FINANCIAL STABILITY REPORT 1/2003 93 rst stage cance nancial system. nancial institu- uenced, and how uenced, and how cient payment system is nances of Member States and greater indepen- nances of Member States and greater nancial crises would change nancial crises would would change the economic map nancial system has not been 68

69 cult to distinguish from the general cult to distinguish nancial system. ciency of vital systems and making sure that im- ciency of vital systems and making sure nancial system would be affected in a number in would be affected nancial system nancial stability should be organised in the EU. This is nancial stability should be organised nancial markets that has taken place in the EU nancial markets that nancial transactions are dependent on some exchange nancial transactions are nancial system in Sweden. Almost all fi The discussion in this article of the effects of the euro on stability in of the euro The discussion in this article of the effects nancial system has been broken down into four questions. How will nancial system has been broken nancial infrastructure, and the possibilities and tools for managing a nancial infrastructure, cient manner. In addition to the preventive work, it is important to In addition to the preventive cient manner. was initiated with the abolition of all obstacles to the free movement of capital in the EU. The second was initiated with the abolition of all obstacles to the free stage, which began in 1994, involved a number of steps including the establishment of the EMI (the for the public fi to the ECB), stricter requirements forerunner began in 1999 with the formation of the European dence for the national central banks. Stage Three in eleven EU Member States, and the of the euro System of Central Banks (ESCB), the introduction countries formulation of a single monetary and exchange rate policy by these Member States. Twelve participate fully in EMU. The following discussion does not distinguish between the different currently stages of EMU. Thus, the analysis is not a complete study of the consequences of a Swedish changeover to the euro. In Thus, the analysis is not a complete study of the consequences of a Swedish changeover to the euro. the economic advantages of participating in EMU to outweigh 1994 and 1997, the Riksbank considered the disadvantages. The Riksbank will not be participating in either campaign ahead of the coming referen- dum. the euro and in Sweden stability Financial nancial stability activities aim to prevent crises that threaten the pay- crises that threaten nancial stability activities aim to prevent 68 of EMU. The fi the issue at hand is whether Sweden will participate fully in Stage Three Technically, the government’s ability to manage fi ability to manage the government’s are joining the Eurosystem. The effects in the event of Sweden diffi numerous and often integration of fi developments, They also involve different over the past decade. answer to not possible to give an unequivocal which is why it is or deterioration whether the euro would entail an improvement in the stability of the fi A Swedish decision to adopt the euro The risks in the fi The risks dis- changeover to the euro. This article of ways by a Swedish affected, and payment system would be cusses how the banks systemic risks would be infl the extent to which ■ of payment. The availability of a safe and effi of payment. The availability of a safe and Essentially, important for the functioning of the economy. therefore fi the long run. This in also economic growth ment system and thereby work is carried out in a number of ways which include ensur- preventive ing the safety and effi given the incentive to manage risks in a safe and portant participants are effi in good time for managing a potential crisis that could establish routines the payment system, in the event such a crisis should occur. threaten the fi the individual fi affect a Swedish changeover to the euro discussed in a separate box. tions, the systemic effects and contagion risks between the institutions, tions, the systemic effects the fi crisis should one occur? An additional aspect concerns how supervision and oversight of fi of joining EMU for the stability of the fi The aim of this article is to analyse the discussed in detail, however. in EMU for the stability consequences of potential Swedish participation of the fi in several respects. The public debate thus far has mainly focused on the in several respects. on factors exchange rate risk and the effects consequences of reduced The signifi stability. such as economic activity and macroeconomic 69 stability in the fi The discussion focuses on how Swedish participation in EMU would affect 94 FINANCIAL STABILITY REPORT 1/2003 ARTICLE ■ discusses theeffects ontheindividualinstitutions. several waysbySwedishmembershipinEMU.Thefollowing section the banks,marketplacesandclearinginstitutions–wouldbe affected in The participantsthatare mostimportantforfi Internationalisation andtheworkoninternalmarketwilllead– thereby alsothe expected forces andtrends thatwillarisefrom Swedish membershipinEMUand of thisarticle.Thepurposeinsteadistodescribetheeconomicdriving cription ofthesituationin,say, fi discussion becomesspeculativeandtheresults are interpreted asades- consequences. aries defi ment systems,contagionrisks,etc.Asaresult, there are noclearbound- years. Thisappliesinparticulartoissuesconcerningcompetition,pay- cant. Inseveralimportantareas, theadaptationprocess couldtakemany imply, however, thattheforces drivinglong-termchangesare insignifi others. Thelackofdistincteffects inthesecountriesdoesnotnecessarily and assetmanagement,theadjustmentprocess isstillinprogress in seen incertainareas, e.g.foreign exchangetrade,fi euro more diffi ders comparisonswithothercountriesthathavealready introduced the quences are onlyindirect and discernableoverthelongterm.Thisren- analysing aSwedishchangeovertotheeuro isthatseveraloftheconse- duced andfocusesonthelong-termeffects ofthis.Oneproblem when the euro. Instead,thearticlepresupposes thattheeuro hasbeenintro- the transitionalphase,i.e.before andduringtheactualintroduction of from more generaltrends. membership inEMU,itisnotalwayspossibletoseparatethese effects the euro. Although thearticleisfocusedonconsequencesofSwedish affected byallthesetrends –includingEMUwhetherornotweadopt not leastduetotheworkonEUinternalmarket.Swedenwillbe effi development ofnewtechnicalandfi economic mapwillchange.Otherdeterminantsincludeglobalisation,the quently, thescopeandtimehorizonforchangesare uncertain. which couldbeofgreat importanceforindividuals’behaviour. Conse- there are otherobstacles–e.g.legal,technicalandculturaldifferences – monetaryunionentailstheremoval ofobstaclestocross-border activities,

cientandliquidsecuritiesmarkets,amendmentstoregulations, ments, however, e.g.through betterpricetransparency. Inaddition, likely tointensify thepressure ofcompetition insomeproduct seg- regardless oftheeuro –tostiffer competition. Asinglecurrency is A commonriskinvolvedinforward-looking analysesisthatthe The articleignores theimmediatepracticaleffects thatcanarisein The fi Changed marketconditionsrun theriskofincreasingvulnerability. However, itisnotsimplyEMUalonethatwilldeterminehowthe ningimmediateadjustmenteffects andlong-term,permanent nancialinstitutions cult.Whiletheeffects onthesecountriescanalready be direction veyears’time.Thatisnotthepurpose ofthesechanges.Al nancialservices,theincreasingly nancialstability–primarily xed-incomemarkets though a -

FINANCIAL STABILITY REPORT 1/2003 95 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN

