All the major banks in Sweden are working actively on these issues, partly because they are expected to result in a smaller capital requirement. For the Riksbank, it is of course not a decreased capital requirement as such that is relevant so much as the fact that the new rules make better allowance for the actual risk in different credits. Finansinspektionen has a central role here in ensuring that financial companies honour not just the letter but the spirit of the Basel rules. This in turn should lead to a more adequate pricing of risk and thereby a more efficient financial system. BIS Review 53/2003  5  A problem that is being discussed in connection with recent methods for risk management and Basel II is the possibility of this development accentuating cyclical fluctuations in the economy. In that the basic idea behind Basel II is for the size of a bank’s capital to be dictated by the credit risk in its lending, it is possible that bank capital requirements and thereby the cost of credit will co-vary with the business cycle. The increased credit risk associated with an economic slowdown means that the banks need more capital. This, it is feared, might lead to a contraction of credit in downturns and an expansion in upward phases and thereby make cyclical fluctuations more pronounced. There are some grounds for this criticism. Experience of business cycles has taught us that the large credit risks tend to be taken as the business cycle approaches a peak.
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