My point of view is that the need for policy response is not so much about imposing more and heavier regulations, but instead about improving and developing existing ones. When doing so, two conditions must be met: first, some kind of market failure has to be proven, and second, the benefits of imposing new rules must exceed the economic costs. Given recent events, there are numerous regulatory issues to discuss within this context. In many cases work has already started. For example, how to achieve better management and supervision of liquidity risk as well as greater transparency in the financial sector are important matters currently under review. Further issues include regulatory treatment of the originate-and-distribute model and off-balance sheet entities, as well as procyclical elements in regulation. Of particular interest is the issue of clearing and settlement arrangements in the unregulated credit derivative markets. One partial explanation of the uncertainty that has prevailed in the financial system recently is the absence of a resilient infrastructure for these markets. No central counterparties have existed and there has been no common market place for exchanging these instruments. As a result, trading has been fragmented and opaque, which in turn has implied that nobody has really known where the credit risks are and few have realised that these risks – directly or indirectly – actually have remained on the banks’ balance sheets. Clearly, there are many issues on the agenda and the course of events over the past year has underscored the need to get to work.
Therefore, the agencies' incentives to do a proper job should be quite enough without regulation. Crisis management – preparedness needs to be strengthened Another issue that I believe needs particular attention is how to achieve better crisis preparedness, which means that I am now switching to talk about crisis management issues. As on numerous occasions in the past, many countries were ill prepared for this crisis and had to rely on ad-hoc solutions for handling it. In the case of the EU, member states quickly had to reach an improvised agreement on a co-ordinated and comprehensive financial support plan. We have had the same situation in Sweden, both when we had a crisis in the early 90s and, more surprisingly, even now. Despite the quite recent experience of a systemic crisis, legislators had not been able to get a proper framework for the management and closure of distressed banks in place. Thus, also this time we had to rely on improvised solutions. Even if these ad-hoc measures often seem to work out pretty well there is no guarantee that they will do so consistently. To let financial system stability become the hostage of improvised political processes is obviously not an optimal order. Experience from previous crises also shows that improvised crisis management measures often come too late, are inadequate, and ultimately turn out to be more costly then they would have needed to be. I would say that British Northern Rock is the perfect example of all this.