70 nancial instability t margins further. further. t margins t margins. It is not It t margins. cient and liquid secur- cient. Participation in EMU cient institutions, however, and a system will only cient institutions, however,

ts for the Swedish banks. Consequently, this this ts for the Swedish banks. Consequently, est rates could partly be explained by the est rates could partly be explained by the nancial disturbances. cient. A protected sector, on the other hand, tends to become inef- on the other hand, sector, cient. A protected ict between stiffer competition (positive) and greater risk of fi competition (positive) and greater ict between stiffer xed-income securities, would be exposed to stiffer com- would be exposed to stiffer xed-income securities, nancing and entail lower borrowing costs and greater oppor- certain that the banks would be able to compensate themselves would be able to compensate themselves certain that the banks services, e.g. international other income from increased through to other on services higher margins or through investment banking and medium-size busi- customers such as households and small in a lower level also results nesses. If Swedish participation in EMU net rates, in particular long-term rates, this could reduce of interest squeezing the banks’ profi income, thereby interest Lower long-term inter of various securities portfolios, should also lead to a reallocation income generating greater which should enhance the possibilities of the All in all, however, for the banks during a period of adaptation. competition and a of stiffer as a result assessment is that the euro, of certain services, would lead in the long term to poorer reduction earnings and lower profi vulnerability and somewhat weaken the banks’ is likely to increase kinds of risks and shocks. capacity to absorb different disappearance of exchange rate risk premiums. At the same time, a disappearance of exchange rate risk premiums. could make it easier for the Swedish banks changeover to the euro by interna- not be large While they may to compete internationally. effi relatively they are tional standards, EMU would result in a reduction in the sales of certain services. sales of certain services. in the in a reduction result EMU would to The opportunities would disappear. exchange trade Some foreign likely to diminish. banks are for foreign bank act as correspondent parti- management and trading in securities, Services such as asset cularly in fi should in all likelihood lead to these effects petition. For the banks, capacity and squeezed profi both weaker earning ities markets. In addition, the Swedish securities markets would markets. On the who- integral part of the European become a more for liquidity and exchange rate risk premiums le, this should reduce in the securities markets. As also the costs of borrowing and thereby via the securities markets of corporate borrowing the proportion would decrease. the economic costs of a bank failure increases, costs for the Swedish banks should decline. borrowing Furthermore, Although the Swedish banks may lose the advantage they currently market, it is likely that in the Swedish krona enjoy when borrowing position with their advantageous borrowing they would retain costs could Borrowing future. private customers in the foreseeable anonym- more fall somewhat. As participants in a larger, therefore ratings that the banks’ credit it is probable ous market, however, Greater liquidity in securities markets may reduce dependence on bank fi tunities for reducing risks. cient and thereby also sensitive to fi cient and thereby (negative). Healthy competition is a prerequisite for effi (negative). Healthy competition is a prerequisite be stable in the long term if it is effi fi

■ effi towards EMU would encourage the trend 70 This indicates a confl 96 FINANCIAL STABILITY REPORT 1/2003 ARTICLE cerned institutionsinthelongterm. also facilitatingcross-border structuraltransformationbetweenthecon- borrowing costssomewhatandenablingbetterriskmanagement,while system. Achangeovertotheeuro shouldalsobecapableofreducing segments, andthatthiscouldincrease thevulnerabilityofbanking could beexposedtomore intensecompetition,atleastwithincertain overall analysishere indicatesneverthelessthattheindividualinstitutions can bediffi be expectedtoaffect individualinstitutionsinseveralways.Althoughit The effects describedabove showthatSwedishmembershipinEMUcan 3 The clearest examples ofcross-border bank mergers are foundintheNordic market,betweencountries 73 See,forexample,Boot, A.(2003).”ConsolidationandStrategicPositioninginBankingwithImplicationsfor 72 SeeChapter4forafurther description. 71 ■ DuetofactorssuchasEMU,cross-border integrationhasalready with highlydifferent strategiesasregards theEU andtheeuro. Europe”, Working Paper. them more effi to bothrationalisetheproduction offi same time,thestructuraltransformationwouldcreate opportunities years, whichcouldhaveimplicationsforfi competition wouldincrease theriskofstrategicerrors incoming services. Theneedfornewstrategicchoicestogetherwithgreater also entailstrategicuncertaintyformanyproducers offi than internationalconsolidation. transformation inEurope thusfarhasmainlyentailednationalrather exaggerated, however. the numberofnationalbarriers.Theshort-termeffect shouldnotbe trading couldincrease internationaleconomiesofscaleandreduce ges inthebanks.Theintegrationofpaymentsystemsandsecurities nature, EMUcould inthelongtermfacilitatefurtherstructuralchan- remaining step. Althoughnumerous obstaclesexist,e.g.ofalegal dominant thatcross-border structuraltransformationistheonly e.g. Nordea. In manycountriesanumberofbankshavebecomeso effect isuncertain. risk shouldreduce thebanks’vulnerability, evenifthesizeofthis mewhat lowerborrowing costsandbettercapabilitiesformanaging for maintainingstabilityinthefi eliminate different kindsofrisk,whichshould improve theconditions ter opportunitiestobothcapitaliseonnewsources offi improve accesstothesemarkets.Thiswouldafford thebanksgrea- securitisation andcredit derivatives.Swedishmembershipislikelyto Greater liquidityinsecuritiesmarketswouldalsofacilitatetheuseof borrowing costsmaytherefore varybetweentheSwedishbanks. would playasignifi begun inthesecuritiesandpaymentarea. Structural transformationmayaccelerateinthelongterm. cultorimpossibletodiscerntheeffects ofEMUseparately, the cient. cantrole fortheseborrowing costs.Changesin 73 Thestructuraltransformationitselfwould nancialsystem.Onthewhole,so- 72 There are exceptions,however, nancialservicesandrender nancialstability. Atthe 71 Forthebanks,structural nancingand nancial FINANCIAL STABILITY REPORT 1/2003 97 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN

uctu- nancial system in a nancial stability could be nancial stability could

cult to assess market poten- uctuations in the economy, uctuations in the economy, ned to three effects: the effects: ned to three tability. The problem would be The problem tability. nancial institutions, a Swedish nancial institutions, nancial system can arise in two ways. nancial system can culties, the effects on fi culties, the effects c factors. Even if the net effect is uncertain, this c factors. Even if the net effect cult to assess credit risk in a larger, more integrated more risk in a larger, cult to assess credit nancial diffi over to the euro could affect stability in the fi stability could affect over to the euro cant. Secondly, there are direct contagion risks. Problems in one risks. Problems contagion direct are there cant. Secondly, SYSTEMIC EFFECTS Systemic effects and contagion risks and contagion effects Systemic The risk of loan losses may be affected. panies in all sectors with a larger domestic market. While this is posi- panies in all sectors with a larger diffi tive, it is also likely to make it more companies. Some tial and competitive conditions for many others may run the risk companies would become successful while with profi of encountering problems companies, as well as most evident among small and medium-size to adapt to new required during the period when companies are the banks’ perspective, it could also be- market conditions. From diffi come more market. This could lead to an increase in loan losses. While a large in loan losses. While a large market. This could lead to an increase is due to the internal market rather than EMU, the part of this effect to the effect. latter also contributes to this integration and thereby At the same time, a monetary union is likely to entail smaller fl Firstly, there are macro risks, e.g. if several banks encounter prob- risks, e.g. if several macro are there Firstly, rates and exchange rates. This would provide ations in interest households and companies with the opportunity to operate in a the risk of loan which could reduce stable macro-environment, more to a the risk of loan losses should be affected losses. In other words, rates such as interest by macro-variables smaller degree relatively and by sector- degree larger and exchange rates, and to a relatively company-specifi if Swe- indicates that loan losses may become less systemic in nature den joins EMU. The effects of large macroeconomic shocks may be aggravated. The effects shocks in the real economy, in particular asymmetric shocks. Al- in particular asymmetric economy, shocks in the real under union fosters a stable macro-environment though a currency

