My assessment was then that our main scenario, with a decline in GDP in the world of around 1 per cent this year and an increase of just over 2 per cent next year was reasonable. But at the same time I considered that there was a risk that the recession would even be deeper and more protracted than we predicted. My reasoning was based on the fact that recessions that arise as a consequence of financial crises and recessions that are synchronised between several countries are normally followed by slow recoveries. Sweden was in a severe recession in April and we are still. We were assuming a fall in GDP of around 4.5 per cent this year and a weak recovery next year. As in the case of international developments, my assessment was that on balance the predominant risks were that the recession could be deeper and more prolonged. CPI inflation was expected to be negative this year, but underlying CPI inflation with a fixed interest rate, the CPIF, was expected to be close to 2 per cent throughout the entire forecast period. In my opinion, there was no reason to worry about deflation and no reason to worry about high inflation. We decided to cut the policy rate to 0.5 per cent. Today I would like to take up two questions in the current situation that are linked to monetary policy. These are the link between resource utilisation and inflation, and the limits for stabilisation policy.
Today, all the Swedish banks have voluntarily strengthened their capital bases by more than the Basel regulations require. Banks in many other countries have done the same. At the same time, the concept of bank sector solvency has been increasingly undermined. Many risks are not on the balance sheet. It is therefore more relevant to consider the ratio between total risk exposure and the capital base. With the expansion and growing complexity of financial market operations, it has become increasingly important that banks are capable of managing the risks in their business. The financial turbulence in recent years has underscored this and banks are also more determined to have such a capability. The  BIS Review 9/2000  2  capacity to understand, monitor and control internal risks is thus featuring more and more prominently in the organisation of financial enterprises. A major aspect of this work has been the development of more advanced methods for the quantitative measurement of risks. As one might expect, most progress has been made in the measurement of market risk; the extensive trading in financial instruments provides a good supply of price statistics and this is a considerable help when it comes to estimating market risks. Much work is now being done in many places to construct models for a better management of credit risks, which are still by far the largest risk category for banks. The difficulties here, however, are far greater than in the case of market risks.