Were every large bank instead to face the maximum capital surcharge of 2.5%, then expected system-wide losses would fall by around 60% relative to their base level. And to remove 90% of the systemic externality – expected losses of around $ billion – a surcharge of over 7% would be needed. A more plausible experiment would be to assume a non-zero correlation among bank defaults. For example, the failure of a large bank which caused it to fire-sale assets could impose externalities on other large banks holding these same assets (Wagner (2009)). To place an upper bound on expected losses in the face of these fire-sale externalities, assume instead a correlation coefficient of one. Chart 5 illustrates the impact on expected system-wide losses of a high degree of default correlation among the big banks. The expected system-wide loss increases to around $ billion per year – similar in size to the implicit subsidy at its peak. A 2.5% surcharge now only reduces expected system-wide losses to around $ billion per year. To lower expected system-wide losses to be around $ billion per year would require a surcharge of around 15% – six times its current upper limit. If anything, these thought-experiments probably produce conservative estimates of systemwide losses and the necessary systemic surcharge. For example, bank asset returns are in practice much fatter-tailed than the log-normal distribution. And in practice, banks are likely to default well before their capital is fully exhausted.
This does not mean that the Riksbank’s tasks would disappear, however, as claimed time and again by one of my predecessors Lars Wohlin. The majority of the Riksbank’s tasks would remain relatively unaffected by our participation. As I just mentioned, this applies to our work on financial stability, which would essentially remain a national responsibility for the foreseeable future. The Riksbank’s operational tasks such as monetary policy transactions, the management of the Riksbank’s assets, the collection of statistics, the management of banknotes and coins and various administrative tasks would also remain. I also object to the claim that the Riksbank would become a branch office of the ECB. In actual fact, the national central banks of the Eurosystem own the ECB. If Sweden were to join the Eurosystem, we would become a member of the board and be able to influence how the system as a whole develops in the future. That is hardly an opportunity available to local offices of other organisations. In addition, the Eurosystem is a decentralised system, in which the vast majority of tasks are carried out by the  BIS Review 29/2003  7  national central banks. Many tasks are also performed at national level completely outside the framework of the Eurosystem. The main change if Sweden were to participate in monetary union would be that decisions on the interest rate level in Sweden would be taken by the ECB Governing Council instead of by the Executive Board of the Riksbank.