Another thing was that economic policy had reached the end of the road, inflation was clinging tightly to an annual level of 8-10 per cent in Sweden, growth was poor and unemployment was showing a tendency to rise. When the deregulation of the financial markets got off the ground in Sweden, the process was rapid – in 25 years we had moved over from being one of the most regulated financial systems in the western world to being one of the most free! However, the process was not exactly painless. The consequences of the macroeconomic imbalances built up during the period of regulation, combined with the Swedish banking system's incapacity to manage risk in its lending when credit granting was deregulated were dramatic, to say the least. We experienced this at the beginning of the 1990s, after the bank crisis and after abandoning the fixed exchange rate regime. During the difficult years at the beginning of the 1990s, with what was for Sweden record-high unemployment, a risk of the central government debt running riot and stubbornly high inflation expectations, despite a low inflation rate, there were not many people who dared to hope for such a rapid positive development as that we saw during the second half of the 1990s. The central government finances are now in good condition, the current account has showed a surplus for several years now, inflation expectations are at a stable level of 2 per cent and unemployment is down to around 4 per cent.
If so, then the firm becomes subject to more legal and regulatory requirements, some of which may be inconsistent with those applicable elsewhere. The result of the geographic expansion then is to increase the risk of possible compliance problems and to make the management of a global business that much more difficult. Deregulation within individual countries is also something of a two-edged sword. Clearly it affords greater business opportunities to a firm, but it also raises challenges in managing compliance risk across a firm’s business units. For example, as a result of the passage of the Gramm-Leach-Bliley Act in the US, a single firm can now engage in commercial banking, investment banking, and insurance activities. The implication for the compliance function is that it must not only keep on top of issues  BIS Review 76/2006  1  within each of these diverse business lines but also the interactions between them - for example, in policing potential conflicts of interest across the firm. Somewhat similarly, the overall compliance challenge for the firm is more than just the sum of the challenges from financial innovation, from globalization and from deregulation. There are interplays between these developments that add additional layers of complexity to the compliance challenge. Level of scrutiny The second broad consideration I mentioned is the increased level of scrutiny of compliance in the U.S. and in other major financial markets - scrutiny that is driven by major industry and political events that have changed the legal and regulatory environment over the past five years.