  Could otherwise hit inflation and growth hard   M onetary policy can alleviate the effects   12  Other measures required to solve the problems entirely  BIS Review 138/2008  Financial turmoil and the inflation target     Situation changes rapidly in mid-September Repo rate has been cut to 3.75 per cent Further cuts over the coming six months  To: …alleviate the effects of the financial crisis on economic activity and… …manage the inflation target of two per cent  Behind the interest rate decision Financial turmoil important          BIS Review 138/2008  Impact of interest rate cuts (initially) Credit crunch Falling wealth Deeper economic downturn Uncertainty and falling exchange rate Falling commmodity prices Lower inflationary pressures  13  Pessimism among households… Net figures 80  80  60  60  40  40  20  20  0  0  -20  -20  -40  -40 The Swedish economy  -60  -60  Own finances Labour market  -80  -80 98  99  00  01  02  03  04  05  06  07  08  09  Source: National Institute of Economic Research  … and in the business sector Seasonally-adjusted index and net figures, manufacturing industry  65  15  60  10  55  5  50  0  45  -5  40  -10  35  -15  30  Purchasing managers’ index (left scale)  -20  Confidence indicator (right scale)  25  -25  01 02 03 04 05 Note.
My point is that, in addition to analysing vulnerabilities in individual countries and general macroeconomic linkages between countries, you also need to look in particular at the major cross-border financial groups and financial infrastructure. The good news is that these are not so many, after all. Of the approximately 8,300 credit institutions in the EU, only nine are defined as truly pan-European and less than fifty have cross-border establishments in more than two countries. When assessing preconditions, regulation and supervision you need to look not merely at individual countries but also at whether there are major differences or gaps in the application between countries or between financial sub-sectors and if this might lead to vulnerabilities, in particular in a crisis situation. As we all know, a common European approach to bank problem resolution has so far not been developed. In a potential or actual crisis situation, we may face “the prisoners’ dilemma” in which the optimal solution may not be achieved since each country would tend first to look to its self-interest. Hence, it is important for a regional FSAP to identify vulnerabilities stemming from potential conflicts between home and host countries in the resolution of a failed financial group, which for instance might have systemic importance in the host country but not in the home country. The common thread in all this is that an FSAP should focus on two things: The weak spots as well as the channels for contagion of weakness. This is what the IMF is doing in its single-country FSAPs.