Stefan Invges’ career has been once forged in crisis. A veteran of the Swedish housing and banking crisis in the early 1990s and the Nordic financial crisis of the late 2000s, Ingves, most recently the long-serving governor of Sveriges Riksbank, secured an international reputation as a man who could get things done, even in difficult conditions, someone who could break down complex problems and resolve them in a pragmatic, speedy manner. Moreover, although often direct and to the point, he has always committed to explaining his actions, using personable story-telling skills to gain support as well as to alter expectations about outcomes. He always strived to understand the practicalities of any issue, rather than relying purely on theory, and has shown repeatedly that, despite high levels of uncertainty, he can take decisions quickly to resolve situations – something he views as a critical area of leadership.
These skills and more were on full display during the two financial crises in Sweden and while Ingves’ worked at the International Monetary Fund and as the longest-serving chairman of the Basel Committee on Banking Supervision. It also explains why the Sveriges Riksbank became the first central bank to introduce negative rates and was confident as it pioneered early work on central bank digital currencies (CBDCs).
Early life and Stockholm-bound
Ingves grew up in the village of Närpes in western Finland. He has described his birthplace as being something akin to the ‘Boonies’, with many of his peers emigrating to seek out their futures elsewhere. Ingves himself moved to Sweden and, in 1984, earned his PhD in Economics at the Stockholm School of Economics. His thesis was centred on credit models, and it was at this time that Ingves developed a keen interest in the financial sector. What particularly piqued his curiosity was how the underlying system – the financial infrastructure that he has described as “akin to managing the tracks, rather than the running of the trains” in the rail industry – actually worked. This, combined with having a vision about change coming to the financial sector, stimulated him.
His early roles, however, were in the private sector. First, he worked at one of Sweden’s largest banks, Svenska Handelsbanken, and then as president of Sweden’s Options and Futures Exchange. But he soon learned that “making a lot of money” didn’t really make him “tick”. What particularly interested him was work related to transforming the financial system, as a whole – and he soon had plenty of opportunities to experience and shape them.
Public sector and the Swedish banking crisis
Ingves was recruited by Kjell-Olof Feldt – Sweden’s long-serving finance minister in the 1980s and a leader that he greatly admired – to the Swedish Ministry of Finance in 1988. His public sector work afforded him a more complete view and understanding of the financial architecture. “I found it more of an intellectual challenge to work on the public-sector side,” Ingves tells Central Banking. “That afforded me great opportunities, and I have had a lot of fun trying to change things when it comes to dealing with the system as a whole.”
Ingves worked in the financial markets department at the Swedish Ministry of Finance and was also a member of the board of the Swedish National Debt Office, the Stockholm Stock Exchange and Värdepapperscentralen (Sweden’s central securities depository) from 1988 to 1992. But about halfway through this period, crisis struck. A build-up of credit that followed a mismanaged deregulation of credit restrictions in the 1980s ultimately resulted in a large housing bubble that burst in the early 1990s, causing Sweden to experience a serious financial crisis. What began as a property and banking crisis, triggered by an interest-rate rise at the beginning of the 1990s, transformed into an economic and monetary crisis. Despite the Riksbank raising interest rates to 500% at one point, the koruna’s peg to a basket of currencies was broken, banks collapsed, GDP fell sharply, and public debt levels and unemployment surged, as Sweden lost its triple-A credit rating.
The Swedish authorities introduced an array of reforms to resolve the troubled banks and reform its economy. This package of measures became knows as the ‘Swedish model’. It included the need for strong political unity on resolution policy, the provision of government guarantees for banking-sector financial obligations, prioritising fast policy action over slower, but possibly more precise, measures, the establishment of a sound framework for resolution, a commitment to transparency of all information by the parties involved, the minimising of ‘moral hazard’ by making the private sector absorb losses before the government, and establishing macroeconomic policies to halt the crises in the real and financial sectors. Ingves, meanwhile, was named director-general of the Swedish Bank Support Authority.
“One lesson was that, eventually, you end up with a systemic problem,” Invges told Central Banking in 2012.
“You need a uniform system and a certain degree of standardisation when it comes to dealing with bad assets, where inevitably you are going to run into evaluation issues. We decided we wanted one approach for the system, then when you deal with bad assets this approach will determine the value of these assets: what write-downs to make,” said Ingves. “Then, when you make the write-downs and banks run out of capital, they have a choice between re-capitalising on their own, which in some sense is a success, or, if they can’t, the government will take them over, restructure them and take it from there.”
