If the banks providing loans suddenly no longer wish to continue lending, the banks that have borrowed money can face problems. And, if they are not affected before, the other banks will be impacted when one or more banks rapidly need to sell their assets, pushing down the prices. To this can be added the vicious circle of negative effects for the real, public and financial economies that I have already discussed. To continue these generalisations, it could also be said that previously we usually believed that market discipline was enough to ensure that business incentives would correspond to socio-economic efficiency. Following the crisis, we know that this is not the case. Private economic incentives for decision-makers in the banks can be so strong that market discipline is not always enough to achieve transparency or effective risk management (to take two examples). The observation that US subprime loans were often sold with the same credit rating as Swedish sovereign bonds should be a good enough example of this. The private benefits – or corporate profits, if you prefer – of debt-financing relative to equity lead to moral hazard. Risks can be passed on to lenders and taxpayers. The management of the banks have been rewarded according to return on equity. By using their own risk models, the banks  9  Akerlof, G (1970): “Market for ‘lemons’: quality uncertainty and the market mechanism”, Quarterly Journal of Economics.
Then I made the remark that a separated responsibility for monetary and macroprudential policy, without any coordination, could result in a game between authorities, which could lead to an outcome not desired by any of the authorities. In the United Kingdom, sole responsibility has been given to the central bank. A Financial Policy Committee is to be set up alongside the existing Monetary Policy Committee. Such a solution of course means that the coordination between these two almost parallel committees, although each with a different focus, becomes an important issue. In the EU, the European Systemic Risk Board (ESRB) has been set up at the ECB in Frankfurt. Central banks and supervisory authorities are represented on the ESRB, but the central banks have the majority of the votes when decisions are made. In Sweden, Finansinspektionen and we at the Riksbank set up the Council for Cooperation on Macroprudential Policy in January this year. This council will discuss the assessment of risks in the financial system as a whole and discuss appropriate risk-prevention measures. The Council will also discuss analyses and the development of tools and methods in the area of macroprudential policy. The Council is a temporary solution while awaiting a more permanent distribution of the responsibility for macroprudential policy. At present, the Financial Crisis Commission is working with this issue. The recently appointed inquiry on capital adequacy regulations will focus specifically on responsibility for the future counter-cyclical capital buffer.