Incentives for increased saving were not actually introduced until the crisis was actually upon us and then they only helped reinforce the decline. It may seem something of a paradox that international organisations, such as the Basel Committee, are now implementing a number of new regulations – such as Basel II – despite the fact that the old regulations had negative effects and were therefore abolished. However, these are a completely different type of regulation. The old regulations were aimed at prohibition and other strict controls, while modern regulations give the banks plenty of flexibility to offer their services as long as they meet certain fundamental conditions. For instance, Basel II allows the banks to determine their own risktaking to a great extent, as long as they have adequate risk management and capital reserves. The experiences of regulation and the crisis also show clearly how important it is that the central bank can make independent decisions regarding the interest rate according to objectives set by parliament, for instance, to maintain inflation or the exchange rate at a stable level. If there are no guidelines for the interest rate, or if the parties that determine the interest rate have differing interests, it will often be set too low for the purpose of benefiting borrowers, investment and central government consumption. This was the case in Sweden during the years of regulation. Apart from leading to higher inflation and pressure on the exchange rate, exaggeratedly low interest rates also have a negative effect on the financial sector.

Of course, considerable resources were required to administer all of these regulations. My description here shows clearly how thoroughly regulated the Swedish financial system was. Furthermore, the regulations applied over a long time. They were for a good purpose. The aim was to create stable markets for credit and foreign currency, secure and sound banks and also to achieve redistribution of wealth effects through prioritising economic policy measures. However, the result was the removal of necessary incentives for the banks to develop their operations in a professional manner and it also reduced the opportunities to compete, which prevented new banks from entering the market. Thus, short-term stability was attained at the cost of the build-up of long-term tensions, which would gradually result in a crisis. The emergence of a market economy… The idea behind the regulations was good, but they led to the central government having too much control over the banks’ operations. This put the banks’ functions out of operation. The banks’ most important task is to borrow money from the general public and then lend it to companies who wish to invest. They must therefore be able to assess the creditworthiness of their borrowers. However, the regulations that had prevailed for almost forty years meant that the banks had not needed to develop thorough credit assessment competence. The central government had controlled their risk-taking. The limits to lending growth also meant that they could choose to only provide credit to the customers with the highest credit ratings. Loan losses were thus small.