For instance, the Riksbank monitors and analyses the financial system, identifies potential risks and influences participants that are important to financial stability. We shall work to prevent financial crises from arising, but if they should nevertheless arise, it is our task to manage the situation. What does this mean? For instance, we must be prepared to act in situations where our assessment is that financial stability is threatened. Let us assume, for example, that a Swedish bank which is under the supervision of Finansinspektionen, the Swedish Financial Supervisory Authority, is solvent and has assets that are greater than its liabilities, but experiences serious problems with its liquidity and thereby difficulty in meeting its payments. If the Riksbank’s assessment in such a situation is that the stability of the financial system is at stake if the bank collapses, then we can intervene with measures to aid liquidity. The United States is currently in the midst of a financial crisis, the backwash of which is sweeping through the global financial system. Although financial turbulence has been included in our analyses ever since last summer, the way it has manifested itself and the intensity of the events has varied along the way. And in recent weeks the problems have escalated. The most recent wave of financial turbulence is the worst so far since the original US mortgage crisis broke out. So what has happened recently? For one thing, large agents in the US financial market have suffered acute problems.
In banking, one of the most important challenges for accounting standard setters is to achieve consistency with sound risk-management practices. Incentives built in to the accounting rules should be compatible with and encourage good risk management. In this connection, the areas of financial instrument accounting and transparency rules require special attention. This idea of market friendly incentive-oriented rules leads me to my last remark on the role of prudential regulation. Third: Efficient risk management One key question that we prudential regulators should ask ourselves is whether regulations provide the right incentives to assess and to manage risks properly. This question is directed at the very essence of financial regulation, whose basic aim is to ensure the stability of the financial system without being too intrusive or undermining its efficiency. Providing market friendly incentives for efficient risk management is probably the best contribution we can make to foster financial resilience. As you know this is one of the key objectives of the new Basel Capital Accord, the so-called Basel II. Let me just mention that in designing the new standards we have been and will continue to be sensitive to the possible implications for financial markets in terms of liquidity and potential development. This is especially so in areas such us securitisation and collateralised transactions. The implementation of Basel II will contribute to enhanced risk management by banking institutions.