been lent out. which is the whole point, of course. at the same time, the banks are unable to renew their loans in the market as they mature, which means they cannot meet their obligations to deposit customers or creditors in the market and they collapse like a house of cards. and without banks the financial system cannot function. if not even the most basic functions can be upheld, people will not receive their wages and will not be able to pay their bills. the economy will grind to a halt. but even though we managed to save the financial system through rescue packages, the costs of the crisis have been immense. the reason for this is that a crisis in the financial system has far - reaching consequences for the whole economy. the financial crisis causes large falls in production, rising unemployment and increased budget deficits as incomes fall and expenditure rises in the wake of the recession. there is thus a big difference, from society ’ s point of view, between banks in distress and ordinary companies suffering problems. this is why we need special regulations for the banks. it is no news to us swedes that crises are extremely expensive. we only need to look back to the crisis in the 1990s for a reminder. but this time the crisis was on a global scale. for the first time since the second world war we have experienced a fall in production in the world economy. it is clear that the world will suffer the consequences of this for a long time to come. but we swedes have also been hit hard this time, too. not least because we are a small, export - driven economy that is very vulnerable to developments abroad. because when the credit taps are turned off, orders that have been made are withdrawn and no new ones are made. in 2009 total production in sweden, gdp, fell by around 5 per cent – the largest fall in a single year since the 1940s. such a large fall in the production flow entails an irrevocable dent in the long - term curve. gone forever. if one converts it, it corresponds to about sek 20, 000 per swedish inhabitant. this is money we could have used for consumption and welfare. and let us remember that this is just one of the effects. add to this the reduction in wealth in the form of falling values of companies, financial instruments and other assets. contagion effects in a globalised financial market the origins of the crisis lay in us subprime mortgages. although swedish banks had very little exposure to

failing to function, or a human error that puts the bank at great risk. some of you may remember how the british bank barings collapsed in 1995 as a result of speculation and unchecked risks taken by a single employee. risk management is about protecting oneself against such undesirable and unexpected outcomes. in short, one wants to take calculated risks. according to earlier agreements within the basel committee, the banks have the possibility to develop models themselves to calculate the size of their risks and this is an opportunity most of the major banks have used. over time, their risk calculation models have become increasingly sophisticated. but during the crisis it turned out that not even the most advanced models managed to capture the real risks. sometimes it was not the model that was inadequate ; there was a lack of available data for assessing the risk. in many cases there was quite simply not enough historical data, as the financial instruments were such fresh inventions. you may have heard of various types of complicated derivative, such as cdos, cdss and so on. in other cases, there was a change in the relationships between prices and other factors that had been previously observed. the calculated probabilities quite simply did not reflect the reality. it is easy to make a comparison with swedish humorist tage danielsson ’ s classical sketch about the probability of a nuclear accident : as harrisburg had just happened, there was absolutely no risk that history would repeat itself. or to look at it another way, as the complicated financial instruments had previously escaped sudden price falls, one need not expect any sudden price fall in the future. slightly exaggerated. underestimating risks and taking excessive risks are two sides of the same coin. and this was just what happened, right up until the us house price bubble burst and the crisis was upon us. it is thus clear that there is a need to ensure that risk management is tightened and that the deficiencies in the banks ’ balance sheets are corrected. the basel committee therefore requires that the banks assume that many financial instruments – including the derivatives i just mentioned – are much riskier than the banks previously assumed. so under the new regulations the banks must leave a good margin for substantial losses possibly arising when they buy and sell risky instruments. moreover, the basel committee is introducing a new risk measure – a leverage ratio. behind this term lies a fairly simple measure of risk that is not based on any advanced risk calculation models. the bank ’ s capital is examined in relation to all of its assets,