In other words, the likelihood that the central bank will have to provide liquidity support to a financial institution is partly determined by the quality of supervision. At the same time, the central bank may very well need the supervisor’s analytical or informational support to be able to decide on whether or not and how to intervene. Finally, in crisis resolution, even if the Ministry of Finance takes the lead, it is likely to rely extensively on the supervisor and the central bank for advice and execution. If we agree that there is a link between the soundness of institutions and financial stability, then supervisors must be interested in crisis management and resolution and central banks must be interested in certain aspects of supervision. In the last decade, at least in Sweden, the macro and micro perspective have grown gradually closer. Indeed, the Swedish FSA now has an explicit interest in the stability of the system, while the Riksbank has taken a greater interest in the stability of single institutions, if they are judged as systemically relevant. We have regular contacts to share information and assessments and coordinate policy. If before, the relationship between the two authorities might have been described as polite but uninterested, it is now a mix of curiosity, some competition and frequent flirting. BIS Review 35/2005  1  The times they are a-changin’ This could have been the happy end of our story but recently there have appeared challenges to this set-up.
Regulation on the EU-level also faces another trade-off that is not present on the national level – that between the value of a level playing field and the cost of an overly detailed or inadequate regulation. A completely level playing field presupposes detailed rules that are applied in the same way in every market. But too detailed rules on the EU level risk being inadequate on the national level since national markets often differ widely. This could give rise to costly overregulation hampering financial development or driving financial institutions to settle elsewhere. Hence, it might be wise to leave some degree of freedom to the member countries. Historically, institutional competition has proved to be very positive for development in the long run. BIS Review 35/2005  3  At the same time, EU directives (as most international rules) tend to leave plenty of room for national discretions, effectively reducing the value of the convergence/harmonisation that probably was the motivation for the directive in the first place. We risk ending up with the worst of two worlds – very detailed rules on the EU level and loads of discretions on the national level. This makes the rules opaque and their implementation difficult to predict for the private sector. The starting point for EU rules should be the least common denominator. Today instead, it often seems like the starting point is the sum of all member states’ national rules.