Friday, September 26, 2008

More On Swedbank

Swedbank continues to be the center of negative news in Swedish media (see for example here, here, here, here and here). Rumors circulate about how much money Swedbank can lose in its baltic division and its stake in Lehman brothers. Swedbank chairman Carl Eric Stålberg angrily denies the rumors and says that they are confident to get back the money Lehman owes them and says that their credit losses in the Baltic countries will be limited. However, many depositors and speculators don't believe him and which is why some are now withdrawing money from Swedbank accounts (Stålberg however claims that there are very few withdrawals and that more people are depositing new money).

Stålberg characterize these rumors as something made up by vile speculators, and has come out advocating a temporary ban on short selling, to prevent short sellers from pushing down Swedbank stocks.

At the same time however, media reports that Swedbank and other Swedish banks are increasingly starting to require some of their borrowers to repay the loans in advance. That presumably reflect a fear that they won't be able to pay back later, and likely also reflect a generally more restrictive lending standard. That implies that monetary conditions are rapidly becoming much tighter. This should finally solve the problem of too high inflation and current account deficits, but also deepen the short term downturn. I'll return later in the day with a separate post on the baltic economies.


Anonymous Anonymous said...

Good afternoon,

Thanks for Swedbank posts!

As for Swedbank, I would like to ask one thing. In previous post comments section, You mentioned:

"Swedbank suffers virtually no risk of going bust because of liquidity problems because they are a commercial bank with unlimited potential access to liquidity from the Swedish central bank."

This is the first occasion I hear this information, and it is very important when analyzing possibility of Swedbank bankruptcy, therefore I want to clarify. Can You please elaborate on unlimited potential access to liquidity? Does that mean, that central bank by law will grant them liquidity as long as they are solvent? Or it is informal, but sure thing?

Thanks a lot!

Waiting the post about Baltics,
Reader from Latvia

2:30 PM  
Anonymous Anonymous said...

Good afternoon,
thx for you interesting thoughts.

Eagerly awaiting your post today on the situation in the Baltics.

What are your thoughts about the currency peg risk , risk of devaluation an impact on the Swedish banks ?


3:19 PM  
Anonymous Anonymous said...

What are your thoughts on the risk of devalution (Latvia to start with) and impact on Swedish banks ?


3:20 PM  
Blogger stefankarlsson said...

I'm not sure whether there is a law , but the whole purpose/point of central banking, apart from providing cheap financing for the government and government favored industries, is to provide liquidity for fractional reserve based commercial banks when they suffer from liquidity shortages, because of for example bank runs.

That was for example the main argument used to justify the creation of the Federal Reserve in America. Bank runs had created a financial panic in America in 1907, and it was then argued that in order to prevent this from happening again, a central bank was needed to help banks that suffer from liquidity problems.

Central banks all over the world, including the Swedish Riksbank, have recently verbally assured the markets that they would provide the banking system with whatever liquidity they need and want.

3:23 PM  
Anonymous Anonymous said...


Absolutely agree with you here, Central Banks should provide liquidity to illiquid but solvent banks, let illiquid and insolvent banks go bust, and be smart enuogh to know the difference.

However, this mechanism may sometimes not work. Remember UK and Northern Rock - bank was essentialy solvent (loans were good, business model was not appropriate for credit crunch), however due to poor legislation and coordination between institutions, it could not get the liquidity in time.

How do You think, is Swedbank protected from such a scenario? Can Riksbank act fast enough without unnecesary paperwork, if suddenly depositors run for their money?

Thsi is the last substantial risk I can think of now, otherwise, given Riksbank protection, I mark Swedbank as safe from going bankrupt for next few months.

Reader from Latvia

3:47 PM  
Blogger stefankarlsson said...

Latvian reader, I don't think you have the story right on Northern Rock. It did get all the liquidity (£25 billion, which is a very large sum) it needed from the Bank of England, and they got it as soon as they asked for it. The reason it was later nationalized was that it became insolvent because of the low quality (and thus falling value) of their mortgage portfolio.

8:14 PM  

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