We all understand the need for reforms, the need for stronger growth, the need for macro stability, the need for regional cooperation, the need for political stabilization and peace among the different nations of the region. Therefore as my very last sentence I would envisage the need for greater reforms, greater efforts towards democracy and market economy. In this respect, I would like to quote myself in Bosnia-Herzegovina, three weeks before “I see enormous possibility for cooperation and policy coordination in the direction of information sharing, institution building, modification of the legal infrastructure and lobbying in European structures. Facing these problems in group rather than separately will allow to benefit and embrace the positive effects of “economies of scale”. I also invite the ECB and EC to explore the possibility of adopting a “party” treatment for the entire SEE region, by adopting a specific program for a specific group of countries”. It might even sound overly optimistic I see this as a mutual beneficiary relationship. The region, on its account, does provide several important advantages: labor markets are positioned right in the middle between Asian countries and new EU members; sufficient investment opportunities in real estate and infrastructure as well as high return on capital; it counts more than 20 million people and represents a fantastic touristic attraction as a product of an interesting combination of different climates with diversified geographical features and multi ethnic and cultural traditions. I think that means in real terms economic stability and sound long term regional geopolitical solution.

Let me now turn to these. The financial systems had not adapted to the change from a sheltered environment to a deregulated and much more competitive situation. In the earlier environment, banks had had little incentive to develop a sophisticated credit culture, involving comprehensive evaluations of debtors, projects and collateral. (One important similarity between Sweden and Korea was the overoptimistic reliance on collateral and other guarantees, rather than on the viability of the loan project itself). When deregulation was a fact, bank managers saw a chance of gaining market share and increasing revenues by taking new risks, but did not clearly see the dangers in a lack of the necessary expertise. One of the major faults in credit decisions in Sweden was that banks lent to customers, projects and geographical areas of which they did not have sufficient knowledge. Another major mistake was that banks accepted high-risk concentrations, not just to individual companies but also to economic sectors, primarily real estate, and to geographical areas. At the peak of the crisis, bank loans to real estate, or collateralised by real estate, accounted for more than 60 per cent of all loan losses. A further weakness was the inability of the banks, as well as of the authorities, to register the growing prevalence of indirect concentration risks. For instance, bank borrowers demanded loans denominated in foreign currencies. Interest rates on these loans were lower than on krona loans and as the krona was fixed within a fairly narrow band, there was presumed to be no exchange risk.