It has taken us several years to become convinced that we should see the exchange rate primarily as one of several inflation indicators. I think we have every reason to keep to this approach. Closing comments Finally, let me give some general reflections on clarity and flexibility. It is sometimes asserted, with quite varying overtones, that the Riksbank is much too restricted by principles. We should act more pragmatically. This is maintained by those who think we should have a higher interest rate and who point to the ECB variant of pragmatism, as well as by those who think the interest rate should be lower and who see the Fed's pragmatism as their ideal. This is a debate which in essence is based on misunderstandings. The constraints within which the Riksbank works, allow a monetary policy which is both flexible and pragmatic. We can certainly extend our target horizon, monitor risks of problems in the financial sector or act early in order to avoid major subsidence in the economy further ahead. But this places requirements on us to motivate our actions clearly and substantially. It is, therefore, in this context – by setting very high standards as regards clarity and openness – that we beg to differ. In essence, I think that demands made on us that we should be more pragmatic in some general way – and not keep to our way of reasoning with a target, with guidelines, etc. – are meaningless.
Likewise, the capitalisation of domestically focused banks hardly changed in 2010 and remains good in relation to both risk-weighted assets and total assets. However, the fact that capitalisation is high overall does not take into account that the regulatory capital requirements do not fully capture certain risks. For example, the interest rate risk and credit risk associated with potentially adverse developments in the real estate and mortgage markets are not taken into account, or only partially accounted for. Yet these risks are especially pronounced in the current environment. On the one hand, interest rate risk for all domestically focused banks continues to remain at a historically high level. Since there is a maturity mismatch between assets and liabilities, a rise in interest rates would result in losses for the banks. The overall high level of interest rate risk is driven by Raiffeisen and cantonal banks. On the other hand, credit risk at domestically focused banks continued to increase. This is because the mortgage lending volume, which is closely linked to developments in the real estate market, continued to grow. The situation in the Swiss real estate market has deteriorated slightly since last year’s Financial Stability Report was published. Even though they varied widely, most real estate price indices suggest that prices also rose substantially in 2010.