The transition to a more global financial system has certainly not been free from problems. It should not be forgotten that extensive capital regulations entail a mispricing of risks. Deregulation then leads to desirable price adjustments. But it is often during these transitional corrections that financial problems are liable to occur. Changes have often occurred too quickly for the system, including the institutional infrastructure, to be able to keep up. In most cases, neither the banks nor the public authorities had the necessary prerequisites for adapting to the new conditions that were created by a freer capital market. The expansion of lending had too free a rein in many countries and the authorities did not properly monitor what was happening at either micro or macro level. Economic overheating often followed the deregulation and opening up of the domestic financial system due to a rapid expansion of credit rapidly. Asset prices rose sharply and imbalances developed. Furthermore, in countries with a fixed exchange rate system, extensive short-term borrowing abroad was stimulated. A large proportion of these funds was often channelled through the domestic banking system and rendered this rather vulnerable. When capital flows subsequently reversed, the adjustment was often violent. Production fell, unemployment rose and both the currency and the banking system faced an acute crisis. Apart from the actual process of financial market deregulation, there may have been other factors at work. The openings for capital investment in so-called emerging markets created opportunities for international investors for achieving high returns.

Much of this work involves international institutions like, for instance, the International Monetary Fund, the World Bank, the Bank for International Settlements, the Basel Committee on Banking Supervision, and the OECD, as well as the newly created Financial Stability Forum. 1  Governor Bäckström is also Chairman of the Board and President of the Bank for International Settlements. Before becoming Governor of the Riksbank in 1994 he was State Secretary in the Ministry of Finance with responsibility for Fiscal and Financial Affairs, which included the responsibility, under the minister, for the handling of the Swedish banking crisis in the early 1990s. 1  BIS Review 88/1999  However, the work, often hard, of implementing policies and codes lies with national authorities. These measures will contribute to improved financial stability only if countries actually adopt and implement them. A crucial ingredient in achieving this is of course to involve countries, formally or informally, in the development of the policies, codes and standards. But even if that is achieved, I know from my own experience how difficult the actual implementation sometimes can be, not least for political reasons. I would also like to make the point that today’s favourable trends in the world economy should not lead us to conclude that the danger is over. Instead, policymakers throughout the world must continue to work on forestalling new problems both because some evident threats to international financial and economic stability still remain and because there may well be vulnerabilities that are not so evident.