICaTIOn

Theglobalisationofthefinancialmarketsinvolvesseveralaspectsoffinancialintegration:1

• opportunitiesforcompaniestoinvestabroadandtofinancedomesticinvestments

usingsharecapitalorloansfromabroad,

• opportunitiesforindividualandinstitutionalinvestorstotradeinforeignsecurities,

suchassharesandbonds,and

• opportunitiesforbankstoexpandabroadandlendoninternationalinterbank

markets.

1 alsén(2009)providesacomprehensivereviewoftheglobalisationofthefinancialmarket.

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accordingtothetheoreticalliterature,therearepotentiallymajorbenefitsfrom

internationallyintegratedfinancialmarkets.Twomainbenefitsareusuallyassumed:

• abetterinternationalallocationofcapital,and

• abetterdiversificationofrisk.

abetterallocationofcapitalcanbeobtainedbecausesavingsincountrieswherethe

realreturnoncapitalisrelativelylowcanbeusedtofinanceinvestmentsincountries

wheretherealreturnoncapitalisrelativelyhigh.Thisgeneratespotentialgainsasthe

limitedinvestmentswhichcanbefinancedusingtotalglobalsavingsaremadewherethey

providethebestreturn.Theinternationaltradingoffinancialassetsthereforeenables

theseparationofnationalsavingsandnationalinvestments.Thesavingsgeneratedin

developedcountrieswithhighincomelevels,suchasSweden,canbeusedtofinance

investmentsinrapidlygrowingdevelopingcountries,forexample,wherethereisagreat

dealofscopeforinvestmentstoincreaseproductivity.TheexpectedreturnonSwedish

savingswouldbehigherinthiscase,whileatthesametime,thefinancingofinvestments

inemergingeconomieswouldbeexpectedtohelpincomelevelsintheseeconomiesmove

morequicklytowardsthoseofSweden.

Wheneverresearchershaveattemptedtoquantifythistypeofgain,however,they

havefoundnoevidencetosuggestthatitwouldbeparticularlylarge.anoftencitedstudy

byGourinchasandJeanne(2006),forexample,hasconcludedthatthewelfarebenefits

ofgoingfromasituationwithoutanycapitalmobilitytoasituationwithcompletelyfree

movementofcapitalisroughlyequivalenttoaonepercentincreaseinconsumptionfor

atypicalemergingeconomy.2Onereasonforthecomparativelysmallestimatedgainsis

thatthelowleveloflabourproductivityassociatedwithalowincomelevelseemsnotto

beprimarilytheresultofalackofcapital,butisdependentonotherfactors,suchaspoorly

functioninginstitutions.

Theabilityoffinancialintegrationtoenablethebetterdiversificationofriskisduetothe

factthatthevolatilityinacountry’sincomemaybereducedashouseholdsownforeign

assets,providedthatmacroeconomicdevelopmentsdifferbetweencountries.Households

arethusabletoavoidreducingtheirconsumptionshouldthecountryexperiencea

negativeshockbyholdingassetswithareturnthatisinsteaddependentondevelopments

abroad.Theresultsofempiricalstudiesofthegainsfinancialintegrationmaybringas

aconsequenceofbetterriskdiversificationaremixed–therearestudieswhichindicate

significantgains,butalsostudieswhichdonotfindanygainsatall.3

Despitestrongtheoreticalargumentsforsignificanteconomicgains,theempirical

literatureasawholethereforedoesnotstronglysupporttheideathattheglobalisationof

financialmarketsreallyhasresultedinsuchgains.Itishardtosay,however,whetherthis

isbecauseofthedifficultyinmeasuringthegainswhichhaveneverthelessbeenmade,or

whetherthegainsareinfactsmall.

2 Therearestudieswhichidentifymoresignificanteffects,however,suchasHoxha,Kalemli-Ozcanandvollrath(2009).

3 See,forexample,Kose,PrasadandTerrones(2009).

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GLOBaLIMBaLanCES

akeyobservationisthatthepatternforcountries’netflowsofcapitaldoesnotfollow

whatistheoreticallyexpectedinasituationwherethecapitalmarketsarefullyintegrated.

Onewayofstudyingthenetflowsistofollowthecurrentaccount,whichshowsthe

differencebetweenwhatisproducedandwhatisabsorbedduringagiventimeperiod.

Ifthevalueofwhatisabsorbedexceedsthevalueofwhatisproduced,thereisadeficit

whichmustbecoveredthroughaninflowofcapital–aloan–fromabroad.Theloanmust

berepaidwithinterestinthefuture,however.Whenthatdaycomes,thevalueofwhat

isproducedmustexceedthevalueofwhatisabsorbed,forexamplebyexportsofgoods

andservicesexceedingimportsofgoodsandservices.Countrieswithacurrentaccount

deficitimportcapital,whilecountrieswithacurrentaccountsurplusexportcapital.Those

countrieswhichimportcapitalhavealowerlevelofsavingsthanisrequiredtofinance

theirowninvestments.Countrieswhichexportcapitalhaveahigherlevelofsavingsthanis

requiredtofinancetheirowninvestments.

Withfullyintegratedcapitalmarkets,wewouldexpectthatcapital-richhigh-income

countrieswouldtendtohaveacurrentaccountsurplusandlow-incomecountrieswitha

shortageofcapitalwouldhaveacurrentaccountdeficit.ascanbeseenfromChart1,

Chinaandtheemergingeconomiesinasiahavehadasurplussincethelate1990s,while

theUnitedStateshashadalargedeficitforalongperiod.TheUnitedStatesisactuallythe

countrythatimportsthemostcapitalintheworld.China’scapitalmarketsareofcourse

notparticularlyintegratedwiththerestoftheworld–theChinesecurrency,renminbi,is

notfullyconvertibletoothercurrencies,forexample.Itisthereforenotparticularly

surprisingthatChina’scapitalflowscannotbeexplainedbywhatwouldbeexpectedin

fullyintegratedcapitalmarkets.However,thephenomenonassuch–thatarelativelypoor

butrapidlygrowingcountryexportscapitaltoarichcountrywithconsiderablylessgrowth

potential–appearstobethewrongwayroundandisoftenreferredtointermsofglobal

imbalances.

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Rest of the world OCADC

Oil-exporting countries

China and emerging Asian countries

Germany and Japan USA

Discrepancy

Chart 1. Current account of countries and regions, percentage of total global GDP

Note. OCADC comprise Bulgaria, Croatia, the Czech Republic, Romania, Hungary, Ireland, Lithuania, Poland, Portugal, Estonia, Greece, Spain, Turkey and the United Kingdom. The discrepancy arises because the total deficit does not exactly correspond to the total surplus.

