Authorities with a mandate in this area must have well-defined roles and responsibilities, including a distinct set of instruments. Current overlaps between instruments should be eliminated, and more flexibility in the macroprudential policy framework should be maintained, so that authorities can implement those measures in a consistent and timely manner, which would require significant changes to Article 458 of the CRR. A more integrated financial market will support the emergence of new types of risk and also require extending the toolkit with new instruments. For the banking sector, this includes complementing the toolkit with borrower-based instruments (such as limits on loan-to-value, or loan-to-income ratios) as well as sectoral buffers and a time-varying leverage ratio add-on so that all aspects of systemic risks can be addressed in the banking union. Finally, the mandatory reciprocity framework needs to be expanded so as to ensure the effective mitigation of crossborder spillover effects and regulatory arbitrage across jurisdictions in the EU. 3/9  BIS central bankers' speeches  The significant progress we have made with our banking union needs to be recognised also from the international regulatory framework perspective. A case in point is the G-SIB 9 framework, which currently penalises cross-border transactions within the banking union by attaching a higher systemic risk score to banks with more transactions of that kind. This goes against the very rationale of the banking union, as it reduces the incentives for cross-border transactions and risk diversification, thus making banks more vulnerable to local shocks.

Perhaps the main concern was the strong domestic inflation trend with price and wage spirals that collided with attempts to maintain a fixed exchange rate, and therefore led to recurring cost crises and devaluations. Another concern, which was partly connected to this, was that fiscal policy was often too expansionary, with rapidly rising public spending and tendencies toward structural deficits as a result. In addition, there was a deregulation of the credit market in the mid1980s, which would lead to far greater problems than were anticipated when the reform was implemented.21 In the early 1990s, these and other ingredients contributed to another domestic cost crisis, which also coincided with a financial crisis largely caused by excessive lending to households and companies. Unemployment rose sharply and public finances deteriorated dramatically. The krona was put under strong pressure by investors who expected Sweden to devalue again soon and, in November 1992, the Riksbank was forced to give up its defence of the fixed exchange rate. It had become clear that the type of policy Sweden had pursued for a number of decades had reached the end of the road, and needed to be fundamentally reshaped. Instead of defending a fixed exchange rate, the task of monetary policy from now on would be to keep inflation low and stable around 2 per cent. For its part, fiscal policy would focus considerably more than previously on keeping public finances in good condition so as to maintain market confidence. Looking back now, around thirty years later, the restructuring was successful.