As the safety net can in various ways make the bank's funders immune to certain risks, it may be tempting to allow the bank to take greater risks than is optimal from the point of view of the economy as a whole. Simply put, the safety net reduces the private costs of applying strategies associated with a higher level of risk; the bank’s financiers gets the upside but not the downside of the increase in the level of risk. This phenomenon is usually called moral hazard. The design of public supervision and regulation is important in the effort to reduce the problems relating to moral hazard. Not least, the conditions concerning aspects such as guarantees and liquidity assistance have a major impact on the possibility to counteract problems and reduce the costs they give rise to. If the state is forced to intervene and save a bank, it is important that the shareholders and other funders do not come out of the process unscathed. Designing a public safety net for financial operations thus entails a number of difficult considerations. Crises change the role of the authorities During the bank crisis of the 1870s, however, there was no real safety net to speak of. The Riksbank sat on the sidelines and had no role to play in the practical management of the crisis.
In addition, it has become far too difficult to monitor the financial sector with its large, complex institutions that have operations and commitments all over the world. And even if monitoring had been simpler and better, there are still no effective mechanisms for counteracting bubbles. The regulation and supervision that has existed has proved inadequate to prevent either exaggerated risk taking in upturns or destructive herd behaviour in downturns. The global extent of the current crisis points to the need to further develop inter-national cooperation regarding financial regulation, supervision and crisis management. A number of proposals are accordingly being put forward at the international level concerning how regulation and supervision can be developed to reduce the risk of similar crises occurring in the future. 6  BIS Review 135/2009  The measures that are now being discussed by authorities around the world largely stem from the fact that in many areas supervision has focused far too much on the state of health of individual institutions and far too little on broader development trends, for example the expansion of credit in the economy, and on the links between institutions in the financial system. Above all, financial supervision has not sufficiently taken into account the risk of financial problems becoming highly contagious. It is, after all, the contagion effects that may have the most serious repercussions for the financial system and, ultimately, the real economy.