In Sweden, the banks have operated in a competitive environment since the deregulation of the 1980s and have been forced into a process of considerable rationalisation. Capitalisation is also satisfactory. There is reason to believe that the Swedish banks would be able to take advantage of the less expensive borrowing conditions in a single currency market and that they would be able to spread their risks over a greater number of counterparties, which would be positive for stability. In the long run, the banks’ customers may find it easier to come into contact with other European banks. This is an important aspect of increased  6  BIS Review 29/2003  competition, although wise lenders nevertheless respect the “church tower” principle, namely to lend only to those that you know well - those that you can see from the local church tower. I do not believe that a single currency in itself would increase credit risk in the banks. If monetary union in the long run were to result in a more integrated market for financial services, the current Swedish banks would most likely be rather small participants in this market, and each bank would be less important for the effective functioning of the payment system. Their significance for financial stability would decrease and the need for public intervention to safeguard stability in the financial system would therefore also be reduced.
During that time, the Riksbank was legally responsible for the exchange rate regime, and the reasons therefore for considering ERM participation were quite simply to prevent the regime of floating exchange rates from constituting a formal obstacle to Swedish participation in monetary union, in the event this was to become a possibility. When the government then decided that there was insufficient popular support for Swedish participation in monetary union, the question of changing the exchange rate regime was dropped. In connection with the Riksbank being made formally independent in 1999, new legislation on exchange rate policy was also introduced. Nowadays, it is the government that decides upon the issue of our exchange rate regime, although the Riksbank determines how it is to be implemented. In other words, it is the government that would decide whether and when the krona should join the exchange rate mechanism ERM2. Following that, the ministry of finance and the Riksbank would decide what rate between the krona and euro we assess to be consistent with a stable development of the economy. There are very good reasons to agree upon a common line of action. This is why we are holding discussions already among toplevel officials about an appropriate line of reasoning, the results produced by different estimation methods, etc. If we do not reach agreement, it is likely to be difficult to hold effective discussions with our European partners.