operate in sweden and swedish banks had to obtain permits when they wanted to establish subsidiaries abroad ; branches were not allowed at all. these restrictions on capital movements had several aims. one was to ensure a stable swedish currency, with a fixed exchange rate, insulated from any sudden capital flows. originally, and in particular during and immediately after the second world war the restrictions supported the rationing of the scarce foreign currency revenues available to the swedish economy. 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. in addition, the large swedish exporting companies learnt how to evade the restrictions on capital movements which gave them a competitive advantage over smaller competitors also in the domestic market. the increasing deficits in the fiscal budget and in the current account made the restrictive system nonoperative. the government finally decided to abolish them, although in a careful and gradual fashion to minimise disturbances to the markets and the economy. during a period spanning the late 1970s and the early 1980s the domestic regulations and the restrictions on capital movements were gradually scrapped.

had a narrow focus on the early detection of weaknesses in the banking system that might lead to another bank crisis. the riksbank also decided to publish a report that would discuss the situation for bank sector stability. internal reports had been produced earlier. in autumn 1997 the riksbank accordingly presented its first more cohesive public analysis of financial stability. the new report was intended to signal the importance the riksbank attached to work on stability and it also helped to focus and develop the internal efforts. the experience of work on the inflation report had been encouraging, so it seemed natural to build up the work on and communication about issues to do with stability in the same way. by launching the financial stability report or, as it was called initially, the financial market report, the riksbank was the first central bank to issue a public account of its appraisal of financial system stability. its example has been followed to date by about thirty other countries. recurrent financial crises have made it clear that there will always be problems which the authorities are obliged to address in some way and it may therefore be of some assistance to have a clear, structured presentation of the approach to financial stability. this has led the international monetary fund, for example, to pay growing attention to these issues. since 1999 the imf and the world bank are engaged in joint evaluations of national financial systems in what is called a financial sector assessment program. matters to do with stability are also on the agenda almost every time i meet my colleagues from other countries. principles for financial system oversight first i should perhaps reiterate what we mean by the financial system. it is the system that provides payment services, converts savings into financial resources for investment and consumption, and contributes facilities for managing risk. in other words, the financial system performs a number of important social functions. if any of these functions were to be disrupted, the social costs could be very high. the damage inflicted by a disruption would probably be particularly great if it involved a vital component of the payment system. this is readily understood when one considers the enormous flow of payments. in sweden, for instance, the payment system has a daily turnover of around sek 500 billion, which means that the equivalent of our annual gross domestic product has to be handled in less than a week. studies show, moreover, that in the past fifteen years there have been more than a dozen crises which cost the countries concerned at least 10 per cent of their gdp. so there are good reasons for state