Swedish participation in EMU would affect macroeconomic development macroeconomic Swedish participation in EMU would affect is confi in several ways. The discussion here the risk of loan losses, on cyclical fl on effect and on industrial structure. ■ In addition to the direct impact on fi impact In addition to the direct change wider sense. Systemic risks in the fi wider sense. Systemic com- One of the aims of EMU and the internal market is to provide lems simultaneously. If many banks have large exposures in one com- in exposures many banks have large If lems simultaneously. or sector and this company sector, as the property such pany or sector, experiences fi signifi the extensive quickly and easily to other banks through bank can spread another. commitments they normally have with one ■ A single monetary policy may entail less scope for managing certain 98 FINANCIAL STABILITY REPORT 1/2003 ARTICLE 4 Seealsothechapteronbanks´borrowers foradiscussion ofthebanks’counterpartyrisks. 74 risks. principle, thebanksencounterfourkindsofcounterpartyandsettlement Normally, thebanksalsohavelarge direct exposures toeachother. In SwedishmembershipinEMUwould reduce someofthe non-fi ■ could havedramaticconsequencesforstabilityinthefi ment system’s dependenceonthebanksare suchthatanyproblems ferent fi management, securitiestrading,andtheclearingsettlementofdif- ■ Theintegrationofmarketsintheeuro area couldleadinthelonger

The needtomanageforeignexchangeexposurewoulddecrease. change exposure inSwedishbankswoulddecrease. res forthebankstomanage.Thus,itislikelythatforeign ex- foreign exchangetrade.Thisshouldresult inlessextensiveexposu- cial companies’foreign exchangeexposure, whilealsodecreasing DIRECT CONTAGION RISKS rise tofi it more diffi that theinabilitytoconductdomesticmonetarypolicywouldmake normal conditions,thusreducing theriskofshocks,there isadanger Specialisation mayincrease. ortunities forreducing riskwouldbethemore importantfactor. nely diffi ween thevariousMemberStatesofeuro area. Whileitisgenui- limited, however, bygreater covariationineconomicactivitybet- markets. Theincreased opportunitiesfordiversifi favourable conditionsforeliminatingsomeoftherisksviathese folios. Alarger, more liquidsecuritiesmarketwouldcreate more a singlecurrency facilitatesinternationaldiversifi nomic fl main domestic.Thiscouldleadtoanamplifi tion inthebanksifasignifi no clearsignsofthisasyet,itcouldreduce thedegree ofdiversifi greater extenttocertainsectorsasaresult ofEMU.Whilethere are structure incertainregions and countriescouldbeconcentratedtoa there are theoretical arguments tosupporttheviewthatcorporate nal bankingsystems.Evenifthecompaniesdonotbecomelarger, that wouldbecomeincreasingly signifi sectors mayincrease. Thiscouldresult inlarger andlarger companies the real economy. Therefore, exposure toindividualcompaniesand term toastructuraltransformationwithincreasing specialisationin 74 Theseariseviaforeign exchangesettlement,short-termliquidity nancialinstruments.Thesizeofthesetransactionsandthe pay- uctuationsbothregionally andnationally. Atthesametime, nancialdisturbancesofasystemicnature. culttomakeanoverallassessment,itislikelythattheopp- culttoprevent large macroeconomic shocksfrom giving cantpartoftheirborrowing wastore-

cantfortherisksinnatio- cationofthemacroeco- cationofloanport- cationcouldbe nancialsystem. nan- ca- FINANCIAL STABILITY REPORT 1/2003 99 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN le if nancial

