It is hoped that Swedish banks will not have to make use of the opportunity for government guarantees or capital injections, since the terms will probably be rather tough. However, we do not know the details of the proposal at this time. However, what we do know is that the Government has decided to expand the deposit guarantee. This is an important measure to strengthen confidence in the Swedish banking system. At the same time it is important to add that measures of this type must be complemented in the long term with mechanisms that facilitate a sustainable financing of the system; in other words, those institutions that are covered by the guarantee must also carry its costs. In the somewhat longer term In a longer perspective there is reason to consider which structural changes are needed to prevent similar situations from arising again. An intense discussion is currently underway about the need for changed regulations and stricter supervision of the financial markets and institutions. The Riksbank has discussed these issues in various contexts for some time. For example, the rules for management and supervision of liquidity risks need to be developed and improved. The financial sector needs greater transparency so that customers and investors can gain a better overview of the companies' commitments. For Sweden it is also important to create a functioning regulatory framework to handle banks in insolvency.
During the spring the turmoil reaped its most startling victim so far. Bear Stearns, the fifth largest investment bank in the US, was forced to suspend payments after being unable to arrange short-term financing. It hardly needs to be said that Bear Stearns was heavily exposed to the subprime market. Conditions on the credit markets temporarily eased after Bear Stearns. Although tensions continued, the market began to slowly return to more normal conditions and credit risk  BIS Review 125/2008  1  premiums decreased sharply for a while. Confidence seemed to be returning to the financial markets. However, the turmoil gained renewed strength during the late summer when Lehman Brothers was forced to apply for bankruptcy protection. Since then a number of banks in Europe and the United States have experienced severe problems. Banks and financial institutions that were forced into being sold or nationalised include heavyweights such as Fortis in Belgium, Merrill Lynch and AIG in the United States, and Hypo Real Estate in Germany. The financial crisis had progressed from being a subprime crisis in the United States into a global confidence and liquidity crisis. Where can we find the explanations? In light of current events, the obvious question is how do we explain the situation? What we see is largely the result of an extended period of vast expansion of credit and growth of the financial industry's assets, which with hindsight has proven to be unsustainable.