At the time, the Riksbank had neither the mandate nor the desire to be the lender of last resort, that is the body that the banks can turn to when they suffer a shortage of liquidity. The Riksbank was instead more like a bureaucratic, state-owned commercial bank that competed with the privately-owned commercial banks. There was, however, a growing realisation in the UK and other countries that it was important to have a liquid credit market and that the central bank could play an important role in safeguarding the stability of the banking system. One of the people who developed these ideas was Walter Bagehot, who was appointed edi-tor of the journal The Economist in 1860. The experience of countries that did not have a central bank, for example Switzerland, also pointed to the need for a central bank to safeguard the stability of the financial system. In connection with various bank crises in Switzerland the banks had tried to protect themselves by reducing lending, which in effect only made the crises worse. BIS Review 135/2009  5  In Sweden, it was not until the Riksbank Act of 1897 that the Riksbank was given an explicit role to stabilise the payment system. When Sweden and the rest of Europe were infected by the crisis in the USA in 1907, the Riksbank was prepared and maintained liquidity in the system. The crisis of 1907 was also, by the way, the event that hastened the formation of the US central bank, the Federal Reserve.
At the same time, faith in the ability of the financial markets to work effectively in all situations has been undermined. An effective financial sector contributes to growth and prosperity in the economy, and it is indisputable that more effective regulation and supervision are now required. In my opinion, however, it is important that the changes in the regulatory structures that are now being implemented are balanced and well considered. Above all, I believe that it is important to avoid the sum total of all the regulations that are introduced restricting growth or, in the worst case, giving rise to new crises. It would be a mistake to underestimate the inventiveness of the financial sector and its ability to circumvent regulations of different kinds. Producing a regulatory framework that makes the financial system safer and more secure without losing important welfare gains is really the major challenge that the authorities now face. Thank you! BIS Review 135/2009  9