Riksbank recommends interbank rate-setting reform

Sveriges Riksbank proposed reforms to the Stockholm interbank offered rate (Stibor) in a new review released today (November 28). The Stibor Review, commissioned in 2011, found no signs of any manipulation of the benchmark rate but identified a number of deficiencies in the rate-setting process. The review also appraised the country's financial stability.

The responsibility of setting Stibor falls to a panel of five banks and the central bank is unhappy with the small membership of the panel. "The fact that there are so few Stibor banks entails a risk of collaboration between the banks," the review said.

The review also raised concerns that banks are able to see one another's submissions when deciding their own – and therefore cannot be said to be acting independently – as well as that banks are in no way obliged to trade at the prices they give. The Riksbank proposed ending both practices, by closing the submission process and committing banks to trading at their stated prices.

The review also condemned the transparency of the process as "inadequate". It called for the framework surrounding Stibor to be open and accessible to the public, while the central bank and Finansinspektionen – the Swedish Financial Supervisory Authority – should have full insight into the panel's discussions.

It also recognised the need for a code of conduct for the banks determining Stibor, a reform proposed for many other interbank rates, including those in the UK, South Africa and Hong Kong.

The Riksbank is also concerned that there is no individual agent with overall responsibility that can be held accountable for the Stibor process and there is no organisation to assess banks' compliance with the Stibor agreement or to deal with questions or complaints from stakeholders.

The Riksbank suggested the Swedish Bankers' Association could be well placed to take the responsibility. Appointing such an agent, it said, would also help facilitate a uniform framework of agreements and rules for the banks determining Stibor to follow.

The Stibor review comprised part of a wider financial stability report, released biannually, that found the four major Swedish banks – Handelsbanken, Nordea, SEB and Swedbank – to be "financially strong". They are well capitalised and have only minor exposures to the countries in the euro area with sovereign debt problems, the report said.

A serious deterioration of the European financial and economic system could increase the banks' loan losses, the report said, but the banks' stress tests indicate they could weather this scenario well. However, household debt in Sweden is at a historically high level and a drop in prices resulting from a severe decline in economic activity could harm the major banks, the report added.

The report also highlighted structural weaknesses in the country's banking system that could damage financial stability in the longer term, including its high level of integration with international markets and its large size in relation to the Swedish economy.

As a preventative measure, the Riksbank said banks must strengthen their capacity to manage any shocks that may arise by ensuring they have sufficient capital and reducing their structural liquidity risks.