Mr Bäckström gives his perspective on Sweden’s economy and looks at factors that contribute to long-term growth  Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, given at the University of Gothenburg on 27 October 1999. *  *  *  A current topic, in the United States and elsewhere, is whether structural changes have made it possible to achieve stronger economic growth than before without generating inflationary tendencies. The term – a new economy – has been coined for this phenomenon. The US economy’s new, improved performance is sometimes said to be due in part to the rapid advances in computer technology and telecommunications. Internet is a part of this. Progress in these fields has led to better and more efficient processes for production and distribution. This in turn has paved the way for stronger competition, higher productivity growth and thereby lower inflation. Consumers, moreover, are better informed than they used to be. Productivity growth in the United States does seem to have risen. The IMF, to mention one observer, considers that the potential growth rate – the annual growth that can be achieved without boosting inflation – has moved up from 2.25% to 2.75%. An even higher potential rate has been estimated by others. In Sweden, too, most things suggest that labour productivity has risen somewhat faster in the present decade than it did in the 1980s.
•  Introduction of rules that ensure the conservation of capital during times of economic and financial distress. •  Imposition of higher capital requirements for systemically important institutions. •  Development of efficient forms of capital. In particular, contingent capital debt instruments that are convertible into common equity if a bank’s share price were to fall precipitously. Capital requirements with improved risk capture The recent financial crisis has shown that parts of the regulatory capital framework were not calibrated properly to account for the most complex instruments. Our efforts to revise the capital rules should emphasize the need to include these and other risks that were not appropriately captured in recent years. In many circumstances, an emphasis on improved risk-capture may be superior to simply raising the capital requirements across the board. There are two reasons for this. First, it may better tie capital to the risks being undertaken. This, in turn, would create more appropriate incentives for risk-taking. Second, it may reduce the risk of regulatory arbitrage. If the risks of some activities are not captured properly, then banks will have incentives to shift their business toward those particular activities. The Basel Committee has made very good progress in revising the capital treatment of trading book positions and for structured credit products – two areas where the crisis revealed critical weaknesses in the regulatory capital regime. Revisions to the capital requirements for over-the-counter (OTC) derivatives exposures as proposed by the Obama administration also strike me as appropriate.