When the financial crisis in the 1990s ended, Ingves was offered the role of deputy governor of the Riksbank, often described as the oldest continuously running central bank, with a history dating back to the 17th century. Ingves, who later became ‘first’ deputy governor, helped to bed in the Riksbank’s new inflation targeting – an approach to monetary policy that he still favours today. “It was quite a task back then to convince the entire country that it made sense to have an inflation target,” Ingves tells Central Banking. “My view is that one should be very, very careful not to change the inflation target. I haven’t been convinced when it comes to an alternative target because, if you start tweaking the system often, I think you will lose credibility. And then it becomes impossible to understand what monetary policy is all about.”
Ingves described his early work at the Riksbank as “highly rewarding”. “Working in central banking offers a unique opportunity to understand the system as a whole,” Ingves said.
It was quite a task back then to convince the entire country that it made sense to have an inflation target
Stefan Ingves
To the IMF
As matters had stabilised in Sweden, crises were bubbling to the surface elsewhere, with matters coming to a head with the outbreak of the 1997–98 Asian Financial crisis. By this point, Ingves had caught the attention of Stanley Fisher, then-first managing director of the International Monetary Fund, who approached him to become director of IMF’s Monetary and Financial Systems Department (then called the Monetary and Exchange Affairs Department). Ingves joined the Fund on January 4, 1999.
Fischer sought out Invges because of his understanding of how the financial system worked, as well as for his hands-on experience in dealing with crises. The draw of working internationally and assisting nations to establish better and more resilient financial systems was an attractive one, especially as Fischer gave Ingves “a lot of slack” to run his department. Ingves’ team advised around 100 countries a year on issues related to central banking, monetary and exchange management, financial sector institutions and reforms, and financial system soundness. “That gives you quite an opportunity to get a feeling for what works and what does not,” Ingves says.
Warren Coats, who worked under Ingves at the IMF, notes that Ingves’ CV “barely mentions his tour at the IMF”, citing it as typical of Ingves’ “modesty and brevity”. Coats portrayed Invges at the time as “a careful listener” who “sought and received the advice of many banking supervision experts”, while also being a person who always “got to the point as quickly as possible”.
Coats recalls Horst Köhler, then managing director of the IMF, dispatching Ingves, himself, Michael Deppler (the head of the European Department) and Mike Mussa (chief economist) to Ankara one weekend to deal with the 2000 Turkish exchange rate and banking crisis. “We worked well into Sunday night, meeting with the Central Bank [of the Republic] of Turkey governor, deputies and finance ministry officials, to have a plan in place before markets opened the next morning,” Coats tells Central Banking. “Drawing on his Swedish banking experience, Stefan’s contributions were very helpful well into the night. I remember meeting with the CBT deputy governor around 3:00 am and when he had answered my questions, I turned my attention away (half asleep). [Ingves] sat there for a few minutes then asked: ‘May I go now.’ I was so embarrassed.”
Ingves played an important role in developing improved financial-monitoring capabilities at the Fund, notably working in collaboration with the World Bank to develop the Financial Sector Assessment Program “to close a gap in the international financial architecture”, said Rodrigo de Rato, IMF managing director in 2005 – at the time when Ingves left the Fund: “Against the background of the financial crises of the 1990s, this programme was established to strengthen financial sector surveillance and help prevent crises. Under his leadership, [the Monetary and Financial Systems Department] also played a key role in the Fund’s programme in support of anti-money laundering and the combating of the financing of terrorism (AML/CFT).”
Ingves himself had already learned that effective leaders need to understand the inner workings of a complex situation if they want to change it. “What I found striking during the Swedish banking crisis, when I was deputy governor and working for the IMF, is that theory is not enough. You really need to understand the nuts and bolts. If you don’t want to spend time on that you will never get anything done. Because, otherwise, you’re only talking about things in theoretical terms, and you don’t understand how to deliver,” Ingves says.
This is important as leaders rely on others to get the work done. “If you can connect with them, because they realise that this individual knows the business and has bothered dealing with the nuts and bolts, then, usually, you can convince more people that you’re moving in the right direction, compared to if you are talking about things from 30,000 feet, and the whole thing is up in the air,” he adds.
Leading the oldest central bank
Ingves soon received an opportunity to ‘walk the talk’, when he says he received an “unexpected call” from the then-chairman of the Riksbank’s governing council asking if he would take over as the next governor of the Swedish central bank. Ingves said he accepted the role as “you only get such a call once”. He relished the prospect of putting some of his learned experiences into practice. “There is a difference between giving advice and running things,” Ingves says.
