Foreigners were allowed to invest in Sweden without a permit, but these investments might not be financed in the Swedish market. Portfolio investment abroad was regarded as more transient than direct investment and it was therefore more difficult for a Swedish company to obtain permission for this in another country. Companies that earned money abroad were obliged to bring it home to Sweden as soon as possible and convert it to Swedish krona. Swedish banks required permits to establish subsidiaries abroad and were on the whole not allowed to open branches abroad. This was because it was easier to control capital movements between parent and subsidiary than between branches, as the latter were not different legal entities. Prior to 1986, foreign banks were not allowed to establish in Sweden. After this, subsidiaries were permitted and later on also branches. Swedes were in general not permitted to purchase shares in companies outside of Sweden. Those who were already in possession of foreign shares were allowed to exchange them for others or to sell their right to own shares to someone else if they sold their holdings. Private persons were not allowed to take unlimited currency out of the country. Amounts above the regulated limit – which was low – required permission from the Riksbank. It was necessary to show evidence that the money would be used for personal aims and not for investment or other financial purposes. Private persons were not allowed to hold accounts abroad.
Incentives for increased saving were not actually introduced until the crisis was actually upon us and then they only helped reinforce the decline. It may seem something of a paradox that international organisations, such as the Basel Committee, are now implementing a number of new regulations – such as Basel II – despite the fact that the old regulations had negative effects and were therefore abolished. However, these are a completely different type of regulation. The old regulations were aimed at prohibition and other strict controls, while modern regulations give the banks plenty of flexibility to offer their services as long as they meet certain fundamental conditions. For instance, Basel II allows the banks to determine their own risktaking to a great extent, as long as they have adequate risk management and capital reserves. The experiences of regulation and the crisis also show clearly how important it is that the central bank can make independent decisions regarding the interest rate according to objectives set by parliament, for instance, to maintain inflation or the exchange rate at a stable level. If there are no guidelines for the interest rate, or if the parties that determine the interest rate have differing interests, it will often be set too low for the purpose of benefiting borrowers, investment and central government consumption. This was the case in Sweden during the years of regulation. Apart from leading to higher inflation and pressure on the exchange rate, exaggeratedly low interest rates also have a negative effect on the financial sector.