It was the uncertainty over the value of the assets that led to many institutions facing problems when their assets declined in value at the same time as they suffered funding problems. Some institutions were then forced to sell of some of their assets which further pushed down the value of the assets and led to new funding problems. There was a belief that the extensive trade in financial instruments meant that the risks were spread and that the system thus became more stable. In actual fact, the risks appear to have finally landed in the bank sector. The financial system was thus in practice more vulnerable than most people – including the financial supervisory authorities – believed. 3 Expansionary monetary policy in the United States The expansionary monetary policy in the United States during the period 2002–2004 has also been held up as a possible contributory factor to the overheating in the US housing market and the ensuing financial turbulence. 4 Some analysts feel that very low, short-term interest rates contributed to the overheating. However, it should be emphasised that inflation in the United States was low during this period and there were fears that the US economy would experience what is known as a liquidity trap, which could have had very serious consequences for developments in the real economy. Here it was the experiences from Japan during the 1990s and 2000s that caused alarm.
The interest on their deposits (in an account overnight or weekly via Riksbank Certificates) must follow the policy rate for monetary policy to function.30 When we raise the policy rate, our financing costs increase, while the return on our assets remains unchanged. These two ways of describing the effects on earnings lead to the same result over time, but the losses are recognised at different times. The Riksbank's accounting  29 I described the change in the balance sheet and the interest rate risk in Flodén (2016). 30 For example, if we chose not to pay interest on bank deposits, the short market rate would be close to zero. That would mean that the policy rate would be zero, and monetary policy would be much more expansionary than is currently necessary. 16 [30]  principles are based mainly on market valuation, which means that the entire effect on on the results will be reported in this year's financial statements, although these are losses that are actually expected to occur gradually as long as the Riksbank owns the bonds.31 Figure 11. The balance sheet then and now SEK billion  Note. Simplified picture of the Riksbank's balance sheet at the end of 2007 and at the end of 2021 respectively. Revaluation accounts and risk provisions are included in the item "equity". The light blue field refers to 'other', and mainly consists of claims and liabilities on the International Monetary Fund. Source: The Riksbank.