Source: IMF WEO April 2012

Theseimbalancesareoftenquotedasacontributoryfactortotheglobalfinancialcrisis

of2008-2009.ThewidespreadaccesstocreditintheUnitedStateswaspartlytheresult

oftherestoftheworld’swillingnesstoinvestinUSassetsandisconsideredtohave

contributedtotherapidincreaseindebtandtherebytogreatervulnerability.asTable1

shows,globalsavingsincreasedbetween2001and2008fromaround21percentto

around24percentofglobalGDP.Incontrast,savingsintheUnitedStatesfellsignificantly

duringthisperiod,fromaround16percenttoaround12percent.Savingsincreased

primarilyinChina,theemergingeconomiesinasia,Germanyandoil-exportingcountries.

Table 1. Savings (S), investments (I) and the difference (S-I) as a proportion of GDP in each country or group of countries (percentage)

2001 2008 2011

S I S-I S I S-I S I S-I

USa 16.5 19.1 -2.6 13.4 18.1 -4.7 12.2 15.5 -3.3China 37.6 36.3 1.3 53.2 44 9.2 51.3 48.6 2.7Emergingeconomiesinasia 27.6 24.2 3.4 32.6 27.6 5 32.6 25.9 6.7Germany 19.5 19.5 0 25.5 19.3 6.2 23.9 18.3 5.6Oil-exportingcountries 33.3 24.8 8.5 38.9 25.6 13.3 36.4 24.7 11.7World 21.4 21.5 -0.1 24.2 23.8 0.4 23.9 23.4 0.5

note.Savingsandinvestmentsfortheworldasawholearethesamesizebydefinition.Thefactthattheyareslightlydifferentinthetableistheresultofmeasurementerrors.

Sources:Berg(2012,table17.3,page365)andIMF(2012a,2012b)

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Thereareseveralpotentialexplanationsforthisdevelopment.Thelowlevelofsavingsin

theUnitedStatesispartiallytheresultofnegativesavingsinthepublicsector;inother

wordsalarge,persistentbudgetdeficit.accordingtothetwindeficithypothesis,there

isastrongpositivecorrelationbetweenabudgetdeficitandacurrentaccountdeficit.4

However,UShouseholdsavingswerealsolowthroughoutthefirstdecadeofthiscentury

andalargeproportionofthegrowthinconsumptionintheUShasbeendrivenbycredit.

InChina,thelackofpubliclyprovidedsocialsecuritysystemshascreatedaneedforhigh

levelsofsavingamonghouseholds.So,althoughinvestmenthasbeenveryhighinChina,

savingshavebeenevenhigher.Cabellero,FahriandGourinchas(2009)suggestthatthe

lackoftradedfinancialinstrumentsinChinaresultsinsavingsbeingchannelled,toagreat

extent,throughcapitalflowstoacountrysuchastheUnitedStates,withwell-developed

financialmarkets.accordingtotheiranalysis,thismaycontinueforaslongasthis

differenceinfinancialdevelopmentexists.5

Table1alsoshowsthatUSsavingsasaproportionofGDPfellfurtherbetween

2008and2011bymorethanonepercentagepoint.atthesametime,investmentsasa

proportionofGDPfellbyover2.5percentagepoints.Thereduceddifferencebetween

savingsandinvestmentsisreflectedinareducedcurrentaccountdeficit(seeChart1).If

theproportionofinvestmentsreturnstothelevelsseenintheUnitedStatespriortothe

financialcrisis,thecurrentaccountdeficitcanbeexpectedtoincreaseagain.

Countrieswithpersistentlylargecurrentaccountdeficitsoftenrunintoproblems.The

deficitinitselfmeansthataninitiallynegativenetassetpositionvis-à-vistherestofthe

worldincreasinglybecomeslarger,andsoonerorlaterthisdebtmustberepaid.Ifthe

creditorsloseconfidenceinthecountry’seconomicprospects,theymaynotbewillingto

refinancetheloans,whichriskstriggeringacrisiswherethecountrymustmovequickly

fromadeficittoasurplus.

Manydevelopingandemergingeconomieswithlarge,persistentcurrentaccountdeficits

havebeenaffectedbyasuddendramaticreductioninorcompleteevaporationofthe

willingnessoftherestoftheworldtofinancefurtherdeficits.Thisaffectedmanycountries

inasia,forexample,duringtheso-calledasiancrisis.6Theonlywaysofmovingfroma

deficittoasurplusareeitherbyobtainingmoreincomefromabroad–forexamplethrough

increasedexports–orbyreducingexpenditureonpaymentsgoingabroad–forexample

throughreducedimports.Itisrarelypossibletoincreaseexportsintheshortterm,soin

practiceitisimportsthatmustbereducedthroughlowerconsumptionandlessinvestment.

Thistakesplacethroughageneraldownturnintheeconomy,whereproductionand

incomesmayfallsignificantly–aprocesswhichcanleadtosocialunrestandpolitical

instability.

4 Seenormandin(1999),forexample.5 TheideathattheUScouldhaveacurrentaccountdeficitfortheforeseeablefutureisalsosupportedbyan

analysisbyGourinchasandRey(2007),whichshowsthattheUSneverthelesshasanetinflowintermsofreturnonassetsandliabilitiescomparedwiththerestoftheworld.

6 See,forexample,Corsetti,PesentiandRoubini(1999).

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Beforethefinancialcrisis,thereweremanywhoexpectedsomethinglikethistohappen

totheUnitedStates.Whattriggeredtheglobalfinancialcrisisin2008-2009,however,

wasinmanywaysadifferentprocess.Itwasnotaboutasuddenreductionintheworld’s

willingnesstoinvestinUSassets,butwasmoreacrisisofconfidencewithintheUS

financialsector,whichwasheavilyindebtedandexposedtobadmortgageloansthrough

complexfinancialproducts.WhentheproblemsontheUSfinancialmarketspreadand

developedintoaglobalfinancialcrisis,theworld’sinterestininvestingitsassetsinUS

securitiesactuallyincreased,whichamongotherthingsresultedinanappreciationofthe

dollarandfallinginterestratesforUSgovernmentsecurities.

RISKSaSSOCIaTEDWITHLaRGEGROSSFLOWS

Behindthenetflowsofcapitalwhicharereflectedinthecurrentaccounts,thereare

verylargegrossflows.Thesegrossflowscanaffectthestabilityofthesystemoverand

abovetheglobalimbalancescausedbythenetflows.Someevenbelievethatanystability

problemscausedbythenetflowsaredwarfedbythosecausedbythegrossflows.7The

netflowswhichacurrentaccountsurplusordeficitentails,resultinachangeinthewealth

positionvis-à-visothercountries,asasurplusincreasesnetassetsandadeficitnetliabilities

vis-à-vistherestoftheworld.However,thesechangesinthewealthpositioncanbealmost

negligiblerelativetothechangeswhichresultfromcapitalgainsandlossesonthestockof

assetsandliabilitieswhichthecountryhasinrelationtotherestoftheworld.Thesegains

andlossesarisepartlybecausethevalueofvarioustypesofassetschangesandpartly

becausetheexchangeratemoves,changingthevalueindomesticcurrencyofassetsand

liabilitiesdenominatedinforeigncurrency.

