Mr Bergström reports on why Sweden has changed its stabilisation policy regime Speech by Mr Villy Bergström, a Deputy Governor of the Sveriges Riksbank, the central bank of Sweden, at the 140th anniversary of the establishment of Norrbärke Sparbank in Smedjebacken, Darlana on 21 May 1999. It is obvious to everyone that we live in a different economic world than we did ten years ago. Ten years ago, registered unemployment was 1.3 per cent and inflation 7 per cent. Now inflation is nonexistent while total registered unemployment is over nine per cent. Why has such a drastic change in the economy taken place? What is characteristic for the new economic conditions? Are there alternatives to the policies now being carried out? Background Since the second war, Sweden, in principle, had a fixed exchange rate. However, in practice, it was not particularly fixed after the mid-1970s. From autumn 1976 to autumn 1982, Sweden devalued five times. I will come back to the sorry history of 1982-92. In autumn 1992, the fixed exchange rate was abandoned and the krona immediately fell by 11.5 per cent. Thereafter the krona declined further so that the total fall in the exchange rate to the lowest position of 13 December 1993, was 31.5 per cent. Note that the starting point for the fall in the value of the krona in November 1992 was a cost level that was 25 per cent lower, measured in common currency, than it had been in 1976. This was a failure for stabilisation policy.

The standards on capital adequacy and risk management that have now been approved by the Council of the Islamic Financial Services Board in December in 2005 is scheduled for implementation in 2007. Islamic financial institutions must therefore be equipped with the required capacity and infrastructure to capture the respective risk weights and assign appropriate amount of regulatory capital at each of the different stages of the Islamic financial transaction. The exclusion of risk-weighted assets funded by the profit-sharing investment accounts from the calculation of regulatory capital requirement places critical emphasis on a comprehensive infrastructure in the Islamic financial institutions to clearly segregate the restricted and unrestricted profit-sharing investment accounts from the non-profit-sharing accounts and shareholders funds and to track their respective flows in financing and investment transactions. BIS Review 4/2006  3  Strategic investments in the state-of-the-art IT and risk management systems are integral to this process. Supervisory authorities need to be equipped with the specialized skills necessary to have the right assessments on the level of risks that the Islamic financial institutions are exposed to and the effectiveness of the risk management infrastructure in the Islamic financial institutions in mitigating these risks. The development of a sufficient pool of talent in Islamic finance Finally, the development of a sufficient pool of appropriately skilled Islamic finance practitioners needs to be accorded the highest priority. The required skill set in Islamic finance is unique. It needs to have the right blend of knowledge of finance with the understanding of the Shariah as being central.