Maintaining financial stability in an open economy : Sweden in the global crisis and beyond

In Sweden, as in other open economies, financial policymakers must cope with crises originating both at home and abroad. This report documents Sweden’s vulnerability to external shocks. It analyzes Swedish financial policy during the global financial crisis, including monetary policy, both traditional (lowered repo rate) and nontraditional (massive balance sheet expansion); guarantees of deposits and other bank borrowing; and adjustment of insurance company regulations. The report describes the effective but improvised coordination of the four agencies that managed financial policy during the crisis. It discusses principles for appropriate coordination of monetary policy and macroprudential policy and some alternative arrangements for future coordination. For reducing Sweden’s external vulnerability, it considers “financial breakwaters” such as liquidity requirements by currency and extra capital requirements for lending abroad. For covering the costs of protecting Sweden’s open financial system, it considers the financing of foreign currency reserves and of the new stabilization fund.