Former Bank of England Governor Mervyn King recently launched a more drastic idea, that a bank must hold more assets that can be used as collateral in the central bank than it has liabilities (including deposits) that can suddenly flow outwards.10 In this way, central banks could always intervene and have sufficient access to liquid funds. Admati et al. note in a response that the consequence of this would be that the authorities also supported bad banks, which would reinforce moral hazard problems and lead to banks that should be wound up not being wound up.11 There is a risk that we would then have so-called Zombie banks, and this would have negative effects on growth and efficiency. In any case, I believe that the instability of deposits is an issue that legislators and regulators around the world need to analyse more closely. The resolution framework also needs to be reviewed The second question concerns the resolution framework. This was introduced after the global financial crisis and the explicit purpose is to make it possible to resolve a systemically important bank in an orderly manner. The idea is that losses should be borne primarily by shareholders and secondarily by bondholders. Public funds should not need to be used. Allowing bondholders to bear potential losses also reduces the problems of moral hazard. So if you can use an effective resolution framework as intended, you reduce the problems created by the deposit guarantee. 10  See King (2023). 11 See Admati, Hellwig and Portes (2023).
It was therefore understandable that the so-called inflation targeting policy introduced by many countries in the 1990s had a focus on price stability and that risks in the financial system disappeared into the background. This also applied to Sweden, despite the fact that we had had a serious financial crisis in the early 1990s. Another reason why the risks in the financial system were overlooked may have been that the deregulation of the financial markets was new and that the risks of financial imbalances building up were underestimated. 13 See Board of Governors of the Federal Reserve (2023) and FDIC System (2023). 12 [30]  The global financial crisis highlighted the importance of financial stability. Inflation targeting policy seemed to be working well for a long time. Inflation was low and stable while growth was good. US economists James Stock and Mark Watson even coined the expression ‘the great moderation' in the early 2000s, suggesting that the economy had entered a calm and stable era.14 This era came to an abrupt end with the global financial crisis. Much of the deregulation and innovation that had laid the foundations for the favourable economic development had at the same time contributed to the build-up of new risks and imbalances in the financial system.15 An important lesson from the financial crisis was that financial imbalances could be built up even in an environment with low and stable prices. However, this knowledge was not entirely new.