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Financial Stability November 2008 Financial Stability 2008:2 The Swedish financial system has been tangibly affected by the global financial crisis Authority measures are now a precondition for satisfactory stability in Sweden Prevailing risks have increased Profit before loan losses and loan losses (net) in the major banks Summed up over four quarters, SEK billion, fixed prices, 2008-09-30 100 80 60 40 20 0 -20 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Profit before loan losses Chart 3:1 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Loan losses Sources: Bank reports and the Riksbank Stability assessment The resilience of the Swedish banks is good Global lack of confidence and liquidity Measures from Swedish authorities a precondition for satisfactory stability in Sweden Prevailing risks have increased Risks on the financial markets Effects of weaker development of the real economy Developments in the Baltic countries Prevailing risks have increased Risks on the financial markets Effects of weaker development of the real economy Developments in the Baltic countries Difference between interbank rate and expected policy rate Basis points 400 350 300 250 200 150 100 50 0 Jan-07 Jul-07 Sweden Euro area Jan-09 Jul-08 Jan-08 USA UK Note. In Sweden the spread is represented by the difference between 3 month Stibor and overnight index swap (STINA) rate Chart 1.2 Source: Bloomberg Premiums in CDS for a selection of banks basis points 1400 1200 1000 800 600 400 200 0 Jan-07 Chart 1.12 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Deutsche Bank SEB M errill Lynch Citibank M organ Stanley UBS Oct-08 Jan-09 Source: Bloomberg Prevailing risks have increased Risks on the financial markets Effects of weaker development of the real economy Developments in the Baltic countries Effects of weaker economic development Economic prospects may decline even more banks affected by fall in earnings and weaker ability of borrowers to pay if the banks further tighten the provision of credit or due to other factors (really difficult to assess the effects of the financial crisis on the real economy). Weaker prospects may lead the banks to be even more cautious in provision of credit This in turn may further weaken prospects Negative spiral of declining economic activity and reduced credit supply Difference between interbank rate and expected policy rate Basis points 400 350 300 250 200 150 100 50 0 Jan-07 Jul-07 Sweden Euro area Jan-09 Jul-08 Jan-08 USA UK Note. In Sweden the spread is represented by the difference between 3 month Stibor and overnight index swap (STINA) rate Chart 1.2 Source: Bloomberg Premiums in CDS index basis points 240 200 160 120 80 40 0 Jan-06 M ay-06 Sep-06 Jan-07 M ay-07 North America - CDX Chart 1.11 Sep-07 Jan-08 M ay-08 Sep-08 Jan-09 Europe - iTraxx Source: Reuters Ecowin & Bloomberg Prevailing risks have increased Risks on the financial markets Effects of weaker development of the real economy Developments in the Baltic countries Swedish banks in the Baltic countries September 2008 Baltic countries’ share of lending and operating profit Market share lending Lending 100% 18 12 % Swedbank 16 % 36 80% 60% SEB 47 Nordea 45 3% 25 40% 27 9,3 11,7 12,1 20% Operating profit, latest four-quarter period 30 25 14 SEB 20 % Swedbank 27 % Nordea 2% 0% Estonia Latvia SEB Nordea Swedbank Lithuania Other GDP growth Annual percentage change 14 12 10 8 6 4 2 0 -2 -4 -6 dec-99 dec-00 dec-01 dec-02 Estonia Chart 2:34 dec-03 Latvia dec-04 dec-05 dec-06 dec-07 dec-08 Lithuania Source: Reuters Ecowin Corporate borrowing in the Baltic countries Annual percentage change 60 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -10 01 02 03 Estonia Chart 2:41 04 05 Latvia 06 07 08 Lithuania Sources: Reuters Ecowin and national central banks The stress tests show… Buffers sufficient to cope with This report also contains a test entailing a more extensive crisis scenario a negative development in the Baltic countries a dramatic economic decline Scenario in line with crisis of 1990s Negative development in Baltic countries Negative development in global economy But, in the current situation with ineffective financial markets globally, the effects would be serious Financial Stability 2008:2 The Swedish financial system has been tangibly affected by the global financial crisis Authority measures are now a precondition for satisfactory stability in Sweden Prevailing risks have increased Article From local to global – today's crisis in the light of yesterday's Highlights differences and similarities between the ongoing crisis and the Swedish bank crisis in the early 1990s