Banks are important Banks are of fundamental importance to the national economy; without them, households and businesses would struggle to make payments. Virtually all payments today depend on various services provided by banks. Without banks, households and firms would also find it difficult to borrow and manage their financial risks. Traditional theory often talks about the three key functions of banks: first, to intermediate payments; second, to allocate credit in the economy, thereby transforming liquid deposits into illiquid loans; and third, to facilitate risk management by households and firms. A well-functioning banking system is therefore a key driver of economic growth. Since the liberalisation of the financial markets in the 1980s, the financial sector has also become more efficient and this has contributed to increasing welfare in many countries, not least in Sweden. At the same time, the risks have increased as the financial sector has grown.3 The unease we have seen during the spring emphasises what I noted earlier, that monetary policy and financial stability are interdependent. I will return to monetary policy shortly, but given the developments during the spring, it is natural to start with the bank problems we have seen and what they mean. Banking involves risks What happened in the United States and Switzerland in March shows once again that banks' activities pose risks to the whole economy. This is nothing new. The risk of bank runs is well known. Such events have occurred many times in history.

The extremist groups have skilfully used religious and nationalist sentiments to garner political support and protect themselves against arrest. However, the Bali bombing has changed the situation. President Megawati has promulgated tough anti-terrorist decrees, including powers to detain suspected terrorists. The Indonesian government has arrested Abu Bakar Ba’asyir, who is the emir, or leader, of the Jemaah Islamiyah group, who had till now defied the Indonesian authorities to act against him. Government action in the aftermath of the Bali bombings has won the strong backing of key local institutions and the Indonesian population. Parliamentary leaders concurred with the passing of the anti-terrorism decrees, and the leaders of the two largest Muslim groups in Indonesia, the Nahdlatul Ulama and Muhammadiyah, have also voiced their support. The people of Indonesia know that if the militants succeed, not only will international confidence plummet and economic progress grind to a halt, but their country will be torn asunder. Southeast Asian governments will act because they know that the objectives of the terrorists are totally beyond the pale. These are not innocent political dissidents exercising their democratic rights. They are ruthless fanatics, quite willing to destroy innocent lives in order to create civil strife and animosity between communities and countries, shake confidence in Southeast Asian economies and their legitimate governments, and weaken the basis of the states. They cannot succeed, but they can cause great harm in trying. Provided the governments respond vigorously to the extremist threat, they can contain the problem and gradually restore confidence to the region.