cant particip- nancial system. The extent to dence in other potential counterparties. cation of counterparty exposures would entail lower would entail lower counterparty exposures cation of nancial problems in one bank spreading to others would thus bank spreading in one nancial problems culties becomes greater if there are a hundred counterparties counterparties a hundred are if there culties becomes greater cantly when the Swedish krona, during 2003, becomes a member cantly when the Swedish krona, A diversifi systemic risks. market is limited, thus forcing in the krona number of participants An appreciably to each other. exposures the banks into considerable area, euro of potential counterparties exist in the number larger over several participants, i.e. the of exposures enabling the spread The risk counterparties can be reduced. concentration to individual of fi to the management of short-term fall. This applies in particular and deposits in other banks, but i.e. short-term loans from liquidity, of en- probability contracts. The also to a number of longer-term number of a larger with increases countering counterparty problems experiencing fi counterparties. The risk of one counterparty diffi number of counter- a larger However, only three. are than if there in the individual amounts parties is also likely to lead to a reduction which is why the banks’ capacity to manage the of these exposures, This improve. without public intervention would probably problems changeover to the leads to the tentative conclusion that a Swedish losses from the risk of the banks incurring would increase euro but that the amounts involved certain counterparty exposures It is primarily the manageable. more would be smaller and thereby contagion the that would affect concentration of these exposures stability in the fi risks and thereby profi their exposure which the Swedish banks choose to alter will depend on their liquidity management Sweden adopts the euro and their confi ants know each other well, the importance of information about integrated more in a larger, increase will probably creditworthiness adopts the if Sweden securities market. Consequently, European on both impact ratings could have a greater the banks’ credit euro, costs and the choice of counterparty in the interbank borrowing counterparties, the need for and dependence on more market. With If dif- be expected to rise. ratings could therefore external credit con- available, this could have different ratings are credit ferent sequences for the four major Swedish banks. The banks’ credit ratings may become more important. ■ the dominate in Sweden, major Swedish banks currently As the four with a small market in which all the signifi Compared It should be noted, however, that the banks’ exposures will diminish for that the banks’ exposures It should be noted, however, whether or not Sweden joins EMU. A substantial propor- several reasons short-term settle- today are tion of the banks’ counterparty exposures exchange transactions. These will be reduced ment risks for foreign signifi ■ 100 FINANCIAL STABILITY REPORT 1/2003 thereby produce amore effi fi single currency, itwouldbeeasiertospread the try –wouldbeexpensiveinthelongrun.With a maintenance ofmanysystems–oneineachcoun- more expensivethandomesticpayments. The structure isthatcross-border euro paymentsare can bemadeincentralbankmoney. large-value interbankpayments where settlement harmonising theexistingnationalsystemsfor system buthasessentiallytherole of linkingand vide satisfactorycollateral.TARGET isnotanew unlimited intradaycredit aslong they canpro- the RIXsystem,where thebankscan borrow risk. InSweden,theRiksbankcurrently manages domestic currency andtherefore carriesnocredit party thatcancreate unlimitedliquidity inthe central bankmoney, asthecentralbankisonly important thatlarge-value paymentsare settledin defi receiving anyitselfandthereby incursatemporary have tosendalarge numberofpaymentsbefore they require considerableliquidity, i.e.abankmay interbank payments. operational securityhavepushedupcosts.Neither same timeasincreasingly stricterrequirements on system makesitsensitivetodisturbances,atthe other problem isthatthecomplexity ofthecurrent B The Europeansystemsforlarge-valueinterbankpayments 5 RTGS standsforRealTime Gross Settlement,whichmeansthatpaymentsare settledindividuallyandimmediately, insteadofs 75 7 Paymentsystemsare generallycharacterised byeconomiesofscaleandnetworkeffects. Itisrelatively expensivetobuildt 77 TARGET standsforTrans-European AutomatedReal-Time Gross SettlementExpress Transfer76 system,andcomprisesthefi 8 Itisexpectedthatthesystem willbeready toputintooperationsometimebetween2007and2010.Theexactstructure oft 78 9 Euro1 ismanaged bytheEuro BankingAssociation(EBA),whichconsistsof more than70 banksinEurope. 79 system payments more effi policy andtorender large-value, cross-border system inorder tomanagethesinglemonetary realised theneedtohaveacommonpayment Stage Three ofEMU,therelevant EUauthorities mon paymentsystem.Priortothebeginningof xedcostsoveralarger number ofpaymentsand systems oftheEU.Thesystemenablescentralbankstobeconnectedapproximately 5,000commercial banksinthe EU. new payments.Thisalsoreduces thecounterpartyrisksthatariseinpaymentsystems. batches. ThismeansthatatthesametimebankApaysB,Bwillhavefunds initsaccountandwillbeabletouse pants. relatively inexpensivetoprocess anindividualpayment.Themore partiesthatjoinasystem, thegreater thebenefi Thus, mostlikelythere willeventuallybeahighlylimitednumber ofsystemsinEurope. However, thepriceineachsystemwillbebasedonlevel systemthat–withfullcostcoveragedemonstrates structure andiii)cost-effectiveness, i.e.nosubsidies.TARGET2 willalsocontinuetoallownationalsystems inadditiontot has notbeendecided,butthesystemwillbe based onthree principles:i)harmonisedcore servicesavailabletoallparticipan cit.From thepointofviewstability, itis One disadvantagewithTARGET’s existing One disadvantagewithRTGS systemsisthat 75 Y DEFINITION makes itnaturaltherefore tohaveacom- related toacurrency. Asinglecurrency , TARGET, 76 cient.Consequently, anRTGS wasdevelopedforlarge-value , paymentsystemsare closely- cientsolution. 77 An- TARGET, isEuro1. euro payments,thesecondlargest system,after nuously duringthedayincentralbankfunds.For however, thatreal-time settlementismadeconti- systems foreuro payments.Itisonly inTARGET, ant issuefortheSwedishbanks. structure ofthefuture TARGET2 systemanimport- less, SwedishmembershipinEMUwouldmakethe 4,500 krona-based transactionsper day. Neverthe- around 300paymentsperday–compared with the SwedishpartofTARGET issmall,however– euro. Thenumberofeuro-based transactionsin the TARGET1 systemtomakecertainpaymentsin adopts theeuro. TheSwedishbanksalready use Europe isindependentofwhetherornotSweden system forlarge-value interbankpaymentsin the EU. account regardless ofthebank’s locationwithin credited directly tothesending/recipient bank national systemsfi payments, willhavetopassthrough thedifferent unlikely thatpayments,includingcross-border potential SwedishentryintoEMUin2006. new systemwillnotbeintroduced untilaftera settlement incentralbankmoney. However, the payments, TARGET2. Thissystemwillalsoimply common RTGS systemforlarge-value interbank quently, workhasbegunondevelopinganew enlarged EUwithmore than15members.Conse- has thesystembeenadaptedtoaccommodatean GET system. per transactionislowerthaninthecurrent TAR- payments toalarge extent viaEuro1, asthecost Euro1 andhavechosentochanneltheir euro The fourmajorSwedishbanksallparticipatein is usedforbothinterbankandcustomerpayments. used systemforcross-border euro payments.Euro1 In additiontoTARGET, there are commercial The introduction ofasimpler, more direct rstbutwillinsteadbedebitedor 79 Itisalsothemostfrequently tswillbeforallthepartici- fteennationalpayment he commonsystem. he infrastructure but ts, ii)asingleprice he TARGET2 system the lowestcost. ettling themin themtomake 78 Itis FINANCIAL STABILITY REPORT 1/2003 101 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN c Swedish nancial system. cally the role of the banks cally the role This development will take 81 nancial stability on the one hand due to nancial stability on nancial infrastructure. ciency than the current RIX system, as there will be RIX system, as there ciency than the current c Swedish system for large-value interbank payments nancial stability is the positive effect that would stem from that would stem from nancial stability is the positive effect Other risk-reducing changes that are independent of EMU of EMU independent are changes that Other risk-reducing cient manner. To ensure this, it is necessary to have a well-func- ensure To cient manner. 80 The payment system system for large-value interbank payments. A more integrated sys- interbank payments. A more system for large-value will entail lower costs tem, such as the single platform in TARGET2, and higher effi likely to decrease in the from the Swedish banks are Volumes systems for large-value interbank payments. is that the Swedish banks. One reason of interbank payments from greater opportunities for economies of scale. greater As a consequence of EMU, the European payment systems are payment systems are As a consequence of EMU, the European A specifi would be unnecessary. All in all, a Swedish changeover to the euro should in the long term should in the long term changeover to the euro All in all, a Swedish settlement of foreign exchange transactions. CLS enables simultaneous settlement of both payments in a settlement of foreign of time zones, thus eliminating so-called Herstatt risk. CLS is exchange transaction irrespective foreign detail in the chapter on fi discussed in more