Itwouldappearthatthelargegrossflowsderivetoagreatextentfromvarioustypesof

debtinstruments,particularlyshort-termloanswithinthebankingsector(Obstfeld,2012).

Chart2showstheoutstandingstocksofinterest-bearingsecuritieswhicharetradedonthe

internationalmoneyandbondmarkets.Thesestocksincreasedstronglyuntilthefinancial

crisishit,butsincethentheyhaveremainedquitestableatjustovertheUSD20trillion

mark.asthechartshows,alargeproportionofinternationaltradingininterest-bearing

securitiestakesplaceinsecuritiesdenominatedinEUR.Themajorityofthesesecuritiesare

issuedbybanksandotherfinancialinstitutions.8

7 See,forexample,BorioandDisyatat(2011).8 InSeptember2012,financialcompaniesweretheissuersofaround75percentoftheoutstandingstockof

internationalinterest-bearingsecurities(BIS,2012).

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Other currency GBP JPY EUR USD

Chart 2. International trading in interest-bearing securities by currency, value of stocks, USD billion

Note. Before 1999 the category EUR consists of interest-bearing securities in the currenciesof the initial euro area countries and the European Currency Unit (ECU).

Source: BIS (2012)

Tradingindebtinstrumentsinvolvinglargevolumesmaycreaterisksforfinancialstability.

Thisisbecauseshort-termloanstendtoincreasetherefinancingriskandtherebythe

riskofliquidityproblemsspreadingrapidlythroughthesystem,affectingmorefinancial

institutions.Thegrossflowscreateproblemsbecausetheforeignassetsacquiredby

certainplayersinthemarketcannotbeusedtocovertheliabilitiesgeneratedbyothersina

situationwherethelatterexperienceliquidityproblems.

Thisisthereforeonewayinwhichtheglobalisationofthefinancialmarketscanhave

anegativeimpactonfinancialstability.Largegrossflowsofcapitalbringariskofmajor

knock-oneffectsbetweendifferentmarkets,whereproblemsinonecountryspreadto

othercountriesandthereisasnowballeffectwheretheproblemsgetbiggerandbigger,as

dothecostsofhandlingthem.

RISKSaSSOCIaTEDWITHDERIvaTIvESTRaDInG

Onesegmentofthefinancialmarketthathascomeunderscrutinyinconnectionwith

thefinancialcrisisisthemarketforfinancialderivatives.Derivativesaresecuritieswhich

arelinkedtothevalueofanunderlyingasset,suchasshares,bonds,commoditiesor

currencies.Theyareused,amongotherthings,tohedgeagainstafallinvalueofthe

underlyingassetsandcanthereforeimproveriskmanagement.However,therearealso

obviousspeculativeelementstoderivativestrading.Itenablesbetsthatthevalueofthe

underlyingassetwillmoveinacertaindirection.Thewrongbetcanresultinveryheavy

losses.Derivativesarealsooftencomplex,whichmayhavecontributedtothedifficulty

ofboththesupervisoryauthoritiesandthemanagementoftheinstitutionstradingin

derivativestograsptherisksinvolved.ThemajorinsurancecorporationaIG(american

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InternationalGroup),forexample,madesuchlargelossesoncreditderivativesin2008that

thecompanywouldhavegonebankruptwithoutthesupportoftheUSgovernment.

Internationaltradeinderivativesgrewverystronglyduringtheyearsleadingupto

thefinancialcrisis.Chart3showsthattheoutstandingvalueofderivativestradedon

internationalmarketsamountedtoaroundUSD750trillionin2008.Sincethen,thisvalue

hasremainedcomparativelystableataroundUSD700trillion.

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Exchange traded options Exchange traded futures OTC Non-allocated

OTC Credit derivatives (from 2004H2) OTC Commodities derivatives

OTC Equity derivatives OTC Interest rate derivatives OTC Currency derivatives

Chart 3. International derivatives market, nominal outstanding amount, USD billion

Sources: BIS “OTC derivatives statistics” and “Exchange traded derivatives”

MostderivativestradingtakesplaceontheOTCmarket,thatisoutsideorganised

exchanges,andtheunderlyingassetsareprimarilyinterest-bearinginstruments.Thefact

thatsuchalargeproportionoftradingtakesplacewithoutacentralcounterpartymakesit

difficultfortheauthoritiestoobtainadequateinformationaboutthetradeinordertosee

therisksinvolved.Inrecentyears,effortshavebeenmadeataninternationalleveltoget

moreofthetradinginderivativesontoexchangesorotherkindsofcentralcounterparty.

CROSS-BORDERBanKInGaCTIvITIES

anotheraspectoffinancialintegrationistheincreasedsignificanceofcross-borderactivities

forbanks.Theexperiencesofthepastfewyearshaveshownthatitcanbeverydifficult

andcostlytodealwithbanksbesetbyproblemsinacross-bordercontext.Thisispartly

becausetherearemanystakeholdersinvolvedintheprocessandpartlybecausetherules

forwindingupafinancialinstitutionareevenmoreinadequateinternationallythanthey

arenationally.Sincegovernmentsareaccountabletotheirrespectiveparliaments,and

ultimatelythevoters,thereisalsoastrongtendencytofavournationalsolutions.During

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thefinancialcrisistherewerealsoseveralpoorlycoordinatedcrisissolutionsimplemented,

whichresultedinextensivegovernmentsupportbeinggiventobanks.9

nevertheless,therearesomewhomaintainthatcross-borderbankingasawhole

strengthensratherthanweakensfinancialstability.10Foreignbanksaregenerallynotas

susceptibletogovernmentpressuretolendto“prioritisedborrowers”asdomesticbanks,

particularlyifthelatterarepartiallystate-owned.Foreignbankscanthereforehelpto

increasetheoverallqualityofloanportfolios.Sinceforeignbanksareactiveonmorethan

onemarket,theyalsousuallyhaveamoregeographicallydiversifiedcreditportfolio.This

meansthattheyrunlessofariskofbeingaffectedbyanypressureswhichmaybebrought

tobearonthelocalmarket.Theyalsogenerallyhavebetterconditionsforobtaining

internationalfinancingandmaythereforefinditeasiertodealwithanyliquidityproblems

thatmayarise.

Thefinancialcrisisandthedegreeofintegration

Globalisedfinancialmarketsareusuallyconsideredtobeamodernphenomenon.However,

muchoftheinternationalisationthathastakenplacesincetheearly1980sisinsome

respectsareturntothesituationthatprevailedbeforetheoutbreakoftheFirstWorld

War.atthattime,thefinancialmarketsaroundtheworldwerehighlydevelopedand

therewerelargemovementsofcapitalbetweencountries.11Incontrast,duringtheperiod

fromthedepressionofthe1930stotheendofthe1970s,thefinancialmarketswere

regulatedandopportunitiestobuyforeignassetswerelimited.Duringthe1980s,most

restrictionsweregraduallyliftedinWesterncountriesandJapan,andtheeconomieswere

onceagainopeneduptocapitalflows.Duringthe1990s,developmentsininformation

andcommunicationtechnologycontributedtoevengreaterfinancialintegrationandnew

financialinstrumentswerecreatedandlaunchedonthemarket.

