There were in fact transitional regulations that initially meant that the banks were not able to calculate so liberally, but these were the regulations that would apply in the longer term and thus those that the banks and investors, and often the authorities, primarily focused on. Given that the banks, in Sweden and in other countries, only needed a small amount of capital, and given that it was often assumed that they were backed by government guarantees, it was highly profitable for them to take substantial risks. The banks themselves carried only a small part of these risks, while it turned out that the banks’ customers and the taxpayers had to carry the major part. In several countries – Spain, Ireland and Denmark for example, in addition to the United States – we have seen how substantial falls in the prices of the banks' assets, mainly in the form of mortgages, have led to major economic problems. The point is that the risk capital that the banks and their shareholders provide is limited to the value of the share capital. But society’s risks are greater than this. A mainstream assessment in economic research is that a national crisis in the financial system costs the economy around 60 per cent of GDP. In Sweden, this would be equivalent to over SEK 2 000 billion, or  BIS central bankers’ speeches  1  more than SEK 200 000 per Swede.
To meet its stability objectives in periods of financial instability, the monetary policymaker must probably put more emphasis on high-frequency financial markets information than he would otherwise do, because in normal times regular flows of macroeconomic statistics more or less suffice to form a correct assessment of the outlook. Special communication efforts are also required. One big challenge for communication in times of stress is to make the public understand that short-term liquidity management can be completely separate from the definition of the monetary policy stance with a medium-term perspective. As I have already pointed out 1 , a standard result in economic theory (William Poole’s paper from 1970) states that, when demand for central bank money is uncertain, then it is optimal to stabilise the short-term interest rate, letting money supply adjust endogenously. That is precisely what has happened in the euro area over the last half year. Indeed, the bulk of liquidity injections since last August was merely an attempt to align the  1  Cf. C. Noyer, “No moral hazard: the banks are doing their job”, Financial Times, 18 September 2007. BIS Review 15/2008  3  timing and maturity of the liquidity supply with a changing demand within the reserve maintenance periods, in order to stabilize the very short-term interest rate on the interbank market.