Major banks are central to financial linkages and risk transfer
News, Economic Commentaries A new analysis shows that Swedish credit institutions have extensive and concentrated exposures to foreign financial institutions. The major banks, in particular, emerge as key hubs. They play a central role in how risks can spread across borders and within the Swedish banking system.
In this Economic Commentary, Marianna Blix Grimaldi, Lukas Guan Hallquist, Jieying Li and Samuel Namér, who work in the Riksbank’s Financial Stability Department, together with Deputy Governor Anna Seim, analyse the nature of Swedish banks’ cross-border exposures. Using supervisory data from COREP, they show that a large proportion of the banks’ major exposures are directed towards foreign financial institutions, and that these are often concentrated among a limited number of counterparties – primarily major Nordic banks.
At the same time, there are clear differences between the banks. Small and medium-sized banks have exposures mainly within the Nordic region, whilst the major Swedish banks have a more global reach. Together with the authors’ previous analysis of domestic linkages, this reinforces the picture of the major banks’ central role in the network: they act both as key international counterparties and as intermediaries within the domestic system.
This means that the major banks play a crucial role in financial stability. Problems affecting foreign counterparties can quickly spread to major Swedish banks and then on through the domestic banking network. The findings therefore highlight the importance of closely monitoring cross-border exposures and the continued attention to the systemically important role played by the major banks.
The Economic Commentary is a second step in a broader research project on financial interconnectedness. Future analyses will include an in-depth quantification of potential contagion risk within the Swedish banking system.