FInanCIaLOPEnnESS

Onewayofstudyingdevelopmentsinrelationtotheregulationofcross-borderfinancial

transactionsistogaugetheso-calledfinancialopennessofcountries.ameasurementof

thisisshowninChart4.accordingtothis,financialopennessfortheworldasawholehas

graduallyincreasedsincethe1980s.TheincreasehasbeenespeciallynoticeableinEurope.

9 ThehandlingofFortisandthedefaultoftheIcelandicbanksareclearexamplesofthis.10 See,forexample,Barbanavaretti,Calzolari,PozzoloandLevi(2010),Goldberg(2002,2004,2008).11 See,forexample,ObstfeldandTaylor(2004).

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Chart 4. Financial openness of countries, Chinn-Ito index

Note. The index is based on binary dummy variables which codify the tabulation of restrictions for cross-border financial transactions as reported in the IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). The data used for the various geographical areas is unweighted averages. For further information, see Chinn and Ito (2008).

Sources: http://web.pdx.edu/~ito/Chinn-Ito_website.htm and the Riksbank

1970 1975 1980 1985 1990 1995 2000 2005 2010

Sweden United Kingdom

East Asia South America

Eurozone

Worldwide

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Itisdifficulttosaywithanydegreeofcertaintywhateffectthefinancialcrisishashad

onthistrend,asitisonlyarelativelyshorttimesincethecrisishitandtheworldhasstill

notreturnedtonormality.Whatwasoriginallyaglobalfinancialcrisishasnowturned

intoaEuropeandebtcrisis,whichcontinuestocreatepressureonthefinancialmarkets.

Chart4neverthelessshowsthattheincreaseinfinancialopennessfortheworldasawhole

hastailedoffinrecentyears.12TheunderlyingtrendshereareforlessopennessinSouth

americaandslightlyincreasedopennessinasiancountries.asthechartshows,South

americahasahistoryofalackoffinancialopennessanditwasactuallyonlytowardsthe

endofthe1990sthatfinancialopennessinSouthamericancountries,asmeasuredhere,

exceededtheaveragefortheworldasawhole.

Oneconsequenceofthefinancialcrisishasbeenverylowmonetarypolicyratesin

thosecountrieswhoserealeconomyhasbeenhitespeciallyhard.Thisappliestothe

UnitedStates,theeurozoneandtheUnitedKingdom.Manyemergingeconomieshave

experiencedastronginflowofcapitalduringthisperiod,whichtoacertainextent

originatesfromtheinvestors’strategyofgeneratingarbitrageprofitsbyborrowingatlow

interestratesintheUnitedStates,EuropeandJapanandtheninvestingathigherinterest

ratesintheemergingeconomies,so-called“carrytrade”.Incountriesthataresubjectto

suchcapitalinflows,theinflowsmaybeconsideredadestabilisingforce,astheycreate

upwardspressureonassetpricesandthevalueofthecurrency.Manycountrieshavealso

takenstepstolimitsuchinflows,suchasBrazil,SouthKorea,PeruandThailand.InBrazil,

inparticular,therehavebeenalotofstrainswithregardtocapitalinflowsfromcountries

12 Theindexmeasuresacountry’sopennessbasedonitscapitalaccount.ItwasintroducedbyChinnandIto(2006).

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withlowpolicyratesandrepresentativesoftheBraziliangovernmenthaveevenspokenof

a“currencywar”.13Thefactthatthecentralbanksofmanycountriesarealsoattemptingto

keeplong-terminterestrateslowthroughthepurchaseofassetsandotherunconventional

methods,hasfurtherfuelledthedebateaboutacurrencywar.

Whetherthemeasurestorestricttheinflowofcapitalhavehadanypositiveeffectis

currentlythesubjectofwidespreaddiscussion,withoutanyconsensushavingbeenreached.14

However,alotofattentionhasbeendirectedtowardsthefactthatanorganisationsuchas

theInternationalMonetaryFund(IMF),whichpreviouslyhasadvocatedfreecapital

movements,hasreviseditspositionandisnowstressingtheproblemsthatcapitalflows

maybring(IMF,2012c).TheIMFalsoconsidersthatthedecision-makersinthecountries

whichgeneratecapitaloutflowshavearesponsibilityandshouldbearinmindhowtheir

decisionsaffecttheeconomicandfinancialstabilityofothercountries.

REDUCEDBanKLEnDInG

Theemergingeconomiesmaybeaffectedbyotherindirecteffectsofthehandlingofthe

financialcrisis,however.asaresultofthemorestringentcapitalrequirementsimposedon

thebanksbothbytheauthoritiesandbypotentialinvestorsinthewakeofthefinancial

crisis,manybankshavehadtoreducetheirbalancesheets.Bankswithcross-border

activitiesoftencutbackontheirlendingabroadfirst.Thiscancreateproblemsincountries

wherethebankingsectorisdominatedbyforeign-ownedbanks–whichisoftenthecasein

emergingeconomies–asthereisariskofareductioninthesupplyofcredit,whichinturn

candampeneconomicactivity.Toacertainextent,areducedsupplyofbankcreditcanbe

expectedtohavetheoppositeeffectontheeconomycomparedwithcapitalinflows.The

effectonaparticularemergingeconomyoftheexpansionarymonetarypolicyoftheUnited

States,JapanandEuropeandthemorestringentrequirementsonthebankstherefore

dependsonwhicheffectdominates.

TheBankforInternationalSettlements(BIS)collectsdataontheforeignassetsand

exposuresofbanks.Chart5showstheforeignexposureofbankssince2005according

todatafromtheBIS.Thisisnotaperfectmeasurementofthebanks’lendingabroad,but

itgivesanideaofhowtheirforeignassetsevolve.Fortheworldasawhole,wecanseea

clearincreaseintheseexposuresintheyearsleadinguptothefinancialcrisis,followedbya

markedfallin2008.Sincethen,exposureshaveremainedatamoreorlessconstantlevel.

WecanseethattherearenosignsofreducedexposureforUKandUSbanks–inthelatter

casequitethereverse,asexposuresincreasedslightlyin2008-2009.Incontrast,theforeign

exposuresofbanksintherestofEuropehaveclearlydeclined.

13 BrazilianfinanceministerGuidoMantegawarnedofacurrencywarinSeptember2010.14 astudybyKlein(2012)findsthesemeasurestohavelittleeffect,forexample.

– 13 –


Chart 5. Foreign exposure of banks, USD billion

Note. Banks in all reporting countries include those countries whose banks (at least 90 per cent of the banking system in the respective country) report to the BIS. There are 30 of these countries in total. Banks in the rest of Europe include banks in all European countries which report to the BIS, excluding the United Kingdom.

