Taking advantage of hindsight, I would like to stress two chief lessons learned from this twenty-year process of modernisation. The first is that regulator and banks have formed a “joint partnership”, prompting a fruitful “virtuous cycle” and matching goals and efforts in order to attain efficiency and soundness. Close communication and constant exchanges of views are the principles currently governing this relationship. The second lesson is that, at the end of the day, there has been no trade-off between profitability and soundness: the competitive capacity of Spanish banks has not been dented by supervisory policies. These policies have been oriented towards enhancing the solvency  BIS Review 56/2008  3  and internal governance of banks, and to increasing the confidence of the public and the markets in the banking sector. However, this transformation has not been painless. It has to be recalled that the Spanish financial system had to overcome a deep-seated crisis in the mid-seventies to early eighties. By the end of the 70s, our banking system was weak, closed, corporatist, old-fashioned and highly regulated. Such regulation affected many of their operating areas, curtailing competitiveness. Interest rates were set administratively and credit institutions were obliged to meet investment ratios to finance certain economic sectors with maximum interest rates. This environment made for weak structures with no incentive to compete and no professional teams or systems to accurately identify and manage risk. At that time a range of new banks were allowed to set up.
BIS central bankers’ speeches  5  Temporarily restricted autonomy when the inflation target is defended Although small countries with variable exchange rates normally have a certain degree of monetary policy autonomy, this does not, however, prevent specific situations arising in which their central banks become highly dependent on the actions of larger central banks. Recent developments in Sweden provide an example of this. A little less than a year ago, at the start of 2015, the Riksbank was in a difficult situation. Inflation had long been below the target of 2 per cent, while long-term inflation expectations were showing a falling trend and were below target. The Executive Board of the Riksbank considered it particularly essential to get inflation to rise towards 2 per cent, as there was a risk that continued low inflation would lead to inflation expectations continuing to fall and to confidence weakening in the inflation target as an anchor for the formation of prices and wages. 8 The monetary policy easing that had been introduced earlier therefore continued. The situation was complicated because the Riksbank needed to take into account the fact that monetary policy was very expansionary in many other countries. Large differences between monetary policy in Sweden and in other countries could lead to a rapid and strong appreciation of the exchange rate. This, in turn, could impede rising inflation and also have negative consequences for the real economy.