of CLS. place whether or not Sweden joins the euro, but it will of course be more but it will of course be more place whether or not Sweden joins the euro, important in the event of Swedish membership. This would have several consequences for the payment system in Sweden. ■ ■ could imply a fall in the volumes A Swedish changeover to the euro 80 CLS stands for ”Continuous Linked Settlement” and is a special purpose bank for managing global It is of vital importance for the economy that payments can be made in a It is of vital importance for the economy safe, effi it is specifi tioning payment system. In reality, themselves in this infrastructure that motivates the special public interest that motivates the special public interest themselves in this infrastructure stability in the fi to safeguarding in the banks with regard of payment as well as the The payment system comprises the instruments Examples of relevant individual systems for managing the payments. payments and the system for retail the bank giro systems in Sweden are interbank payments. RIX system for large-value of change. a process undergoing currently will be no need for a specifi If Sweden joins EMU, there 81 interbank payments. Please see the boxed text for a discussion of the systems for large-value entail positive macro effects on fi effects entail positive macro and less macro- company-related becoming more the risk of loan losses should arise the other hand, negative effects and systemic. On related mone- no longer be possible to use domestic the fact that it would from impor- shocks. Of greater macroeconomic large tary policy to manage tance for fi All factors point to a lower concentration in counterparty exposures. the end of the day it is in contagion risks, although at decrease resultant that would determine the expo- the actions of the individual participants the banks. also the level of dependence between and thereby sures include Newclear, VPC’s new system for securities settlement. In other new system for securities settlement. VPC’s include Newclear, of EMU or of a irrespective develop entirely this situation will words, of the euro. potential Swedish adoption 102 FINANCIAL STABILITY REPORT 1/2003 ARTICLE Asliquiditycanbemanagedmore effi ■ Today, theSwedishbanksuseprimarilyEuro1 systemforeuro ■ The risksinthepaymentsystemswouldchange. volumes ofinterbankpaymentsviaRIXinanycase. netting offoreign exchangesettlementperformedinCLSwillreduce appreciably larger impactonthebanks’payments,forinstance.The such astheintroduction ofNewclearandCLSBankwillhavean be affected onlybyaSwedishadoptionoftheeuro. Otherchanges blished otherchannels.However, thenumberoftransactionswillnot the foreign banksinthemajorityofcasesshouldalready haveesta- the eurosystem thesepaymentswillbecomeeuro fl ments toandfrom foreign banks’ accountsinSwedishbanks.Within many ofthetransactionsperformedtodayinRIXare krona pay- for theeconomythatauthoritiesmayfi mic perspective.Thesystemwouldattainsuchalevelofsignifi level ofsecurityandbusinesscontinuityplanningisfrom anecono- ship structure for thechosensystem.Itisnotclearwhatoptimal problems inthe eventofacrisiswoulddependpartlyontheowner- be investedinbothprevention andthemanagementofoperational higher levelofoperationalsecurity. Itislikelythattheresources to security features tonewsystemsthanadaptexistinga potential crises.Itisoftensimplerandlessexpensivetoaddmore improve thechances offi planning more important.Ontheotherhand,asinglesystemshould area, makingthe choiceoftechnicalsolutionandbusinesscontinuity problems would havesignifi ence onasinglesystemwouldincrease. Inthissystem,operational effects onstabilityinthefi the risksoffi following entryintoEMU.Thus,itwouldalsobepossibletoreduce would bepossibletoreduce contagioneffects betweenthebanks settled notjust individually butalsoinbatches. Thisislikelytore- summer 2003that willenablecross-border retail payments tobe domestically. TheEBAisplanningtointroduce anewsystem in slower andmuchmore expensiveifmadecross-border thanifmade the TARGET system donotfall.Retailpaymentsare presently both likely thatthebankswillcontinue todosoaslongthepricesin payments. IntheeventofaSwedishchangeovertoeuro, itis Cross-border retailpaymentsmaybecomemoreeffi rently workingontheseissues. bly balancedcontinuitysolution.AnECBcommittee,PSSC, is cur- existing paymentsystemsformsthebasisfordecisionsona reasona- effi authorities tooverinvestincomparisonwhatiseconomically solutions, whiletheoretically there maybeanincentiveforpublic hazard wouldlead commercial participantstounderinvestinsecurity far-reaching problems. There isariskthattheproblem ofmoral cient.Agoodanalysisoftherisksandconsequencesfor nancialdiffi cultiesinoneinstitutionhavingdetrimental ndingalternativeoperationalsolutionsto nancial system.Atthesametime,depend- cantconsequencesfortheentire euro cientlyinalarge system,it nditdiffi owsforwhich culttoaccept cient. cance FINANCIAL STABILITY REPORT 1/2003 103 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN nan- cient ows. cant cient competi- . For the really big . For the really cant long-term conse- t fully from this devel- t fully from 82

cult to expect changes in cult to expect changes cant effect on stability in the fi on stability in the cant effect cient systems for cross-border pay- cient systems for cross-border

nancial infrastructure, see also the chapter on this infrastructure. nancial infrastructure, ed and replaced by a more international coordina- by a more ed and replaced holds and small and medium-size companies, how- holds and small and medium-size companies, cient internal market with larger cross-border payment fl cross-border with larger cient internal market ciency gain. Nevertheless, it is diffi ciency gain. Nevertheless, opment. The integration of payment systems would have implications for supervision and oversight. and more standardised, this could have signifi standardised, and more the banking sector as well quences for structural transformation in outside the domestic as for the opportunities for banks to compete and small and me- market, even for services aimed at households dium-size companies. The internationalisation of the banking struc- a Euro- towards would be stimulated and the trend in Europe ture pean banking market would accelerate. As the new systems for potential earnings ought the largest euro-based, payments are retail Having to be most attainable after a Swedish adoption of the euro. the chances for as legal tender in Sweden would increase the euro Swedish companies and households to benefi tion. The current dissimilarities between the national retail payment dissimilarities between the national retail tion. The current If the systems for retail one of many barriers to entry. systems are effi more to become countries were payments between euro companies, national boundaries are not of great importance. The importance. not of great companies, national boundaries are for these compan- international in nature banking market is already ies. For house for several reasons are There national. the market is still largely ever, country from and traditions differ this. Banking legislation, standards pay- of retail is that a number reason Another probable to country. of impor- The availability still national in nature. ment systems are effi for can often be a precondition tant infrastructure duce the costs of small euro payments, thus contributing to a more to a more thus contributing payments, of small euro duce the costs effi ments could in the long term also affect the present distinctly na- distinctly the present ments could in the long term also affect tional characteristics of the banks at present From an economic point of view, this would entail a considerable this would entail a considerable of view, an economic point From effi cial system in the short term. They could, however, promote inte- promote term. They could, however, cial system in the short structural transformation in a wider sense. also gration and thereby payment systems may have signifi The integration of retail bank structure. implications for long-term retail payments to have a signifi payments to have a retail the risk of becoming so large that the authorities will be unable to the risk of becoming so large The need for public intervention in the accept any serious problems. also supervision and oversight under event of a crisis, and thereby of EMU. change as a result could therefore normal circumstances, of the public authorities would The strictly national responsibility need to be modifi tion of supervision and oversight. Such coordination already exists in already tion of supervision and oversight. Such coordination ■ ■ systems, such as those for payments, run The new pan-European effi The development of more 82 For a discussion of the integration of the fi 104 FINANCIAL STABILITY REPORT 1/2003 ARTICLE 5 Inpractice,itisdiffi 85 Theimplicationsforsupervision are discussed furtherintheboxnextsection.SeealsoEuropean 84 3 Forexample,theEBAoperatesundersupervisionandoversightof theECB.Furthermore, thebanks’ 83 fi one ormore banks –ofimportanceforthepaymentsystemencounters to function.Thebiggestthreat isifoneormore institutions–inpractice with, inparticulartoavoidasituationwhere thepaymentsystemceases Any crisisthatthreatens stabilityinthefi injection orallow like anyothercompany. Thisinvolvestheownersproviding acapital oversight andsupervisionofthissector. which wouldalsohaveconsiderableconsequencesfortheauthorities’ tems couldfacilitatethecreation ofapan-European bankingmarket, these effi chances forSwedishcompaniesandhouseholdstoavailthemselvesof decision onEMU,althoughSwedishparticipationislikelytoimprove the payment systemsinEurope. Thiswilltakeplaceirrespective ofSweden’s integration ofthebankingmarketvia,forinstance,integratedretail in Europe. This shouldleadtoeffi All inall,EMUhasproduced greater integrationofthepaymentsystems tance (ELA). central bankcancometoitsaidbyproviding emergency liquidityassis- nancialdiffi the EU”,CESifoWorking Paper No812,July2002. 2003”, CESifo,andStolz,S.(2002)”Banking SupervisioninIntegratedFinancialMarkets:Implicationsfor Economic AdvisoryGroup (2003).”FinancialArchitecture”, Chapter4of”ReportonEuropean Economy problems, especiallygiventhetimepressure underwhichdecisions oftenhavetobemade. signifi lity oftheBelgianauthoritiesandCLSunderUS responsibility, butthedegree ofinternationalcooperationis manages therisksinvolvedinforeign exchangesettlement. Technically, SWIFTcomesundertheresponsibi- Telecommunications), whichisabank-ownednetworkforfi international paymentsare entirely dependentonSWIFT(SocietyforWorldwide InterbankFinancial can therefore notberuledout. for more centralisedresponsibility forfi the contagionproblems thatexist.Inthefuture ofEMU,theneed supervision andoversightoffi market, thegreater thereason tointroduce amore centralformfor problems. Themore advanced integrationbecomesinthebanking cial criseswouldnotfullyheedpotentialinternationalcontagion risk thatnationalsupervision,oversightandmanagementoffi Crisis management various forms. important asasubjectforoversight. less systemicallyimportant,theinfrastructure maybecomemore guard stabilityinthefi lity, which wouldreduce theneedforpublicinterventiontosafe- in thismarket.Thiswouldlessentheirimportanceforfi for fi noted thatifEMUinthelongrunleadstoamore integ cantinbothcases. ciencygains.Inthelongterm,integrationofpaymentsys- nancialservices,thebanksoftodaywouldbesmallparticipants 85 culties.Ifthebankissolventbuthasliquidityproblems, the Ifthebankisinsolvent,bestthingusuallytotreat it culttodistinguishbetween abankwithliquidityproblems andabankwithsolvency ing thebanktogointobankruptcy. Incertaincircums- 83 However, coordination isalsoassociatedwiththe nancialsystem.Whilethebanksmaybecome ciencygainsandinthelongrunto nancialstabilityinorder tointernalise 84 Atthesametime,itshouldbe nancialsystemmustbedealt nancialmessages.Inaddition,CLSbank nancialstabilityatEUlevel nancialstabi- rated market nan- FINANCIAL STABILITY REPORT 1/2003 105 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN

