Such manipulation has not come to light in Sweden, but the need to reform the reference rates has nevertheless become increasingly clear. Strengthening the interbank rate frameworks is not enough After the global financial crisis and the LIBOR scandal, extensive international work began, initially aiming to strengthen the framework around interbank rates. As a result of this work, both STIBOR and other interbank rates have changed and further changes are underway. However, as activity in the interbank market has continued to decline, it has become increasingly clear that this process of change will not be enough. The banks' judgements will still form much of the basis for the calculation. As we all know, the financial market is a confidence-based industry. As very significant sums are directly linked to the reference rates, a lack of confidence in these rates could affect large parts of the financial market and, ultimately, have negative consequences for the whole economy. Global initiatives for new reference rates There you have a brief background to me standing here today and talking about SWESTR. And it was against this background that authorities throughout the world, headed by central banks, took an active role in developing an alternative to interbank rates. The solution that soon seemed most appropriate was to move away from the system of reference rates based primarily on banks' judgements and instead calculate and publish new, fully transaction-based, reference rates.
A credible stress-testing process has to try to account for not just the effects of a discrete change to some dimension of market risk or some constellation of asset prices, but the effects of those changes on, for example, the behavior of financial market participants and on the broader macroeconomic conditions that might affect credit. It is also critical that firms assess their concentrations not only under current conditions, but also determine how firmwide credit concentrations to names, sectors or counterparties could build up under more stressful economic and financial market conditions. Of course, what is important here is not just that firms do a better job of capturing and valuing potential exposures, but that this information is translated into appropriately conservative judgments about limits and terms. Where uncertainty and complexity is higher, we should see this translate into higher cushions against potential loss. And senior management needs to be willing to lean against the erosion in credit terms and margin practice typically induced by competitive pressure during periods of low credit losses and implied volatility. Overall capital is, of course, an important part of what makes financial systems stable. But the size of the margin above the regulatory minimum or the thresholds that might affect a financial rating is critical, as is the extent to which the initial margin is set at levels that are likely to be sustainable over  2  BIS Review 28/2006  the cycle.