This means that banks can lend money at a lower cost than would otherwise be the case. They can thus boost the expansion of credit in the economy without taking any significant risks themselves. This is something that we have actually seen in recent years – lending to Swedish households has increased at a worryingly high rate. I believe that the introduction of a ceiling for how much the banks can lend without increasing their equity is a reasonable measure to prevent an excessive provision of credit. 8  BIS central bankers’ speeches  New standards for the banks’ liquidity management As I mentioned at the beginning, the financial crisis has also given us reasons to consider more direct and specific liquidity regulations. Consequently, the Basel Committee has drawn up entirely new standards for how banks should manage their liquidity. They have drawn up two quantitative measurements; the Liquidity Coverage Ratio and the Net Stable Funding Ratio, and will also impose considerably stricter requirements on the banks to report their liquidity risks. The Liquidity Coverage Ratio focuses on the banks’ liquidity buffers. The banks must hold liquidity reserves that are sufficiently large and sufficiently liquid to cope with a 30-day stressed cash outflow. The rules for what constitutes liquid assets are strict. At least 60 per cent of the reserves must consist of government securities, the rest can be made up of highquality, liquid mortgage and corporate bonds. The second measurement, the Net Stable Funding Ratio, is a structural measurement focusing on the banks’ funding models.
Floating exchange rates: perception and experience Views on how floating currencies behave and what the implications of their implementation are have changed over the past 30 years, in the light of current experience. Early protagonists had fairly idealistic expectations with respect to floating. For example, Harry G. Johnson, one of the grand old men of international economics, when he stated hopefully 30 years ago: "a freely flexible exchange rate would tend to remain constant so long as underlying economic conditions (including government policies) remained constant: random deviations from the equilibrium level would be limited by the activities of private speculators…"1 This optimistic view was based on two convictions. For one, on the notion that exchange rate distortions are primarily triggered by inconsistent government policies oriented to short-term effects. In actual fact, the economic developments of the late sixties and of the seventies promoted the perception of a fundamental contrast between inherently stable private markets and a destabilising public policy sector. On the other hand, most economists were profoundly convinced that free exchange rate movements would be clearly dominated by inflation differentials with no lasting impact on real exchange rates. It must be borne in mind, however, that 30 years ago the play of global financial markets so forcefully driven by expectations was still in its infancy.