86

nancial sta- nancial assistance Consequently, even Consequently, 87 nal report of the Banking Law nal report ciently. ciently.

nancial system. There are several possible are nancial system. There nancial crises, especially if the ELA involves more nancial crises, especially if the ELA involves more central bank to provide unlimited ELA changes. As ELA affects liqui- unlimited ELA changes. As ELA affects central bank to provide for have undesirable effects it can therefore dity in the economy, The exchange of information with the ECB and the monetary policy. be important would therefore area other central banks of the euro in the event of fi considerable amounts. if Sweden were to join EMU, it is the Riksbank that, under current to join EMU, it is the Riksbank that, under current if Sweden were the provi- for decisions regarding would be responsible regulations, sion of ELA to Swedish institutions. ELA would require coordination. national central banks are responsible for promoting fi for promoting responsible national central banks are ”the competent NCB As early as 1999, the ECB stipulated that bility. of ELA to an institution takes the decision concerning the provision place under the respons- operating in its jurisdiction. This would take ibility and at the cost of the NCB in question.” The Riksbank would continue to be responsible for ELA. The Riksbank would continue to be responsible ict with the EU’s prohibition of government support. Instead, it is prohibition ict with the EU’s Committee. One consequence of joining EMU is that the ability of a national In practice, however, EMU entry could affect the government’s possibili- the government’s EMU entry could affect In practice, however, ties to manage a crisis in the fi in this regard. effects ■ 86 see, for instance, the fi problem, For a discussion of the moral hazard tances, however, a bankruptcy may have considerable negative effects negative effects may have considerable a bankruptcy tances, however, The also on the economy in general. and thereby on the payment system some form of fi have to provide government may then can assistance to insolvent banks costs of providing to the bank. As the as gua- is the only party that can serve be substantial, the government is the- solvency assistance assistance. Ultimately, rantor for this kind of to however, is good reason, levy taxes. There based on the right to reby of moral problems banks, as it creates assisting insolvent from refrain it should be given in assistance is provided, In the event that hazard. incurring losses, from not save the shareholders such a way that does lenders. primarily the bank’s which is why assistance should target central banks, the for the European regulations to current According Another reason to refrain from assisting insolvent banks is that it could from to refrain Another reason confl e.g. of a bankruptcy, effects often better to attempt to limit the harmful conducted in a smooth man- are by ensuring that settlement procedures Should a bank become insolvent, it may also be necessary to provide ner. of a systemic effects contagion to prevent ELA to solvent banks in order way EMU will affect is whether and in what The question here nature. crises effi ability to manage the government’s ■ 87 ECB Annual Report 1999, pp. 98. 106 FINANCIAL STABILITY REPORT 1/2003 measures designedtodealwithcrisesinthefi nent iscrisismanagement,whichconcernspublic the fi panies, andcentralbanks’oversightoftherisksin risks andregulatory complianceinindividualcom- prises supervisoryauthorities’supervisionofthe second istheday-to-dayoversight,whichcom- which fi and regulations, thatestablishestheboundswithin sed. Presently, amendmentstoregulations are role when theregulatory frameworkisto berevi- European Commissionwillplayamore prominent duction oftheso-calledLamfalussyprocess. cient. Thishasbeenachievedthrough theintro- the process forenactingthenewrulesmore effi the appointedtime,itwasalsonecessarytomake enable allthemeasures tobeimplementedwithin these relate tothesecuritiesmarkets.Inorder to already beendecidedupon.Alarge proportion of world by2010.Three-quarters oftheitemshave petitive, knowledge-basedeconomicarea inthe realise thevisionofmakingEUmostcom- fi ted by2005tocompletetheinternalmarketfor Plan) containing43itemsthatmustbeimplemen- developed aplanin1999(FinancialServicesAction With aviewtoacceleratingthisprocess, theEU number ofrulesneedtobedrawnupintheEU. regulatory framework,whichmeans thatalarge the fi sometimes bealengthyprocess. At thesametime, States, thedrawingupofnewregulations can achieved through negotiationbetween allMember between institutionsfrom different countries. different rulescouldcreate barriers tocompetition restriction fortheseinstitutions,the existence of Given thattheregulatory framework constitutesa objectives –asinglemarketforfi Europe isaprecondition foroneoftheEU’s main similar frameworkforallfi The drivingforce behindthisisthefact thata carried outforanumberofyearswithintheEU. for fi EU level. shift ofthisoversightinEurope from nationalto number ofrelevant trends inlightoftheongoing cial system.Whatfollowsisadiscussionof I Oversight ofthefi nancialservices.Thisplanofactionwillhelp is aregulatory framework,consistingoflaws can besaidtohavethree components.Thefi N BRIEF nancialinstitutionsinSwedenhasmainlybeen nancialsystemasawhole.Thethird compo- nancialsectorissafeguarded byan extensive Briefl As asingleregulatory frameworkfor theEUis The developmentoftheregulatory framework nancialcompaniesmustoperate.The y, theLamfalussyprocess entailsthatthe , publicoversightofthefi nancial sectorinEurope nancialinstitutionsin nancialservices. nancialsector nan- - rst in regulations forthesecuritiesmarkets. regulation. Bothcommitteescanpropose changes matter. Finally, theCommissionadoptsnew then senttoESC,whichmakesadecisiononthe which thendevelopsaproposal. This proposal is after whichitreports backtotheCommission, market participantsandusersoffi study aparticulararea. CESRinturnconsults structure, theEuropean CommissionasksCESRto decision-making process intheEU.Innew securities marketsinoneunitandtospeedupthe public regulatory andsupervisoryfunctionsinthe Securities Regulators,CESR). with anadvisoryfunction(CommitteeofEuropean tion (European SecuritiesCommittee,ESC)andone one witharegulatory anddecision-makingfunc- mittees havebeencreated forsecuritiesmatters, the MemberStatesgovernments.Two newcom- tion withcommitteescomprisingrepresentatives of made bydecisionoftheCommissionincollabora- a considerablenumberofamendmentswillbe pean Parliament.Through theLamfalussyprocess, decided bytheCouncilofMinistersandEuro- regulatory frameworkhasbecomesocomprehen- other hand,itisopentodiscussion whetherthe excessively highrisksinthefi vague orinadequateregulations thatcouldleadto themselves. Thusfar, thishasnotresulted inoverly risk ofneglectingtheobjectivesregulations aspect andthereaching ofanagreement, atthe taching fartoomuchimportancetoboththetime harmonisation ofregulations runstheriskofat- important goal.Thisfocusonproducing aspeedy tion oftheregulatory frameworkisthemost certain amountofrisk.FortheEU,harmonisa- speed. Atthesametime,developmentsentaila new rulesare negotiatedwithacertaindegree of more effi ECB andthrough theirownnational members. powers willberepresented inCEBSthrough the Member States.Centralbankswithoutsupervisory uniform implementationofEUdirectives inthe to bankingsupervision,andcontributea horities, toadvisetheCommissiononissuesrelated is tofostercooperationbetweensupervisoryaut- Banking Supervisors(CEBS).Theiroverallmandate Banking Committee(EBC)andtheof the creation oftwonewcommittees: theEuropean regulations more effi equivalent wayofmakingtheworkonbanking In 2002,efforts were initiatedtofi Theaimistoconductallcoordination of The initiativetomaketheregulation process cientiscommendable.Itimportantthat cient.Theproposal implied nancialsector. Onthe nancialservices, ndan FINANCIAL STABILITY REPORT 1/2003 107 y 2003”, er No 812, July nancial sector cant operations nancial companies cult to implement for

