2  BIS Review 24/2006  …and a financial crisis How did the banks react to the new deregulated environment? Now they could set their own prices and grant loans as they wished. One might say that the bank management saw the opportunities more clearly than the risks. They wanted to obtain market shares and increase their income. The general public’s pent-up demand for credit was substantial when the credit regulations were abolished and high inflation made it more profitable to borrow than to save. The 1980s were also a period of strong economic growth, which contributed to the credit demand enduring even after the earlier pent-up need had been satisfied. There was thus a rapid credit boom over a number of years. Between 1985 and 1990 the general public’s loans from banks increased from 75% to 115% of GDP. A substantial part of the borrowed money was used to buy property, which led to property prices being pushed up beyond what was essentially justified. In this situation it is of course important to use monetary policy and fiscal policy to tighten the economy. However, at that time Sweden had a fixed exchange rate pegged to a basked of international currencies, primarily the US dollar. Monetary policy – the interest rate – had to balance the short-term capital flows and could not be used to influence domestic demand. Nor was fiscal policy tightened to cool down the overheated economy.
I would like to assure the public, that we will be consistent in our disciplined approach and we will continue to follow our plan for reforms in the banking sector focusing not on the issues of the past but on addressing effectively the challenges of the future in order to maintain financial stability and integrate successfully in the European financial infrastructure. 2  BIS central bankers’ speeches