Swedish Chamber of Commerce / Stockholm School of Economics in Riga Open Lecture

1. Swedish Chamber of Commerce / Stockholm School of Economicsin Riga Open Lecture Global Banking Crisis: focus Sweden Uldis Cerps uldis.cerps@fi.se May 8, 2009

2. Global perspective on present crisis Increased risk appetite (e.g. Sub-prime, emerging market exposures) • Unusually low interest rates • Complex structured products, misperceptions of risk diversification • Increased cross-border capital flows • Credit rating agencies • Procyclicality • Remuneration logga

3. Reports documenting causes and solutions • Turner review (UK FSA) • De Laroisière (on request of COM) • ”Geneva report” • ECOFIN roadmap • G20 conclusions

4. Swedish perspective: State remedies • Liquidity support program and capital support program • Emergency Support for banks • National Debt Office responsible for executing the programs • Finansinspektionen responsible for monitoring and reporting to the government whether the programs are benefitting consumers and companies • No explicit or implicit restrictions on cross-border capital flows

5. Liquidity Support Program • Aim is to facilitate borrowing and reduce borrowing costs during the financial crisis. Extended until October 31, 2009 with an option of further extension • Total frame of SEK 1500 billion, no restrictions on currency • Ceiling on each participating institution • up to 20 percent of deposit base as of September 1, 2008, or • the ”sum of maturing debt instruments with maturity over 90 days maturing between September 1, 2008 to April 30, 2009 • Guaranteeing issues of debt securities for up to 5 years of maturity (but not subordinated debt or complex structured products)

6. Liquidity Support Program (2) • Point 4.4 in bacground comments to the proposition explicitly makes clear that the liquidity support program can be used even to improve the liquidity in subsidiaries • ”.. även likviditetsförsörjningen i de svenska bankernas dotterbolag i utlandet, exempelvis i Baltikum, kan förväntas förbättras genom detta åtgärd.”

7. Liquidity Support Program: affiliated institutions • Swedbank AB (publ) • Swedbank Hypotek AB (publ) • Sveriges Bostadsfinansieringsaktiebolag SBAB (publ) • Volvofinans Bank AB (publ) • Carnegie Investment Bank • SEB Bank AB (publ): in the process of application

8. Support for capital base of banks: the underlying reasons • Swedish banks are entering the crisis with strong balance sheets • But… • international credit markets are constrained • companies have difficulty to finance themselves • increased risk that the Swedish economy could be exposed to serious turbulence • state has the responsibility for the stability of the financial system • Underlying basic idea is still preference for private sector solutions

9. Support for capital base of banks: basic features • Based on the Law on State Aid to Credit Institutions (2008:814) • Structured according to EU-principles • Applicable to solvent and financially sound credit institutions in Sweden • Shares, hybrid capital • Total frame: SEK 50 billion • Maximum support equivalent to an increase of 2 percentage points in capital adequacy • Financed through Stability Fund (expected to reach 2.5% of GDP in 2023 or SEK 150 Bn)

10. Support for capital base of banks: alternative 1 • Up to 70% of infusion of capital from the state • The state receives adequate, market-based returns from investment and participates on the same terms as private investors • No limitations on dividend payouts to shareholders • Limitations on remuneration to 5 highest ranking directors

11. Support for capital base of banks: alternative 2 • More than 70% of infusion of capital from the state. • Yield from the capital support decided by the National Debt Office • The state shall benefit from the possible increase in the value in the company • Limitations on remuneration to 5 highest ranking directors

12. Emergency Support for Banks • Broad mandate for the National Debt Office to intervene if a particular institutions threatens financial stability • Broad set of instruments and strategies (including winding-up of institution) • Support only provided to banks that are considered sustainable • National Debt Office can consider a support matter without a formal application, if the situation so requires • Support provided on commercial basis and shall not distort competition

13. Tangible Effects on Markets Ränta 5-årig bostadsobligation och 3 månaders interbankränta, samt räntor statspapper 20081001-20081208

14. Financial crisis – focus areas of Finansinspektionen • Credit risk related examinations • Enhanced risk reporting • Funding situation • Intensified dialogue with banks on stress tests • Exposures to business areas of particular attention (e.g. Baltic states, commercial real estate, private equity) • Establishment and coordination of colleges

15. Financial crisis – failed institutions • Failure of two minor banks (Carnegie and Kaupthing) • Both cases resolved by private solutions following public intervention • Emergency liquidity in both cases and takeover by National Debt Office in one case, followed by a private sector solution

16. Swedish banks lending to the public

17. The three phases of the crisis • Phase 1: 2007 Q2 – 2008 Q3 Fall in asset prices and drying up of funding market • Phase 2: 2008 Q4 - ??? Recession and credit losses • Phase 3: The world after the crisis …

18. Swedish banks in phase 1 • Profits ”stable”. Net profit 2008: about 80 bn SEK • Sizable capital buffers over the regulatory minimum. Capital adequacy rations strengthened by all 4 systemically important banks • All 3 systemically important banks that raised capital managed to raise it from private sources, as opposed to many other large European banking groups • But…increasing credit losses • Continued funding market risks • Grim macroeconomic outlook

19. GDP and projections

20. Cumulative credit lossessince 2007 for the Swedish operations Note that the banks define the Swedish operations somewhat different from each other.

21. Cumulative credit lossessince 2007 for the Baltic operations Note there is no data for Nordea for Q1 and Q2 2007.

22. Tier 1 strong in the Swedish banks Note. According to Basel II. Nordea is pro forma new issuance of shares.

23. Financial crisis – effect on SE insurance sector • Industry as a whole still has sufficient capital buffers • Fears (now diminished) on extremely low long interest rates and the effect on technical reserves. • Possibility to use long term covered bond rates in calculation of risk free interest rate for discount of technical provisions • Falling assets prices and the associated need for reallocation in companies managed in accordance with mutual principles

24. Phase 2: recession and credit losses • Recession • Low interest rates • Lower profits • Credit losses • Migrations in IRB models

25. Thank you!