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FINANCIAL CRISIS

Riksbank offers help to Icelandic subsidiary

The Riksbank on Wednesday announced it was offering loan assistance of up to 5 billion kronor ($695 million) to the Swedish subsidiary of Iceland’s Kaupthing Bank.

Published: 8 October 2008 08:37 CEST

Riksbank offers help to Icelandic subsidiary

“The conditions in the Icelandic bank sector have recently made it difficult also for Kaupthing Sverige AB to meet its payment obligations. In the situation that has arisen there is an imminent risk that the bank may suffer liquidity problems,” said Riksbank Governor Stefan Ingves in a statement.

“To safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets, the Riksbank has therefore decided to grant liquidity assistance to Kaupthing Sverige. The Riksbank is prepared to supply the liquidity necessary.”

The Riksbank added that it and Swedish Financial Supervisory Authority (Finansinspektionen) both view Kaupthing Bank Sverige AB as solvent.

It therefore qualified the measure as a decision based on the need to meet temporary liquidity problems, rather than an effort to save the bank from insolvency.

On Tuesday, Iceland’s central bank offered €500 million ($678 million) in assistance to Kaupthing hf, the Iceland-based parent of Kaupthing Sverige AB.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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