Financial crises can give rise to substantial costs in an economy. A crisis can impair the financial system’s ability to provide services such as payment intermediation, risk management, saving and financing. That in turn can hamper growth in the real economy. As a result the Riksbank analyses threats to the stability of the financial system primarily with a view to preventing serious crises from arising in the financial sector. The prospect of financial crises occurring in the future cannot be ruled out, however.
At the beginning of the 1990s the Swedish government authorities had no routines in place to deal with the critical situation that arose in the Swedish banking sector. Instead, they had to largely improvise their management of the banking crisis. The authorities took extensive measures to get to grips with the crisis, including both capital injections and emergency liquidity assistance. In retrospect we can see that the final direct costs of the crisis for the taxpayer were relatively modest. That the outcome did not prove more detrimental was partly due to a number of concurrent fortunate circumstances. The indirect costs in the shape of lower economic growth, for example owing to greater difficulty in obtaining financing for consumption or investment, are harder to measure. Nevertheless, several international studies of banking crises indicate that these indirect consequences are often considerably larger than the direct fiscal effects.
To mitigate the impact of a future financial crisis it is important to maintain a good state of preparedness. Crises can arise unexpectedly and spread rapidly to other parts of the financial system. If a crisis breaks out it is crucial to quickly establish effective communication channels and to have an explicit delineation of responsibilities between public authorities.
The Riksbank is the authority in Sweden with the power to provide emergency liquidity assistance to financial institutions that have run into liquidity problems. That gives the Riksbank a potentially key role in the event of a financial crisis. It is usually said that the Riksbank in such situations acts as lender of last resort. The ability to provide emergency liquidity assistance may be an important means to prevent the spread of a financial crisis, but it can also have undesirable effects on banks' risk behaviour – if banks think that they will always be able to borrow from the Riksbank there may be less of an incentive for them to manage their own risks satisfactorily. It is therefore important that such measures are not taken without due cause and that the routines and conditions for granting emergency liquidity assistance are well thought-out.
Financial institutions are operating more and more over national boundaries. It is thus important that central banks and supervisory authorities in different countries develop their cooperation as regards crisis management, crisis preparedness and prudential supervision.
Click on the below links to access a number of documents related to the Riksbank's crisis management.