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Regaining and preserving confidence of the public and the market in banks is essential to resolve financial crises, Sweden's central bank governor Stefan Ingves said in a speech Tuesday.
"This should be done by acknowledging the losses and dealing with the bad assets", the Riksbank governor said. Moreover, to prevent the financial crisis from repeating itself, the confidence regained should not be allowed to dissipate again, and this could be done by reforming of liquidity and capital regulation, he said.
Ingves noted that a loss of market confidence was the main driver of the liquidity crunch, with bad quality assets, also known as a lemon, explaining the breakdown of the market. "Normality will not return until the impaired assets are dealt with. Consequently, we convincingly need to go and get the lemons", the governor said.
Ingves pointed out that resolving bad assets could be done through various asset relief measures. Further, to restore confidence, a process of stress testing was necessary, but with the tests being credible and adequately disclosed, he said.
In the long run, liquidity and capital regulation could provide for a safer financial system. Liquidity buffers would provide a cushion for banks, while the quality and amount of capital would improve the resilience of individual banks, he said. Moreover, building trust between authorities of various countries was important to enhance cross-border crisis management, the governor added.
The Swedish central bank governor has a long experience in dealing with financial crises and was instrumental in resolving the banking crisis in Sweden in the early 1990s.
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