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Crisis preparedness
Financial crises can cause substantial costs to society. A crisis can have a negative effect on the financial system's ability to supply services such as mediating payments, risk management, saving and financing. This can in turn have negative effects on growth in the real economy. The main purpose of the Riksbank’s analysis of threats to the stability of the financial system is to prevent serious crises from arising in the financial sector. However, the possibility of a crisis arising at some point in the future cannot be entirely ruled out.

At the beginning of the 1990s, the Government had no prepared routines for managing the critical situation that arose in the Swedish banking sector. Instead, the government authorities were to a large extent forced to improvise. The state guarantees for managing the bank crisis were extensive and included both capital injections and emergency liquidity assistance. After the event, we can see that the final direct costs of the crisis for tax-payers were relatively moderate. The fact that the outcome was not worse was partly due to a number of fortunate interacting circumstances. It is more difficult to measure the indirect costs in the form of lower growth, for instance as a result of poorer access to financing of consumption and investment. But several international studies of bank crises imply that the indirect effects are often much greater than the direct tax effects.

To alleviate the effects of a potential future financial crisis it is important to have good preparedness. A crisis situation can arise unexpectedly and spread rapidly to other areas of the financial system.  When a crisis breaks out, it is important, for instance, to rapidly establish efficient communication channels and a clear allocation of responsibility between the authorities concerned.
 
What does the Riksbank do?
The Riksbank is the authority that can provide emergency liquidity assistance to financial companies experiencing liquidity problems. This gives the Riksbank a potential key role in the event of a financial crisis. The Riksbank can in such cases act as lender of last resort. The possibility to provide emergency liquidity assistance may be an important means for preventing the spread of a financial crisis, but it can also lead to undesired effects on the banks’ risk behaviour – if the banks believe they will always be able to borrow from the Riksbank, they may give less importance to managing their risks properly themselves. It is therefore important that such measures are not taken unnecessarily and that the routines and conditions for granting emergency liquidity assistance are well-founded. Financial companies increasingly conduct cross-border operations. It is therefore important that central banks and supervisory authorities in different countries develop cooperation regarding crisis management, preparedness and supervision.
Below you can find links to a number of documents concerning the Riksbank’s crisis management.
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Financial Stability Department

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2/28/2008
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