Source: BIS

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

2005 2006 2007 2008 2009 2010 2011 2012

Banks in all reporting countries Banks in United States

Banks in the United Kingdom Banks in the rest of Europe

TheIMFhashighlightedtheriskthatthereductionofEuropeanbanks’activitiesinasia

maycreateproblemsintermsofaccesstotradecreditsandfinancingofmajorinvestment

projectsthere(IMF,2012d,chapter2).Europeanbankshavetypicallydominatedwithin

thesemarketsegments.Toacertainextent,thiscreatesopportunitiesforbanksfromother

countriestoincreasetheirmarketshares.However,financingmajorinvestmentprojects,

inparticular,isahighlyspecialisedactivityanditcanbedifficultforotherbankstofully

compensatethereducedsupplyofcreditfromEuropeanbanks,sincethisoftenrequires

syndicatedloanswithlongmaturity.

Withregardtotradecredits,ontheotherhand,itappearsthatbanksfromotherregions

havetakenoversomeofthemarketsharesoftheEuropeanbanksinasia.Thereare

indicationsofthisinparticularwithregardtoaustralianandJapanesebanks.Chart6shows

theexposuresofbankstocountriesinasiadividedintoEuropean,Japaneseandaustralian

banks.ItcanclearlybeseenthattheexposuresoftheEuropeanbankstocountriesinasia

fellsignificantlyin2008butthenstartedtoincreaseagain.However,thechartsuggests

thattheseexposuresthenfellduring2011.ItappearsthattheexposuresofJapaneseand

australianbankstocountriesinasiahaveincreasedsomewhat,althoughoveralltheyareat

aconsiderablylowerlevelthanthoseoftheEuropeanbanks.

– 14 –


Banks in Europe Banks in Australia Banks in Japan

Chart 6. Bank exposures to countries in Asia, USD billion

Note. The data in the chart refers to banks which report to the BIS. Japan is excluded from countries in Asia.

Source: BIS

0

100

200

300

400

500

600

700

800

900

1 000

2005 2006 2007 2008 2009 2010 2011 2012

The foreign exposures of Swedish banks have generally not declined. This can be seen in

Chart 7. Exposures in the Nordic countries have continued to increase, while exposures in

the Baltic States have fallen off. Exposures in the rest of Europe have remained relatively

constant since 2005.

0

The Nordic Region The Baltic States

Eastern Europe Other EU countries

Chart 7. Foreign exposures of Swedish banks, USD billion

Note. The data for other EU countries excludes the Baltic States and Poland. Eastern Europe comprises Poland, Ukraine and Russia.

Source: BIS

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011 2012

600

– 15 –


Thepictureisalittledifferent,however,ifwefocusontheSwedishbanks’lendinginthe

BalticStates,whichcanbeseeninChart8.15TheSwedishbankshaveclearlyreduced

theirlendingthereasaresultofthefinancialcrisis.ThisisparticularlytrueofLatviaand

Lithuania,whilethereductionislesspronouncedinEstonia.

Estonia Latvia Lithuania

Chart 8. Swedish banks’ lending in the Baltic States, EUR million

Sources: The banks’ annual reports and the Riksbank

8 000

9 000

10 000

11 000

12 000

13 000

14 000

15 000

16 000

17 000

2006 2007 2008 2009 2010 2011 2012

Onthewhole,itappearsthatcountriesinEasternandCentralEuropehavebeenhit

thehardestbythereductioninbanks’lendingabroad.Thereductioninbanklendingin

emergingeconomiesislargelydrivenbytheproblemsthebanksareexperiencing.Since

banksexperiencingproblemsareprimarilybanksfromtheeurozoneandasitismostly

thesebanksthathaveforeignoperationsineasternandcentralEurope,thecutbacks

therehavebeenparticularlysevere.16Whetherthisconstitutesaneconomicproblemfor

thesecountriesisnoteasytodetermine,however.Insomerespects,thedevelopmentin

easternandcentralEuropehasbeenreminiscentofthatinsouthernEuropeandIreland

beforethecrisis,withlargecurrentaccountdeficitscombinedwithrapidlyrisingunitlabour

costs,indicatingadeteriorationincompetitiveness.Thisdevelopmentwasprobablynot

sustainableinthelongrun.Morerestrictivelendingshouldthereforeatleastpartially

representanadjustmenttotheunderlyinggrowthconditions,whichmaynothavefully

justifiedthegrowthincreditobservedbeforethecrisis.

15 TheexposuresshowninChart7arereportedonthebasisofthecountrywhichultimatelybearstherisk,whichisnotalwaysthesameasthecountrywherethelendingtakesplace.Therefore,theexposuresshowninChart7differfromthoseshowninChart8.

16 Foranempiricalanalysisofthefactorsbehindthereductioninlendinginemergingeconomies,seeavdjiev,KutiandTakáts(2012).

– 16 –


THEInTERBanKMaRKET

accordingtothelateststatisticsfromtheBIS,activityontheinternationalbankingmarkets

hasrecentlydeclinedconsiderably(BIS,2012,2013).Cross-borderclaimsbetweenbanks

havecontractedeveryquartersinceQ42011(thelatestprovisionalstatisticsrelateto

Q32012).Duringthesecondquarterof2012,cross-borderclaimsbetweenbanksin

developedeconomiesreducedbyUSD344billion.Mostofthisreductioncanbeattributed

toreducedclaimsonbanksintheUKandtheUnitedStates.asmallerportioncanbe

attributedtoreducedlendingtobanksintheeurozone,primarilyinGermany,Spainand

thenetherlands.Thereductionincross-borderclaimswasmainlydrivenbyareductionin

loansbetweenvariouspartsofinternationalbankinggroups.

TheSwedishbanksappeartohaveremainedrelativelyunaffectedbythereduced

activityontheinterbankmarket,however.Theycontinuetoenjoygoodaccesstofunding,

notleastshort-termfundinginUSD.Chart9showshowtheUSmoneymarketfunds’

exposurestoEuropeanbankshavedevelopedsincethefinancialcrisis.Thesefunds

havereducedtheirtotalexposurestoEuropeanbanksbyoverhalf,fromaroundUSD

1100billionduringautumn2009toaroundUSD500billionduringautumn2012.Their

exposurestothenordicbankshaveremainedmoreorlessconstantduringthisperiod,

however.

Chart 9. US money market funds’ exposures, USD billion

Exposures to Nordic banks Exposures to European banks

0

200

400

600

800

1 000

1 200

Sep2009

Jan2010

May2010

Sep2010

Jan2011

May2011

Sep2011

Jan2012

May2012

Sep2012

Sources: Fitch Ratings and the Riksbank

Thus,overallthereisaclearindicationthatthefinancialcrisishassetglobalisationback

somewhat.Somecountrieshavereintroducedrestrictionsoncapitalinflows.Somecross-

borderbankshavefocusedtheiractivitiesmoreontheirhomecountries,therebybecoming

morenationalinnature.Itistooearlytotellwhetherthisdevelopmentistemporary–

somethingwhichinthefuturewillappearasakinkinthecurves–oranewtrend.

