However, performing these activities makes banks vulnerable, in particular receiving short-term deposits and transferring them into long-term loans. At worst, banks may fail and destabilize the whole financial sector and even the whole economy. To avoid such calamities from happening, society is willing, under certain specified circumstances, to rescue banks from failure by providing exceptional lending from the central bank or solidity enhancements from the government. Depositors may be protected by a deposit insurance scheme. But the willingness of the authorities to assist the banks and their customers must be matched by regulation and monitoring to ensure that the bank owners and others do not use, or I might say “abuse”, the possibility of public support to further their own purposes. Hence, there must be some regulation and supervision to make sure that banks behave in ways which are consistent with the overarching goals of society, such as financial stability and consumer protection. Regulation must also provide the necessary incentives for banks to act prudently and in fair competition with other banks and other financial institutions. An adequate level of domestic regulation is also necessary if you want your banks to do business internationally or if you allow foreign banks to do business in India. You should welcome foreign institutions but you should not open your markets to unregulated and unsupervised institutions. Ideally, regulation should be limited to what is really necessary to obtain these overarching goals. In practice, authorities have a tendency to over-regulate since they are risk averse.
Such events might mean that the bank would have to suffer a loss although it thought it had protected itself. The conclusion is that the authorities must force the banks to assess whether the risk buyers have adequate financial and organisational capabilities and whether the legal arrangements are robust. As in many other countries, there is a strong tendency in the Swedish financial sector to move from “bricks and mortar”, such as having many branch offices, to providing their services through the Internet and telephone. About half of all payments of companies and physical persons in Sweden are made through the Internet and by phone. This has made it possible to increase bank efficiency in  6  BIS Review 111/2006  terms of staff numbers and branches. Each Swedish bank branch now services an average of 4,700 persons in the population compared to, for instance, only 1,900 being serviced by the German banks’ branches in Germany. Of course, each country is free to choose its own service level and may prefer a higher level, although it brings higher costs. Modern regulation In my view, Sweden abolished its old-fashioned regulations for good reasons. Using the banks for directed lending and for other non-commercial purposes may seem handy for the government, but entails large risks and costs.