For some time the Riksbank has had a well-designed analytical apparatus for early detection of changes and vulnerabilities that could develop into a serious systemic crisis. Above all, its purpose is the timely detection of vulnerabilities in banks that are of central importance for the payments system, which requires knowledge of the status of the various institutions and how the market functions. This in turn presumes continuous follow-up, where frequent contacts with financial market participants play an important role. These established contacts are essential in a crisis situation, both to determine the type of measure that is needed and to ensure timely implementation. Ten years ago we began to publish stability reports twice a year. These reports provide a basic analysis of financial stability with an emphasis on the four major banks. The report leads up to a comprehensive stability assessment, highlighting the various risks to stability. Financial stability and implementation of monetary policy Monetary policy and financial stability have a fundamental relationship in the payments system. Through its repo rate decisions and by determining the conditions for the banks’ deposits in and borrowing from the RIX system, in practice the Riksbank determines the overnight rate, that is, the interest rate on overnight interbank loans. Through the steering system, the Riksbank aims to keep this shortest market rate close to the repo rate. The overnight rate in turn affects the interest rates offered to the general public, and thereby economic activity and prices.
We have thus been faced with a broad litany of serious problems affecting many of the institutional requirements and elements that are so vital for maintaining confidence, for the efficient allocation of resources, for the orderly working of any financial system and for the effective supervision thereof. I shall return to these matters later. But let me first say that, faced with the above-mentioned multifarious shocks, the international financial system showed a capacity for resilience that should be viewed as highly satisfactory. It is not easy to assess which factors have contributed to increasing, and to what extent, such resilience. Among them, however, mention should be made of the following: the priority given to stability by many monetary and fiscal authorities during the preceding long expansionary phase; the improved workings of more integrated and better informed international financial markets with increasingly flexible trading systems; the high levels of solvency, via own funds and provisions, attained by banks during the previous upturn, which has made it easier to soak up the losses now arising; and, finally, the advances made by many banks in risk management, providing for better risk identification and monitoring, risk diversification and the reallocation of risk towards final investors, on increasingly efficient derivatives markets. Despite the resilience of the international financial system, both the independent developments within the system and the aforementioned events which perturbed the markets have repercussions for banking supervision. These are worthy of mention.