The challenge, now, is to calibrate and phase in the new framework in a way that does not impede the recovery. The macroeconomic assessment of the reforms underway will help us strike the optimal balance. 25. Beyond capital and liquidity, other important initiatives are aiming at addressing systemically important financial institutions and cross-border resolutions. To better deal with the problem associated with systemic firms, progress is being made to improve the capacity to resolve them orderly, and to strengthen ex ante preparedness, contingency planning, cooperation and information exchange among the relevant authorities. 4  BIS Review 113/2010  26. There is a broad agreement for an approach that may have two pillars. One is about tools and measures to limit the risk of their failure; the other is about tools and measures to limit the consequences of their failures. Discretion is required to allow national authorities to strike the balance between the two pillars and tailor regulatory and supervisory actions to domestic conditions. The challenge is to ensure that national policies to address the risks associated with these firms are consistent, mutually supportive and thus avoiding regulatory arbitrage. But beyond international initiatives, enhancing supervision at the domestic level remains very critical. 27. Higher and better capital and liquidity standards are not sufficient conditions to secure the stability of the financial sector. Changes in the practice of micro-prudential oversight are also needed. Indeed, a lesson from the crisis is that the way supervision was performed prior to the crisis has likely contributed to it.
The monetary base has thus increased by around 300 per cent. In simpler economic models one usually assume that there is a fixed relationship between the monetary base and the money supply. 2 The question that has been discussed is whether the large increase in the monetary base could give rise to rapid inflation. But for this to happen the money volume in society must also increase, that is, as well as the monetary base increasing, the general public’s deposits in the banks must increase. This could happen if the increase in the monetary base leads to the banks increasing their credit granting to the general public and if this in turn leads to the general public depositing more money with the banks. In the prevailing economic downturn this has not been the case. The banks have tightened their credit granting, while demand for credit has declined, particularly from companies. A more reasonable interpretation of what has happened is that the banks have increased their demand for liquid reserves in the Riksbank. Put simply, one can say that the bank system as a whole has borrowed as much from the Riksbank as it is willing to invest as a deposit with the Riksbank. Thus, the ratio between the monetary base demanded and the money supply has increased, or in other words what is known as the credit multiplier has  2  Money supply here refers to the general public’s holdings of banknotes and coins and the general public’s deposits with the banks.