Similarly, those extending loans will find it more difficult to assess the real value of collateral security and the borrower’s wealth. This situation must be corrected sooner or later, and when bubbles burst the risk of debt crises and financial instability is high. We have seen examples of this in Norway and in other countries. If we allow imbalances to develop in the domestic economy, this may trigger major capital movements with wide fluctuations in the exchange rate and long-term rates. Distributional effects of monetary policy The distributional effects of changes in nominal interest rates figured prominently in discussions concerning interest rate policy in the 1970s. There is probably a basis for saying that the consideration of distributional effects was an important reason behind the low interest rate policy. However, as developments were to prove, this was not the right approach. The low interest rate policy contributed to increased disparity. People are affected in different ways by a change in interest rates. Households with considerable debt will, ceteris paribus, be adversely affected by an increase in interest rates because they must use a higher proportion of their income to service the debt. However, the increase in interest expenditure in  BIS Review 92/2000  8  relation to household income is about the same for all income groups. This is because households with high income generally have a higher level of debt.
Details are important, but looking at details you sometimes miss the overall picture. This, at least, is one conclusion we drew in Sweden from the experiences of the 1990s. The third pillar of oversight is the supervision of the financial infrastructure. This is a relatively new task derived from the complicated technical and legal systems that handle all financial transactions today. The infrastructure is of particular importance to the central bank, since we would most probably have to provide emergency liquidity assistance if anything went wrong. The infrastructure is dominated by the systems for clearing and settlement of payments. In Sweden, like in many other countries, we manage the large-value payment system in-house at the central bank. But the infrastructure also includes the stock exchange, the derivatives exchange, the central securities depositary (CSD) and connected trading systems. Well-designed systems reduce the risk of contagion from the financial markets or between institutions. They also reduce the risk of the infrastructure itself causing problems through, for instance, operational disturbances. 2  BIS Review 58/2003  The Financial Stability Report In Sweden, the main tool for addressing the oversight of systemic stability is the report on Financial Stability. The Report, in Sweden as well as in other countries, basically aims to provide a picture of the banks’ ability to stand up to any disruptions.