What I found striking during the Swedish banking crisis, when I was deputy governor and working for the IMF, is that theory is not enough. You really need to understand the nuts and bolts
Making fast, informed decisions amid high degrees of uncertainty is also a critical trait in leadership, according to Ingves. “The buck stops with you; you’re paid to decide, right or wrong,” Ingves says. But once a decision is made, it still needs to be followed up with clear communication about why it was taken. “If it is a convincing story, mostly people will do what you tell them to do. And the fantastic thing about that is it changes people’s expectations in such a way they tend to accept whatever it is you have suggested in terms of decision-making.”
Perhaps it is not surprising then, that one of Ingves’ major commitments as governor of the Riksbank was to transparency, something he views as a prerequisite to operational independence. “If you’re independent, it’s vital that people can understand what you are doing,” Ingves said in 2012. “If you are independent and you tell the general public ‘it’s none of your business’, independence will be taken away from you, sooner or later. Transparency is also helpful. If people can understand what you’re doing, and part of your job is to affect people’s expectations, you will always be better off if you explain what you are doing.”
Under Ingves, the Riksbank made a concerted effort to be open and clear about when, where and how it provided information, so all groups in society had an equal opportunity to obtain information about its work. Notably, the Swedish central bank changed the way it explained its monetary policy decisions to the public. Instead of publishing written Q&As online, the Riksbank also made videos (unusual at the time) with the governor conveying the same message – boosting audience numbers 100-fold. The Swedish central bank also included press conferences after each monetary policy meeting; provided detailed minutes of the discussion, with no anonymity for members; and introduced a policy of avoiding giving any indication of upcoming decisions in between meetings. It also published a wide range of economic index forecasts and offered almost all information in English as well as Swedish. And, it was an early adopter of social media and layered communications.
The commitment to a lack of anonymity for members in policy discussions would raise challenges for Ingves. But well before then, his skills as a crisis manager would once more be called upon as he had to respond to the dollar funding market freeze in Sweden and the banking crises in Iceland and the Baltics that struck in the late 2000s.
A second financial crisis
Unlike the Swedish financial crisis of the early 1990s, when Sweden’s system faced problems but most of the world’s did not; the banking crisis in 2008 was symptomatic of funding problems sparked by the global financial crisis struck in 2007–08. Swedish banks had a weak dollar funding position, which left them vulnerable, despite maintaining a relatively strong credit position, even if they needed to write down debt related to their Nordic exposures.
“Swedish banks are, and were, dependent on what happens in the global market – if the dollar market dries up then it becomes an issue of liquidity and how to deal with that. Then there was a need to deal with the issues in the Baltics in a forceful way,” Ingves said in 2012. “Once people realised what was going on there, the ‘old timers’ were brought in; those who had done it before – dealing with bad loans and bad assets, seizing collateral, and the rest. It was handled efficiently because there was enough knowledge spread throughout the system. Part of it, on our side, was to do this together with the IMF, because Latvia ended up with an IMF programme.”
This time around, the central bank and debt office played relatively more important roles compared with the government, which did not need to play a major role as ‘owner of last resort’ – although Carnegie Investment Bank was nationalised in 2008. The central bank had to address the consequences of the global liquidity issue and the inter-bank market not functioning, well while dealing with bad loans related to Baltic countries. The Riksbank’s balance sheet rose from Skr200 billion ($19.4 billion, at the current exchange rate) to Skr700 billion in a short period of time. “The simultaneity of the whole thing was different to the ‘90s, and the whole cross-border aspect was different this time around,” said Ingves.
One of the “old timers” from the 1990s crisis, was Bo Lundgren, by this time director-general of the Swedish National Debt Office. “This meant when Bo called me on the phone for the first time when the whole thing started unravelling – they did their swaps and we started with our lending operations – our immediate reaction was ‘here we go again’.” While the ability to act quickly helped, the situation would have been easier to manage if a crisis management framework had been put in place prior to the problem, rather than trying to implement the necessary legislative changes in the middle of the crisis.
Chairman of the Basel Committee
Ingves’ experience in handling Sweden’s two crises, as well as his international experience at the IMF and in the Nordics region, were contributory factors for him being approached by Jean-Claude Trichet – then president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision (GHOS) – to become chair of the Basel Committee on Banking Supervision. The Riksbank veteran says Trichet offered him the job as the two men lined up for a ‘family photo’ at the IMF meeting in 2011. Ingves’ response was characteristically brief and to the point: “‘Well, yeah, sure. That’s fine with me.’”
