Bloomberg News

Swedish Riksbank Won’t Offer Liquidity Below Market Rates

September 30, 2011

(Updates with comments from Nyberg in ninth paragraph, bank shares in last paragraph.)

Sept. 30 (Bloomberg) -- Sweden’s lenders can’t rely on the central bank to provide cheap liquidity should Europe’s debt crisis deepen and engulf the region’s banks, Riksbank Deputy Governor Lars Nyberg said.

“If they borrow from us, it should be as a last resort,” Nyberg told Bloomberg in response to questions in Stockholm yesterday. “It will be more expensive than what they can buy on the markets.”

Europe’s bank funding market is “very stressed” as the specter of a Greek default threatens to send shockwaves across the whole region, Nordea Bank AB Chief Executive Officer Christian Clausen said Sept. 15. The European Central Bank has been pumping cash into euro area money markets, including dollar liquidity, to keep credit flowing among the region’s banks as interbank lending shows signs of stalling.

Stockholm-based SEB AB, the biggest Nordic currency trader, told the Svenska Dagbladet newspaper last month it could have found alternatives to tapping the Riksbank for dollar liquidity during the financial crisis that started in 2008, and that it used the central bank because it was cheaper.

“We could have chosen other paths to replace our dollar funding or reduce our balance sheet but that would have been worse for our customers and commercially less interesting,” Ola Kallemur, an SEB spokesman, told the newspaper on Aug. 16.

‘Reasonable Interpretation’

Telling banks they can’t expect the Riksbank to provide financing at rates cheaper than the market is “a reasonable interpretation of the lender of last resort possibility,” said Jan Erik Gjerland, an analyst at DnB NOR ASA in Oslo, by phone.

Reluctance amongst Europe’s banks to lend on the interbank market is the highest in more than 2 1/2 years, market rates indicate. The Euribor-OIS spread, the difference between the three-month European interbank offered rate and overnight index swaps, rose this week to 91 basis points, the highest since March 18, 2009, Bloomberg data show.

Sweden’s Riksbank has urged the country’s banks to reduce a mismatch in dollar funding and krona lending to prevent a rerun of the 2008 liquidity crisis that followed the failure of Lehman Brothers Holdings Inc. That event forced the central bank to step in and provide emergency dollars, peaking at $30 billion, to support Swedish banks.

Not Intended

“We allowed the banks to borrow at pretty good rates” during the crisis that followed Lehman, Nyberg said. “That has even been said by a bank to a newspaper: that we borrowed from the Riksbank not because we had to but because it was cheaper than borrowing from someone else. It’s not meant to be like that.”

The Nordic country’s lenders still need to do more to prepare for a deterioration of Europe’s debt crisis that threatens to freeze interbank markets, Lars Frisell, chief economist at the country’s financial regulator, said Aug. 17.

Foreign currency borrowing by Swedish banks, whose combined balance sheets are about four times the size of the economy, has risen to about 1.5 trillion kronor ($222 billion), from 200 billion kronor in 1998, according to Riksbank data.

Sweden’s biggest lenders, which include Nordea, Swedbank AB, Svenska Handelsbanken AB and SEB, all passed the European Banking Authority’s stress test on July 15 with a core Tier 1 capital ratio of at least 8.6 percent under an adverse scenario. The minimum requirement was 5 percent.

Nordea shares fell 2.6 percent to 56.85 kronor as of 10:26 a.m. in Stockholm. SEB’s stock fell 2.8 percent, Handelsbankens shares were down 2.5 percent and Swedbank declined 2.5 percent, underperforming a 1.6 percent drop in Stockholm’s OMX index.

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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