88 rst step towards greater cross-border cross-border greater rst step towards As regards crisis management, cooperation crisis management, As regards crisis management is regarding One problem The current rules governing home country The current and the delineation of responsibilities at European at European and the delineation of responsibilities level is even less advanced than for day-to-day oversight. A fi cooperation for crisis management has been taken a through within the scope of the ESCB. This arose authori- between different cooperation agreement concerns ties in crisis situations. The agreement practical arrangements such as the exchange of is information. This is an initial step, but there to intensify the cooperation further at reason level. European that it is not formalised in the same way as the other two components. The need to manage crises the central banks and supervisory authorities are authorities are banks and supervisory the central This is mainly due in nature. still primarily domestic of fi to the fact that the majority to national domiciled according still largely are As oversight can be conducted. where origin, from consolidation in the fi cross-border number of genuinely an increasing progresses, i.e. companies will appear, international companies majority of their operations in that do not have the One example of such a company one country. which has signifi today is Nordea, and Denmark. Nord- in Finland, Sweden, Norway position ea, as well as other banks with a dominant has a subsidiary- in several countries, currently which means that each national based structure, central bank and supervisory authority is re- the bank sponsible for supervision and oversight of gives subsidiaries operating in its jurisdiction. This of a clear delineation of responsibi- the impression often operate as one unit, lities. Corporate groups which raises the question of whether the however, separate to such an extent that operations are makes supervision of the legal entities meaningful. enti- In addition, it is uncertain whether the legal bank ties could be separated in the event of the prob- failing. For example, it is likely that liquidity a lems in an international bank will always be counterparties do not as the bank’s matter, group distinguish between the various legal entities. diffi supervision may prove that these kinds of genuinely international banks could be systemically important in several likely countries. In the long term, it is therefore will be a need for alternative, comple- that there mentary solutions. ciency nancial cial status in the nancial services. There nancial services. There nancial stability issues nancial services by 2010 is nancial services by 2010 eld of supervision. The role of eld of supervision. The role ciency interests to the desired extent to the desired ciency interests ces are supervised from the home from supervised ces are nancial companies that are established as nancial companies that are Although oversight and supervision are being Although oversight and supervision are Cooperation in the area of day-to-day over- Cooperation in the area The principle of home country supervision CESifo, and Stolz, S. (2002) ”Banking Supervision in Integrated Financial Markets: Implications for the EU”, CESifo Working Pap CESifo, and Stolz, S. (2002) ”Banking Supervision in Integrated Financial Markets: Implications for the EU”, CESifo Working 2002. 88 Econom Chapter 4 of ”Report on European (2003). ”Financial Architecture”, Economic Advisory Group See, for example, European the group will be given more offi will be given more the group at EU level, the tasks of and more conducted more country. Consequently, corporate groups that corporate groups Consequently, country. are include legal entities in a number of countries subject to supervision by authorities in several this, and to foster the ex- facilitate countries. To change of other information, the various supervi- and sory authorities have concluded both bilateral of mutual understanding. multilateral agreements supervisory authorities the EU’s Furthermore, de Contact, the aim of which cooperate in Groupe and formulating principles includes coordinating for how supervision is conducted in the EU. This is an exchange of information and done through best practice experiences, as well as by creating solutions for the fi of CEBS. when it is made a working group future In addition, the central banks and supervisory authorities cooperate on fi System of Cen- within the scope of the European their participation on the tral Banks (ESCB) through Banking Supervision Committee. The Committee has two principal tasks, namely to follow and a fi from trend analyse the macroeconomic cooperation stability perspective, and to promote between supervisory authorities and central banks. sight is not as advanced as in the formulation of sight is not as advanced as in the formulation particularly due to the fact that re- regulations, lies at national still largely sponsibility in this regard level. applies to supervisory authorities, which means that fi also subject to super- legal entities in a country are while supervisory authority, vision by that country’s branch offi sive and restrictive that it risks leading to effi that sive and restrictive of fi losses in the production to be realised. are no clear incentives for individual Member no clear incentives for individual are existing regula- an abolition of States to propose of only more is a risk tions, which is why there new the proposed With being created. regulations of regulatory it is mainly representatives process, discussing the need for changes that are interests that this will But it is not certain to regulations. effi safeguard vision of being the most competitive if the EU’s in the world for fi region 108 FINANCIAL STABILITY REPORT 1/2003 serious crisesoccur. Thisalsomeans thatitis avoid givingfi rience saysthatgovernmentsare seldomableto measures, duetoproblems ofmoralhazard, expe- the governmentshoulddoitsutmosttoavoidsuch fi question ofgovernmentwillingnesstoprovide due tothefactthatcrisismanagementispartlya diffi nagement isoftenperceived assensitiveand what optionsare available.Inaddition,crisisma- the different publicauthoritiesshouldactandfor division ofresponsibilities andstructure forhow seldom arises,whichhasresulted inalessdistinct nancialassistancetothefi culttodiscussinadvance.Thisisparticularly nancialassistancewhenparticularly nancialsector. Evenif lem tocooperatewitheachother. of countriesthatbecomeinvolvedinsuchaprob- countries. Thisplacesgreat demandsontheability will alsohavetobeconductedjointlybyseveral cial systemofseveralcountries,crisismanagement bank’s failure couldthreaten stabilityinthefi number ofcountries.Ifthere isariskthatonesuch matic forbankswithsignifi mate guaranteeforcrisismanagement. thereby therighttolevytaxes–thatare theulti- ties formakinguseofthegovernmentbudgetand fi nancialresources –i.e.thegovernment’s possibili- All ofthismakescrisismanagementproble- cantoperationsina nan- FINANCIAL STABILITY REPORT 1/2003 109 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN nan- nancial nancial crisis, it nancial system. The cult to limit the effects cult to limit the effects nancial crisis should not nancial crisis should nancial sector are managed. Regard- nancial sector are nancial securities markets that can ab- nancial assistance in crises