– 17 –


New rules create new challenges

New regulations for the activities of financial institutions are being drawn up and

introduced around the world. This may result in more lasting changes of the global

financial markets. The new regulations are more stringent and are being designed on the

basis of the deficiencies revealed during the financial crisis. Extensive efforts have been

made internationally in recent years to implement new regulations. The aim has been to

dramatically reduce the likelihood of a global financial crisis happening again and to ensure

that the costs of future global crises will be significantly lower should they nevertheless

arise.

Some believe that the recent regulation brings a risk of returning to the world as it was

before the days of deregulation, with financial markets performing their basic functions

poorly: that is processing payments, turning savings into financing, and managing risks.

This was also a world with significantly less internationally integrated financial markets than

in recent decades. Others believe, in contrast, that the new rules are not strict enough and

are far too close to the situation before the financial crisis. It is difficult to determine exactly

what the right approach is in this area, so the discussions about how the regulations should

be designed are in all certainty set to continue.

BaSEl III accOrd

For Sweden, the regulations agreed upon within the EU are of major importance, since

these can be expected to be binding. The EU reforms are affected in turn by the negotiations

underway at international level to agree on which rules all countries should introduce. The

Basel committee, which is an international committee that makes recommendations on

banking regulations, has been working since the financial crisis to provide new

recommendations in precisely this area. The new recommendations are known as the Basel

III accord (Basel committee on Banking Supervision, 2010a, 2010b). The basic principles of

the new regulations are that the banks will be required to hold more and better-quality

capital and to have liquidity buffers.

Work is currently underway to implement the Basel III accord in many parts of the

world. at EU level, the new requirements for how much and what kind of capital the

banks must hold will be implemented in a new directive and a new regulation (usually

referred to together as the crd IV Package or crd IV/crr). The European commission

has submitted a proposal, on which there has not yet been a final decision. The Swedish

government has been critical of some elements of this proposal. One such element is

that the capital requirements imposed on banks within the EU should be completely

harmonised. That is, they will not just be set on the basis of a specified minimum level, but

will also have an upper limit, so-called maximum harmonisation. This is problematic from a

Swedish perspective, since both the government and authorities such as Finansinspektionen

(the Swedish financial supervisory authority) and the riksbank want higher capital

requirements than the minimum levels recommended by the Basel III accord, which risk

– 18 –


alsobecomingmaximumlevels.Theargumentforhavinghighercapitalrequirementsin

SwedenisthattheSwedishbanksrepresentagreaterriskthanbanksinothercountries

simplybecauseoftheirsizerelativetotheeconomyasawhole.Theexperiencesof

countrieswithsmalleconomiesandalargebankingsector–suchasIrelandandIceland

–showthattheconsequencesofabankingcrisiscanbedisastrous.Thereistherefore

goodreasonfortheSwedishauthoritiestoimposestricterrequirementssoastomakethe

Swedishbankslessvulnerable.

However,sofarthisargumentdoesnotseemtohavemetwithmuchsympathyinthe

negotiationsontheCRDIvPackage.TheCommission’sanalysishasbeenbasedonthe

ideathatcapitalrequirementsthatarehigherinonecountrythaninothercountrieswould

riskgivingacompetitiveadvantagetothatcountry’sbanks,astheywouldappeartobe

betterandthereforeabletoobtaincheaperfunding.Theunderlyingjustificationforthis

approachisthedesiretocreateruleswhichmeanthatallbankswithintheEUcompeteon

thesameterms,inotherwords,thedesiretocreatealevelplayingfield.Iftheauthoritiesin

onecountryimposestricterrequirementsthanintheothercountries,theywouldbeguilty

ofso-calledgold-plating,whereacountrygivesitsownbanksasealofapprovalwhichsays

theyarebetterthanthebanksofothercountries.

aEUROPEanBanKInGUnIOn

TheCRDIvPackageispartofamuchlargerpackage–launchedbytheCommission–

whichaimstocreateaEuropeanbankingunion.Inearlyautumn2012,aproposalwas

submittedforasinglesupervisorymechanismforbankswithintheeurozone,with

theEuropeanCentralBank(ECB)astheresponsibleauthority.Thesinglesupervisory

mechanismisintendedtorepresentthefirststepontheroadtoabankingunion.Theother

stepsinvolveacommondepositguaranteeschemeandcommonrulesforpreventingbank

failuresandforinterveningwhenabankgetsintofinancialtrouble.InDecember2012,the

CounciloftheEuropeanUnionagreedthatfrom1March2014,theECBshouldassume

responsibilityforthesupervisionoflargerbanksintheeurozone.Theotherelementsofthe

bankingunionproposalwillbediscussedduring2013.

ItiswidelyrecognisedthatanintegratedEuropeanfinancialmarketispoorlysuitedto

today’sregulatoryframeworkandinstitutionalstructures,whereregulation,supervision,

depositguaranteeschemesandcrisismanagementareatnationallevel.Thishasalso

beenthesubjectofdiscussionformanyyears.Thecomplexityoftheproblemhasbeen

appropriatelydescribedastheEuropeanfinancialtrilemma.Thisreferstotheimpossibility

ofachievingthethreegoalsoffinancialstability,financialintegrationandnationalfinancial

independenceatthesametime(Schoenmaker,2011).

Thusfar,EUMemberStateshavechosentoprioritisefinancialintegrationandtheir

nationaldecision-makingpowers.Thefinancialcrisis,however,hasclearlyshownthat

financialstabilityandfinancialintegrationcannotbeachievedatthesametimeas

pursuingastrictnationalpolicy.Theinitiativetoraisenotjustbankingregulation,but

– 19 –


alsosupervision,thedepositguaranteesystemandtheframeworkforhandlingfinancial

institutionsincrisistoasupranationallevelshouldthereforebewelcomed.

However,asisoftenthecasewithnewlarge-scaleregulations,thedevilisinthe

details.atpresent,thereisonlyadetailedproposalforthefirststage:establishingasingle

supervisorymechanism.Detailedproposalsfortheothertwostages–acommondeposit

guaranteeschemeandacommonframeworkforbankresolution–willbesubmittedat

alaterdate.However,asinglesupervisorymechanismwithouttheothertwoelementsin

abankingunionmayresultinasystemthatisatleastasfragileasthepreviousentirely

nationalregulations.Itisdifficult,forexample,toforeseewhatwouldhappeninasituation

wheretheECBdecidestorevokeabank’spermissiontooperate.Suchasituationcouldbe

costlyforthetaxpayersinthebank’shomecountrywherethegovernmentiscompelledto

takeoverthebankorotherwisesupportitinordertoavoidabankingcrisis.

Thesinglesupervisorymechanismappliesinitiallytotheeurozonecountries,although

EUMemberStatesoutsidetheeurozoneareallowedtoparticipateonavoluntarybasis.an

importantquestionforSwedeninthefutureiswhetherweshouldremainoutsideorjoin

thebankingunion.TheSwedishgovernmenthasbeencriticaloftheproposalanddeclared

that,atleastinitially,Swedenwillnotjoin.Thegovernmenthasstressedtheneedtobe

abletoimposehighercapitalrequirementsonthebanksandalsotobeabletoinfluence

thedecisionsmade,somethingwhichwasnotpossibleforcountriesoutsidetheeurozone

intheCommission’soriginalproposal.Thegovernmenthasalsoemphasisedthatitwants

toensurethatSwedishtaxrevenuesarenotusedtorescuebanksincountrieswhichhave

nottakenadequateresponsibilityforensuringthatthebanksarestable.

