The restrictions also ensured orderly conditions on the securities markets: The Riksbank arranged a queue for the issuance of new securities and monitored the timing and sequencing of issuance in order to match it with the available liquidity and investor appetite. Another aim of the restrictions was to make it more difficult to circumvent the domestic restrictions on the credit market through overseas transactions. Finally, I must admit that there was a degree of protection of the Swedish financial institutions from foreign competition. The regulations on the domestic credit market as well as of capital movements resulted in a highly rigid and underdeveloped Swedish financial sector. However, given the oligopoly situation the sector was rather profitable. You might conclude that the priority purposes were subsidized at the expense of the banks’ savers. Regulation, policy mistakes, and their consequences Starting from the late 1970s it became gradually more obvious that the restrictions did not function as planned. The financial sector became gradually more inefficient since it could not progress in line with external developments and it could thus not provide the necessary new financial services to support the overall economy which was undergoing modernisation. The restrictions were in various ways circumvented by the institutions themselves and by other market participants. Instead of promoting financial stability the restrictions led to increasing vulnerabilities, for instance when the share of lending provided by less regulated entities increased. The restrictions on capital movements meant that imbalances in the Swedish economy were not always identified as early as they should have been.

We at the central bank stand ready to analyse the new  8  BIS Review 111/2006  capital requirements’ effects on financial stability, in particular in situations when there is volatility in the macro economy and banks’ credit losses may increase. There is also the issue of implementing the new international accounting standards, IAS. A highly controversial but also interesting development is that the standards promote a higher degree of market-related valuation of many more categories of assets and liabilities in banks and other institutions. Banks are already used to market valuation for highly tradable assets, but the new standards go further and request banks to value also non tradable assets and even liabilities to assumed market prices. In general, and although I recognize the problem of market-valuation of items for which there is no ongoing market, I support the idea of more transparent and market-oriented valuation. I accept that it may lead to more fluctuations in the banks’ balance sheets and also in their profits and losses. Although the financial strength of a bank in the long run will not be affected by using the new accounting principles there is a risk that the analysts and other readers of the financial reports will not understand the difference between the reported temporary results and the underlying issues. They may then panic because of seemingly bad short-term bank results or become excessively optimistic over temporary good results.