In brief, these involve raising the international requirements regarding the capital and liquidity the banks must hold. For instance, a larger share of the capital must be real equity capital. Another example is that the EU has established a special body, the European Systemic Risk Board, which is to identify risks in the financial system and to provide warnings and recommendations to the countries and authorities concerned. Public finances an acute but difficult problem The two other challenges are rather more difficult. The problems with public finances entail a difficult balancing act for the countries concerned. On the one hand, it is desirable that the  2  This and the third challenge are taken up by, for instance, Olivier Blanchard in the foreword to the IMF’s World Economic Outlook, October 2010. BIS Review 149/2010  3  savings do not increase too much too soon thereby withdrawing public sector demand while private sector demand is still weak. This could lead to a negative spiral, with falling demand and production, where public finances are weakened rather than strengthened. On the other hand, the deficits and the government debt must not continue to grow to the extent that doubts arise regarding the ability to repay the debt at all. Such a situation would hardly be preferable. A further complication is that this time there are many large countries who need to save at the same time. The effects on the global economy could then be substantial, particularly if the balancing act is not successful.
Moreover, the financial sector in Sweden has some distinguishing characteristics which make stability and clear game rules particularly important. From an international perspective, the Swedish banks’ collected balance sheet totals are large in relation to our GDP, market funding comprises a larger share than in most other countries, and funding from abroad is relatively extensive and largely short-term. Our own Swedish regulatory framework also needs to be renewed. For one thing, we need to look into the division of responsibility and the powers of authority of the different government agencies. For instance, the Riksbank is responsible for the stability of the financial system in Sweden, but has no really effective tools to carry out this task. Finansinspektionen (the Swedish Financial Supervisory Authority), on the other hand, has tools that could be used to influence the banks’ behaviour. But it does not have the task of counteracting macroeconomic developments than entail risks for financial stability. Another important issue that needs to be addressed in a new regulatory framework is how the state should manage banks in distress. 3  See, for instance, Ben S. Bernanke, “Fiscal Sustainability and Fiscal Rules”, speech given at the Annual Meeting of the Rhode Island Public Expenditure Council, Providence, Rhode Island, 4 October 2010. BIS Review 149/2010  5  In February we presented a report to the Riksdag proposing that the regulatory framework in Sweden should be reviewed. We mentioned these two areas as examples of important objects for analysis.