Thegovernmentneverthelessappearswillingtoworktowardsasinglemechanismfor

banksupervisionthatisdesignedinsuchawaythatitwillbepossibleforSwedentojoin

atalaterdate.Inorderforthegovernmenttowanttojoininthefuture,however,there

probablyhastobegreaterclaritywithregardtohowtheotherelementsofaEuropean

bankingunionwillbedesigned,aswellasguaranteesthatSwedishtaxpayerswillnotbe

forcedtopayforfailingbanksinothercountries.

Thedesiretocreatecommonframeworkscanneverthelessbeseenassomething

positive,asitwouldbeaconcerniftheEuropeanbankingmarketweretobecomemore

fragmentedandnational.Onegeneralproblemwiththebankingsectoristhatitishighly

concentratedandthereisthereforeatendencytowardsanticompetitivebehaviour.One

reasonforthishighlevelofconcentrationiswithoutdoubttherelativelystrictregulation

comparedwithmanyothersectors.Regulationstendtocreatebarrierstomarketentryand

exit.atthesametime,however,itseemsthatthedynamicsofbankingcrisesaresuchthat

thebankingsectortendstobecomemoreconcentratedafteracrisisthanitwasbefore.

acommonsolutionwhenbanksgetintodifficultyistogetacompetitortobuythem.

Swedenisagoodexampleofthis.TheSwedishbankingcrisisintheearly1990sledthe

numberofmajorbankstoshrinkfromseventofourthroughacquisitions.

– 20 –


Oneofthefewthingsthatmayreduceanticompetitivebehaviouronaconcentrated

marketisexternalcompetition.Whennewplayersenterlocalbankingmarkets,thiscan

resultinincreasedcompetitionandefficiencygains,whicharepassedontoconsumersin

theformofawiderrangeoffinancialservicesandlowerprices.17

ItisthereforeimportanttosafeguardthecommonbankingmarketwithintheEU.This

isfarfromeasy,however,atatimewhensomecountriesareexperiencingproblemswith

theirbankingsectors.Itwouldrequirethesecountriestodealwithunrealisedlosseson

thebanks’balancesheetsandtorestructurethebankingsector.Butthestakesarehigh

andpowerfulspecialinterestsmaycomplicatethepoliticalprocessrequiredtocarryout

restructuring.

MaCROPRUDEnTIaLSUPERvISIOn

Thereisacloselyrelatedandpartiallyoverlappingareawherenewregulationsarebeing

drawnup:macroprudentialsupervision.Thisisapolicyareawhichaimstoreducethe

levelofriskinthefinancialsystemasawhole,notjustatindividualinstitutions.Someof

thetoolsusedforthispurposeincludecountercyclicalcapitalbuffers,lendingceilings,risk

weightsandliquidityrequirements.

atEuropeanlevel,theEuropeanSystemicRiskBoard(ESRB)hasbeenformed.The

ESRBisthebodyresponsiblefortheoverallmacroprudentialsupervisionofthefinancial

systemintheEU.Itstasksincludecollectingandanalysingrelevantinformationaswell

asidentifyingandassessingsystemicrisk.TheESRBdoesnothaveanydirectregulatory

powersofitsown,however,buthastorelyonthenationalauthoritiestakingactionwhen

theBoardissueswarningsandrecommendations.

Macroprudentialsupervisionmayalsohaveeffectsonthedegreeofinternational

integrationofthefinancialmarkets.Itiseasytoimagineaconflictofobjectiveswhen

countriesaretocarryoutmacroprudentialsupervisionofwhatarefundamentallyhighly

globalisedmarkets.Increasingacountercyclicalbufferinacountryinordertoreduce

thevulnerabilityofthebanks,forexample,mayhaveanegativeimpactonlendingin

othercountrieswherethecountry’sbanksareestablished.Theeffectofintroducinga

mortgageceilinginordertoreducehouseholddebtmaybesmallifbranchesofforeign

bankswhicharenotcoveredbythemortgageceilingincreasetheirlending.Suchcross-

borderexternalitiesmaycreatefrictionbetweencountriesandencourageanegativeview

ofthehighdegreeofintegrationfromwhichtheexternalitiesultimatelyderive.TheESRB

isintendedtobeaforumwheretheEUMemberStatescaninformotherMemberStates

oftheirmacroprudentialsupervisionandresolveanyconflictswhicharisefromundesirable

sideeffectsinothercountries.ThiswillremainanimportanttaskoftheESRB,despitethe

factthatitsroleastheEuropeanmacroprudentialsupervisionbodyhasbecomesomewhat

17 Ontheotherhand,increasedcompetitioncanhaveanegativeimpactonfinancialstability.Goodhart(2012)hasmaintainedthatthelackofcompetitionwasamajorreasonforthestabilityoftheUKfinancialsystembetween1930and1970.Hebelievesthatbankmanagerstakefewerrisksiftheycangeneratelargeprofitswithouttoomucheffort.

– 21 –


unclearinlightoftheECB’snewroleashavingultimateresponsibilityforbanking

supervisionwithintheeurozone.

CEnTRaLCOUnTERPaRTyCLEaRInGOFFInanCIaLDERIvaTIvES

aspreviouslymentioned,workiscurrentlyunderwayatinternationalleveltosteersome

oftheOTCtradinginfinancialderivativestowardscentralcounterparties.Thisworkis

beingledbytheFinancialStabilityBoard(FSB),whichisaninternationalgroupprimarily

madeupofrepresentativesoftheG20countries.Itwantsallstandardisedderivative

contractstobetradedthroughcentralcounterpartiesandforOTCtradinginderivatives

tobelinkedtohighercapitalrequirements.18Ifmorederivativetradingtakesplacewith

centralcounterparties,thesecounterpartiescanbeexpectedtobecomekeyplayersonthe

financialmarkets.Theymayevenbecomesystemicallyimportantinthesamewayasalot

ofbanksaresystemicallyimportanttoday.Theauthoritiesthereforeneedtoensurehere

thatthesepartieshavesufficientcapitalandproperlyfunctioningriskmanagement,and

thattheycanbewounddowninanorderlymannerifrequired.

Manycentralcounterpartiescleartransactionsinmultiplecurrencies.InLondon,

forexample,LCH.Clearnetclearstransactionsinseveralcurrencies,includingtheeuro.

