In my view, a key part of the successful resolution of the Swedish banking crisis in the 1990s was that the impaired assets were assigned realistic and conservative values. Removing the suspicion that bad surprises may linger around the corner is essential to restarting a market. It is a matter of confidence. Similarly, the lack of confidence in the banks’ balance sheets cannot be improved by creating opaque accounting rules. The book value of a bank will increase if we assign book values above market value, but will it restore confidence? Again, to regain confidence, the balance sheets of banks should reflect realistic values. Accounting rules should force banks to disclose what their assets are worth and not allow problems to be hidden. Lack of confidence arises over concerns about a bank’s actual financial situation. If market participants have to recalculate reported valuations, then the return of confidence will be more difficult to achieve. It is therefore important that accounting is transparent and internationally harmonised. We should also keep in mind that accounting rules are not only about preserving financial stability in the short run. Changing the accounting rules could make communication more uncertain and less transparent. Another tool for telling stories about the future is stress testing. Stress testing can thus be a very valuable and effective tool in restoring confidence. However, this requires that the stress tests are both credible and adequately disclosed. The Fed’s stress tests of US banks earlier this year present a good example of how this tool can be used.
Bond yields have, consequently, been low by historical standards, a phenomenon which has substantially facilitated private investment. This in turn, will not fail to have a highly positive effect on growth. A third benefit of the Euro is the removal of exchange rate risk and transaction costs for intra Euro area trade. This has promoted trade integration among Euro area countries without diverting trade with other countries. Indeed, it appears that business cycles tend to be more and more synchronized over time, an evolution which allows for greater efficiency and  BIS Review 115/2007  1  sustainability of the common monetary policy. This shows that monetary union is a self sustaining process: real convergence is to some extent a result, as much as a precondition of economic integration. Another benefit of the Euro is the boost it gives to financial integration in Europe. In many segments, European financial markets have reached the depth and liquidity which, up to now, were the preserve of dollar markets. This stimulates productive investment, helps in restructuring and, more generally, allows a better allocation of savings and sharing of risks. The current market turmoil is a clear test for this achievement and while the problems affecting the Euro markets have been comparable to those affecting the other major markets, the strength of the Euro shows, to some extent, that it has become a safe haven in our globalized financial world. The Euro is becoming extremely attractive, as a vehicle, a transaction, an investment and a reserve currency.