The Swedish banking sector is large by international standards and strongly concentrated on a small number of major banks that are dependent on foreign funding – about half of their funding is in foreign currency. This poses a further risk to financial stability. The Riksbank therefore needs to hold a foreign currency reserve that is large enough to satisfy the needs that arise in a financial crisis, in other words the currency reserve needs to be at least as large as it is today. Another challenge that monetary policy needs to relate to is the free movement of capital. In combination with a rapid financial development, this has led to asset prices, indebtedness and exchange rates being increasingly affected by monetary policy in the major currency areas. This has progressively limited the degree of freedom for monetary policy in smaller economies. How to increase the degree of freedom for monetary policy, by, for example, implementing macroprudential policy measures that could put a dampener on indebtedness, is being discussed internationally. This is highly relevant for Sweden and I have brought this matter up in several of my previous speeches to the Swedish Economics Association. I will also return to this problem today. Conducting monetary policy is about being constantly prepared to meet new types of challenges and economic problems. Low interest rates are needed today in order to stabilise inflation at around 2 per cent, but they must be weighed against the risks of low rates over a longer period.
If one wishes to detect problems in good time, before they develop into a crisis, it is important that the public authorities within a country and those in different countries can coordinate and exchange information. There have been large inadequacies in this field in previous crises. This can to some extent be blamed on confidentiality regulations, and the relevance of these may be questioned during a crisis, but in all honesty it can also be blamed in many cases on the authorities having insufficient interest in collaborating. Tendencies in the financial sector The financial sector is subject to rapid development. The borders between different financial activities are being eroded. Banks are selling insurance-like products and insurance companies are selling banking products. In some cases financial conglomerations are being established. Moreover, the trade in financial instruments has developed to such an extent that the risks are spread to a greater number of agents than before and also spread outside of the banks and insurance companies. Another development is the cross-border integration, particularly in the Nordic countries. Danish banks have established themselves in Sweden and Swedish banks in Denmark. Integration as such is a positive development, for several reasons and not least to increase economic growth. The Riksbank therefore supports measures, for instance within the EU, that lead to greater integration. It is therefore important that the authorities manage the risks that integration might entail to avoid setbacks.