It is very, very important not to do away with the leverage ratio, and it has to be high enough, because the leverage ratio says something about the losses a bank can sustain if things go completely wrong
Ingves would once more deploy one of his leadership mantras “to solve other people’s problems”, using his full range of puzzle-solving and communication skills to secure consensus for the highly technical, extremely complex, new Basel III capital accord. His predecessor, Nout Wellink, had already addressed some of the ‘trading book’ rules. The GHOS-approved work programme under Ingves involved splitting the various issues into smaller segments so they could be tackled, one at a time, while trying to secure consensus among the 50-odd people involved in negotiating the new supervisory approach. “Out of these conversations came the work on the liquidity coverage ratio, the net stable funding ratio (NSFR), the risk weights and the floor on risk weights, and the leverage ratio,” Ingves said. “And, as a parallel process was the issue of defining and dealing with global systemically important financial institutions.”
Ingves says it was not possible to know whether, ultimately, all the parts would “add up”, so part of his job was to make sure they did. While public policy-makers were given a clean mandate from the public at that time to reform the bank rules for internationally active banks, securing agreement among the competing interests was far from trivial – even if only a few major economies effectively had vetoing seats at the table. Ingves sought out a median view and detached his views as they related to Sweden, then sought a consensus. He made continuous efforts to communicate and demonstrated dogged persistence to reach agreement. “You just keep at it. And you never give up,” he says. “If you get one or two trying to stall the whole process, then you keep at it and they usually give in after a while.”
Basel flaws and concerns
There were some issues that Ingves failed to address. One element was related to sovereign haircuts for the domestic government bonds held by banks. Another was related to the definition of ‘internationally active banks’. Over the years, Basel rules have been applied to all banks in some jurisdictions, while, in others, only to ‘internationally active banks’. Ingves says there was “no logic” behind the choice of a 72.5% level output floor for the maximum reduction in capital banks can secure by using advanced risk modelling approaches, as supervisors had “different views”. But, he believes that if the matter was left to bankers the rates would be “too low”. He mentions that despite the introduction of the NSFR there is still “quite a discrepancy at present between the duration of the assets and liabilities” – as highlighted by Silicon Valley Bank’s recent problems. Ingves also believes there is much still to do to supervise the non-bank financial sector and says stablecoins should be termed “unstablecoins”.
Another concern is that the implementation of Basel III is taking place too slowly, with some adjustment periods running to 2030–32, by which time supervisors may have forgotten the global financial crisis and could be vulnerable to push-back. “The private sector gets paid to chip away at the rules – and they never give up,” Ingves says. “There have not always been enough people in the public sector whose job it is to say, ‘No, you have to stick with this’.
Perhaps the most important element of the Basel III reforms that public policy-makers must resist being watered down or overturned, according to Ingves, was the leverage ratio. “It is very, very important not to do away with the leverage ratio, and it has to be high enough, because the leverage ratio says something about the losses a bank can sustain if things go completely wrong,” says Ingves. “It was quite a fight to get the leverage ratio up, and it should stay up – and it probably should stay higher. It’s very important to try as hard as we can to ensure this holds for future generations. It’s just so easy to lose the lessons and draw the conclusion that this issue was ‘a long time ago’ and now ‘we understand much better how to do these things’, so let’s ‘loosen up a bit’. That’s not a good idea.”
The Riksbank veteran also believes it is inevitable that central banks will play a role as ‘market makers of last resort’ in economies with large direct funding markets. “That’s just a fact of life. Otherwise, the whole financial sector stops working, in which case you have lost the transmission mechanism and can only talk about monetary policy as an abstraction.” he says. “I do not think interventions interfere with monetary policy objectives, as you need a financial sector to make monetary policy effective.”
To lean, or to clean?
A major debate that followed on from the global financial crisis was the social cost of central banks sticking to monetary policy objectives while ignoring the build-up of asset price bubbles. Many felt the price of cleaning up once a bubble had burst might be too high. Consensus formed around the use of macro-prudential tools – many of which are very similar to tools used prior to the 1980s – to try to pre-emptively address dangerous bubbles. But there was greater debate about the use of interest rates to lean against the development of bubbles.
Under Ingves’ leadership, the Riksbank explicitly made monetary policy decisions based on macro-prudential considerations, with the central bank ‘leaning against the wind’ through its monetary policy to cool an asset bubble during its 2010–11 hiking cycle. Although inflation was forecast to hover at around 1.5% later in 2010, and not reach the 2% target until well into 2013, the board increased the repo rate from 0.25% in July 2010 to 2% by July 2011. Lars Svensson, deputy governor at the time, said the move was a ‘terrible mistake’ that forced the central bank to ultimately take rates below 0% in 2015.
