Since the financial markets operate across national borders, the Riksbank works together closely with foreign central banks on these issues. For example, the Riksbank participates in several ECB committees related to stability issues and takes an active part in the ongoing work to reform the capital adequacy regulations. It is also stipulated in law that one of the primary functions of the Riksbank is to promote a stable and efficient payment system. In order to fulfil this task, the Riksbank must closely follow developments in those financial institutions that are of central importance to the payment system, i.e. primarily the four major banks, which are each sufficiently large to cause problems for financial stability if they fail. The analysis focuses on three main areas. The first area concerns general developments in the banking sector - how the competitiveness and long-term profitability of the banks are developing. The second area examines credit risks related to the banks’ lending to households and non-financial companies. 1  BIS Review 50/2000  The third area that is analysed is counterparty and settlement risks that arise in connection with the banks’ trading and taking positions in the financial markets. The analysis is undertaken on an ongoing basis and is presented in the Financial Stability Report, which is issued twice a year. I will mainly focus on the analysis of the banks’ credit risks associated with lending to households and companies. This is a subject that has attracted growing attention as lending, especially to the household sector, has risen significantly.
Chart 7: Canadian and Australian banks better  Chart 8: Real short-term interest rates were  capitalised than UK’s in 2005  generally lower in Canada and Australia Per cent 7 Australia  6  Canada  5  UK  4 3 2 1 0 -1 Sources: Bush, Guimaraes and Stremmel (2015). Tangible common equity as a share of total unweighted assets. 2005 and 2006 average. 10  1998  2000  2002  2004  Sources: Thompson Reuters Datastream and Bank calculations. See also Ferrero et al. (forthcoming). 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  II: Some simple mitigants If this is right then the gains from formal co-ordination might not be that significant. Even a single, “joined-up” committee would generally find itself reaching for macro-prudential tools to control financial risk and using interest rates to moderate cyclical swings in demand and inflation. Shortly, in the next section, I’ll offer a more positive reason to keep some distance between the two policies. Before that, I should point out that, even in instances where there may be gains from policy co-ordination, there are things you can do within the existing framework. One involves the appropriate choice of secondary objectives. As I’ve tried to explain, the case for cooperation is stronger the more severe and frequent any conflicts between the respective objectives. There’s a very general result that puts the same point the other way around: if you give the two committees exactly the same objectives there is no co-ordination problem.