So how do we create a better and more sustainable structure for the financial markets both nationally and globally? I do not have the perfect answers to all of these questions. I doubt that anyone has. But I shall spend the next 20 minutes trying to answer them to the best of my ability. And I hope this will provide a good basis for the coming hearing. Monetary policy and the economic situation The downturn in the world economy has been very rapid and severe – in this way the worst in many decades. Sweden is an export-dependent economy and has been hit hard partly because of this. It will take time before the economy is back at the same level as prior to the crisis. But now we have come so far that the recovery has begun. One important component to which I shall also return is that the conditions on the financial markets have improved. Several indicators are also showing that confidence in the future among both companies and  BIS Review 138/2009  1  households has become much stronger, an important factor in the economic recovery (Figure 1). Figure 1.
But this should be compensated to some extent by the banks becoming more secure and thus a fall in risk premiums on loans to banks. Although our calculations show that the costs of the new regulations are limited, it is unavoidably the case that stricter regulation entails various forms of cost. It is in the nature of the regulation. The important thing is that these costs are seen in relation to the gains in the form of a more stable bank system. And there is no doubt that the gains are substantial, after what the world has gone through since the financial crisis began. Here I refer to the severe economic downturn I mentioned at the start. But it is nevertheless important not to tighten the screws too much. This would mean that the banks only wanted to lend money to the most secure customers and investments. A lot of good investments would be missed. A lot of people would be unable to buy homes. Longterm economic growth would be slowed down and our total welfare would decline. We must quite simply ensure we do not put a spanner in the works so the banks reduce their lending too much. When I first worked at the Riksbank, in the 1970s and 1980s, the credit market was severely regulated and this is not a situation we should wish to return to. Nor should we ignore the fact that banks have an ability to circumvent regulations and make use of loopholes in the law.