It was quite a fight to get the leverage ratio up, and it should stay up – and it probably should stay higher. It’s very important to try as hard as we can to ensure this holds for future generations
But Invges remains unmoved. “I’m fine with what was decided back then. I certainly have not changed my mind,” he says. “For the sake of argument, suppose you ignore the housing market completely; the central bank created all this money and then the whole housing market blows up. The public will clearly understand that the central bank participated in creating all this money. But then you go in front of the cameras and say, ‘I had nothing to do with it’. That’s not a credible position, and it will seriously affect the credibility of the central bank.”
Ingves says even the use of macro-prudential tools, which are not the preserve of the central bank in Sweden, “has a kind of a shadow policy rate”. The problem is that policy-makers and politicians have “not yet quite figured out how to find the proper combination between fiscal, macro-prudential and monetary policy”.
Public disagreement
The split in policy views on the Riksbank’s executive board at the time it ‘leaned’ were fully attributed to its members and made public. They were picked up in the media and the level of transparency was viewed as being a step too far for most central banks, even those that also value transparency highly. But Ingves is unrepentant. “The key to this, which is not always understood, is to read the minutes, which we issue with attribution after a 10-day lag,” Ingves says. “The minutes tell a story about monetary policy from the perspective of each individual board member, and it’s only if your view really differs a lot that you dissent. From that perspective, the minutes are a very efficient way of signalling to market participants and others in an organised way.”
He accepts that the transition to a more transparent system can “bother” people, but the “difficult phase” is when you “move from an opaque system to a transparent system”. “In my view, it’s not dangerous at all. Of course, many individuals don’t like to get criticised. And, if you do minutes with attribution, you will get criticised. But that’s part of the job.”
Negative rates
Sveriges Riksbank broke new ground in 2015 when it introduced a ‘negative’ policy rate – although commercial banks had previously been charged for depositing funds at the central bank back in 2009 – while also introducing asset purchases. These policies were made to try to drive inflation up towards target levels and limit currency appreciation against the euro to prevent imported inflation. The ‘nuts-and-bolts’ side of negative rates worked, although Invgves stresses the Riksbank only went “slightly negative” by cutting the policy rate to -0.5%, meaning only professionals, rather than households, had to deal with negative rates. “There was never really an appetite among executive board members to go ‘deeply negative’, say around -4% to -5%, because no-one could fully grasp what would happen under those circumstances,” says Ingves.
Just as the Riksbank finally restored rates to 0% and reached its 2% inflation target, the Covid-19 pandemic struck. In response, the Swedish central bank expanded asset purchases to include municipal bonds, commercial paper and corporate bonds but did not cut interest rates below zero. “We felt strongly that we did not want the problems to morph into a financial crisis. With that in view, it didn’t make much sense to us to go deeply negative. We felt it was much more important to make sure markets worked and that there was an ample supply of credit in the system.
The future of money
The Riksbank, under Ingves’ stewardship, is also viewed as a pioneer for its research into central bank digital currencies (CBDCs). This is in part due to rapidly declining cash use in the country. But the debate over CBDC goes to the heart of a more-than-century-old debate about the extent to which central banks should be given the sole right to issue physical money or not. While cash still fulfils important inclusion and resilience features, at some point in the future it will cease to exist. But the role a central bank plays in a retail CBDC is still uncertain and, ultimately, is a political value judgement and “depends on the structure of your financial sector and how you define money”, Ingves says, which goes beyond the central bank: “It is tied to the definition of fiat money, which is created by an act of law in one form or the other – because fiat currency is not physical; it’s not gold, or silver, or copper, or whatever. That means the parliaments need to get involved.”
His own view is that it is important for the public to be able hold digital central bank money, even if it is not a lot, as it guarantees there is an exchange rate of one-to-one between private sector money and central bank money. This should ensure there is a functioning unit of account. The key, according to Ingves is to create a legal framework that is “technology-neutral”. This, he says, is a matter for legislatures – although they have not had to address issues related to money for generations. Ingves, true to form, would like politicians to get on with it: “I would like to see developments happen sooner rather than later in Sweden because we are early adopters of new technologies.”
The Central Banking Awards 2023 were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Joasia Popowicz, Ben Margulies, Riley Steward, Jimmy Choi and Blake Evans-Pritchard.
