The legal rights of the parties in the financial market are important, at the same time as the authorities must be able to operate without the threat of legal countermeasures by the banks in the event of an intervention. The supervisory authority therefore needs to have adequate resources, the right competence and operational independence. There need to be clear rules as to how the authority responsible can take over and close a credit institution. This was not the case in Sweden at the time of the crisis, which of course delayed the rescue work. Creating confidence in the banking system – which does not become unconditional confidence if the central government acts as final guarantor – also requires a deposit insurance that  4  BIS Review 24/2006  clearly indicates how much of the customers' deposits the government is prepared to guarantee. The legislation must also cover more than just the banks – other institutions that receive deposits from the general public must also be under supervision. As I said, deregulation was necessary – it was rather the incapacity of the banks and the supervisory authorities to manage a competitive situation that contributed to the crisis. However, the economic policy conducted also contributed. Monetary and fiscal policy were not used to slow down developments at the end of the 1980s, which laid the foundations not only for increased borrowing, but also for the currency crisis. The combination of a fixed exchange rate and large budget deficit was devastating.
Of course, considerable resources were required to administer all of these regulations. My description here shows clearly how thoroughly regulated the Swedish financial system was. Furthermore, the regulations applied over a long time. They were for a good purpose. The aim was to create stable markets for credit and foreign currency, secure and sound banks and also to achieve redistribution of wealth effects through prioritising economic policy measures. However, the result was the removal of necessary incentives for the banks to develop their operations in a professional manner and it also reduced the opportunities to compete, which prevented new banks from entering the market. Thus, short-term stability was attained at the cost of the build-up of long-term tensions, which would gradually result in a crisis. The emergence of a market economy… The idea behind the regulations was good, but they led to the central government having too much control over the banks’ operations. This put the banks’ functions out of operation. The banks’ most important task is to borrow money from the general public and then lend it to companies who wish to invest. They must therefore be able to assess the creditworthiness of their borrowers. However, the regulations that had prevailed for almost forty years meant that the banks had not needed to develop thorough credit assessment competence. The central government had controlled their risk-taking. The limits to lending growth also meant that they could choose to only provide credit to the customers with the highest credit ratings. Loan losses were thus small.