nancial system encounter a fi nancial system encounter uence would be greater. In this respect, the In this respect, uence would be greater.

ows between participants in different countries. The banks’ countries. The ows between participants in different nancial crisis on the real economy. The importance of domestic economy. real nancial crisis on the nancial crisis. payment systems and banking markets. The disappearance of ex- payment systems and banking markets. interna- numerous and more in larger change rate risk should result tional fl and European more liquidity management is also likely to become is that fi A likely consequence less national than it is today. will also be more while there will increase, dependence in Europe advanced fi banks and more in one bank that problems sorb part of the risk. Even if this implies contagion problems would have an impact on other banks, systemic entry into EMU. and the need for ELA would diminish following European integration may impose new demands on crisis management. may diminish. of a fi means of managing a fi monetary policy as a however. be overestimated, The need for government fi would not be possible as part of the Eurosystem to lower interest to lower interest as part of the Eurosystem would not be possible words, to alleviate the consequences. In other rates in Sweden alone diffi could make it more membership in EMU development of European oversight and the consequences this will development of European have for crisis management is discussed further in the adjacent box. negative effects of remaining outside EMU is especially pronounced outside EMU is especially pronounced of remaining negative effects to issues concerning stability in the fi with regard less of EMU, European integration will entail increasing demands for integration will entail increasing less of EMU, European this oversight to be managed to some extent at EU level. Within infl EMU, Sweden’s government’s oversight of the fi government’s The Riksbank would not be able to use the repo rate to manage a to use the repo rate would not be able The Riksbank fi cult as it will not be possible to adjust interest rates to reduce the rates to reduce cult as it will not be possible to adjust interest EMU is likely to contribute to integration of securities markets, ■ ■ If Sweden joins EMU, there will not be any change, technically speaking, If Sweden joins EMU, there stability in the fi in its capabilities for managing a crisis that threatens for ELA. It is cial system. The Riksbank will continue to be responsible possible that the management of a crisis will be made somewhat more diffi EMU could accelerate integration However, economy. on the real effects far-reaching banking market, which could have more of the European consequences for supervision, oversight and crisis management in the long term. Crisis management is associated with how other elements of the Swedish fi Should the ■ 110 FINANCIAL STABILITY REPORT 1/2003 ARTICLE fi the shortterm.Inlongerterm,consequencesmaybemore signi- institutions, theimplicationsforfi Although thesedirect, initialeffects would havesomeimpactonthe trade andaconcentrationofsecuritiestradingtootherinstruments. have consequencesforcertainareas, suchasreduced foreign exchange management. Theimplicationsofmembershipvary. ween theseparticipants,onthefi dual participantsofimportanceforstability, onthecontagionrisksbet- ways. Thisarticlefocusesontheeffects withinfourareas: ontheindivi- Swedish membershipinEMUwouldaffect fi fi ing dependencebetweenEuropean countriesasregards stabilityinthe increasing market integrationandwouldtherefore contributetoincreas- institutions adapttothenewsituation.Theeuro isanobviouspartofthe The rateofchangewilllargely dependonhowquicklythefi ) Competitioninthefi 1) participation inEMU.Somelikelyeffects are: ) AsEMUcontributestoauniformEuropean fi 7) Cross-border paymentsinthenewsystems wouldbesaferandless 6) Thepayment systemwouldchange,althoughthemostimportant 5) Counterpartyriskshoulddiminishsincetheopportunitiestospread 4) 3) Larger fi Structuraltransformationwouldaccelerateandthefi 2) cantasthemarketsforfi nancialsystem. One importantconclusionisthatmembershipinEMUwouldquickly Summary andconclusions The analysispointstoseveralpotentialconsequencesofSwedish extent atEUlevel. sight ofthefi fi long term,thiscouldsqueezeprofi expensive, whichmayresult inmore payments. continuity inthis/these,islikelytoincrease. the euro. DependenceononeorafewsystemsinEurope, aswell changes wouldoccurirrespective ofwhetherornotSwedenadopts banks decidetomanagetheirexposures inaeuro-world. hazard. However, thesizeofthiseffect woulddependonhowthe stability inthesystemaswellalleviateproblem ofmoral exposures over more counterpartieswouldrise.Thisshouldimprove reduce theeffects ofabankfailure ontheeconomy. cing toagreater extentviathesecuritiesmarkets.Thisinturnwould and riskintheeconomy. Asaresult, companiesshouldseekfi would becomemore European. nancialsystemmore vulnerable. nancialmarketsshouldresult inbetterallocationofcapital nancialsectorwouldhaveto be conductedtoagreater nancialservicesmarketwouldincrease. Inthe nancialservicesbecomeincreasingly European. nancialinfrastructure, andoncrisis nancialstabilitywouldbemarginal in tmargins andthusmakethe nancialstabilityinseveral nancialmarket,over- nancialmarket nancial nan- FINANCIAL STABILITY REPORT 1/2003 111 FINANCIAL STABILITY IN STABILITY FINANCIAL EURO AND THE SWEDEN nite conclusion nancial system. nancial crises would primarily remain a national remain would primarily nancial crises The management of fi The management however: matter, a) level, and at national rests as long as the formal responsibility b) national in nature. mainly as long as the banks are to draw any defi it is impossible would vary, As the effects as to whether Swedish participation in EMU would result on the whole in on the participation in EMU would result as to whether Swedish in the stability of the fi or deterioration an improvement The effects would also depend on how market participants behave in the on how market participants behave in would also depend The effects able authorities are and to what extent the European new environment to Europe. to adjust the focus of their oversight on