Similarly,inStockholmnaSDaQOMXclearssometransactionsineuros.accordingto

theECB’slocationpolicy,however,significantamountsineurosshouldonlybecleared

bycentralcounterpartiesintheeurozone,whichmaypresentafurtherobstacletothe

continuedglobalisationofthefinancialmarkets.19TheECB’spositionisbasedontheview

thatsupervisorybodiesintheeurozoneshouldexercisecompleteoperationalcontrolover

partieswhichinfluencethefinancialstabilityoftheeurozone.However,ifeveryoneadopts

thisview,centralcounterpartieswillinevitablybecomenationalinnatureandsomeofthe

benefitsoftradinginmultiplecurrencieswillbelost.Itisdifficulttoassessthesizeofthese

benefits,butitneverthelessappearstobeanineffecientsolutionfortheglobaleconomy

asawholetohaverelativelysmallcentralcounterpartiesclearingtradeinderivativesin

eachindividualcurrencyarea.abettersolutionwouldprobablybetodevelopinternational

cooperationinthisareasothatcentralbanksandsupervisoryauthoritiessupportone

anotherwiththeinformationnecessarytoensurefinancialstabilityathome.

ConclusionsandconsequencesforSweden

Internationalintegrationoffinancialmarketsisexpectedtobringeconomicgains,although

itisnotwithoutrisk.Theriskrelatestoglobalimbalancesreflectedinlargeandpersistent

currentaccountsurplusesanddeficits.Ifadeficitisnolongersustainable,countriesmay

haveproblemsadaptingtoanewsituation.Theriskalsorelatestolargegrossflowsof

18 SeeG20communiquéfromthesummitinPittsburghinSeptember2009(G20,2009).19 ThispolicyresultedintheUKgovernmenttakingtheECBtotheCourtofJusticeoftheEuropeanUnionin

September2011forcontraventionofEuropeanUnionlawandoftheinternalmarket.

– 22 –


capitalbetweencountries.Thesecreateriskastheforeignliabilitiesthatsomepartieshave

amassedcannotbecoveredbyforeignassetsamassedbyotherparties.

veryrecently,however,itappearsthattheglobalisationofthefinancialmarketshas

cometosomethingofastandstillandonsomesegmentsevenstartedtoreverse.Itseems

thatthisislargelytheresultofproblemsintheeurozone,asitmostlyrelatestoreduced

lendingbyandtoEuropeanbanks.Itisentirelypossiblethatglobalisationwillpickup

againoncetheproblemsintheeurozonebegintosubside.However,newregulationsalso

probablyplayaroleandtheirimpactmaybeofamorelastingnature.

Greaterfragmentationofthefinancialmarketswouldresultincostsintermsofpoorer

capitalallocation,riskdiversification,andcompetitiononthebankingmarket.atEuropean

level,however,aproperlystructuredbankingunioncouldhelptopreventsuchoutcomes.

ForSweden,theplansforaEuropeanbankingunionaresomethingwhichpolicy-makers

needtodealwith,whetherornotSwedenparticipates.IfSwedendoesnotparticipate,

theECBwillneverthelessformpartofthesupervisorycollegesthatexistinordertoenable

authoritiesindifferentcountriestoworktogetheronthesupervisionofcross-border

banks.TheECBwillbethesupervisoryauthorityfortheeurozonecountriesandotherEU

MemberStateswhochoosetoparticipateinthesinglesupervisorymechanism.Thismeans

thatevenifFinansinspektionenholdsthechairmanshipofthecollegesestablishedforthe

Swedishbanks,theECBwillprobablyhaveamajorinfluenceonthedecisionsmade.20

IfSwedenweretojoinsubsequently,thedecisionsonthesupervisionofSwedishbanks

wouldbemadebytheECB,andFinansinspektionenwouldbecomeakindofbranchoffice

performingsomeoftheday-to-daytasksofsupervision.InbothcasesSwedishdecision-

makerswouldlosesomeoftheircontrolovertheSwedishbanks.

TheSwedishbankscurrentlyenjoyafavourablecompetitivesituation.Theconfidence

inthemontheinternationalmarketsseemshighandtheyareabletoobtaincomparatively

cheapfunding.Theyarerelativelywell-capitalisedandhaveagoodliquidityposition.

Thismakesthemattractivecounterparties.However,toacertainextenttheirfavourable

fundingsituationmaybeaconsequenceoftheSwedishauthoritiesimposingmorestringent

requirementsregardingcapitalandliquiditythaninmanyotherEUMemberStates.

Fromthisperspective,theargumentof“gold-plating”mayhaveacertainbearingonthe

developmentoftheSwedishbanks.asideeffectofthemorestringentrequirementsmay

bethattheSwedishbanksarefavouredininternationalcompetitionandthereforeareable

toincreasetheirmarketsharesandgrowevenlarger.Thiswouldbesomethingofanirony,

asthesizeofthebanksispreciselythereasonwhySwedishauthoritieshavebeentougher

thanthoseinothercountries.

20 IntheoriginalproposaltherewasalsoariskthattheECB’sopinionwouldalwaysprevailifsupervisoryauthoritieswereindisagreementandtheEuropeanBankingauthority(EBa)wascalledintomediate.Thiswasbecauseintheinitialproposal,theeurozonecountrieswouldalwayshaveamajorityattheEBainso-calledbindingmediation.Thispartoftheproposalhasbeenmodified,however,andthevotingrulesarenowintendedtoguaranteethatcountriesoutsidethesinglesupervisorymechanismwillalsobeabletoexerciseinfluenceoverdecisions.

– 23 –


TheSwedishbanks’goodaccesstoshort-termfundinginUSdollarsbringssomerisks

fromastabilityperspective,asitmaybedifficultfortheRiksbanktoprovideliquidity

supportinUSdollarsinacrisissituation.TheRiksbankdidprovidesuchsupportduring

2008and2009,butatthattimetheRiksbank,likemanyothercentralbanks,hadaswap

agreementwiththeFederalReservewhichfacilitatedthissupport.Therealisationthat

aliquiditycrisismayinvolvecurrenciesotherthanSwedishkronoristhereasonwhythe

RiksbankhasrecommendedthatthebanksfulfilliquidityrequirementsinbothUSdollars

andeuros,whichissomethingthatthefourmajorbanksnowdo(SverigesRiksbank,2012,

p.18).

ThemostimportantreasonforthefavourablefundingsituationoftheSwedishbanks,

however,isprobablytheeurocrisis.ThishasresultedinSwedishbanksappearingtobe

safercounterpartiesthanmanyotherEuropeanbanks.astheeurocrisissubsides,itcan

thereforebeexpectedthattheSwedishbankswilllosesomeofthefavourablecompetitive

positiontheycurrentlyoccupy.althoughthiswouldmeanSwedishbankslosingmarket

shares,itwouldneverthelessbeaverywelcomedevelopment.StrongerEuropeanbanks

outsideSwedenarepreferable,evenfromapurelySwedishperspective.Swedenbenefits

fromawell-functioningfinancialsectorintheeurozone,asthisnotonlypromotes

competitionbutalsoreducestheriskofpressureonthefinancialmarketsescalatinginsuch

awaythatitalsoaffectsfundamentallysoundbanks.

– 24 –


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