rate and entry into erm2. in this respect there may be cause to say something about what has happened earlier. the question of erm participation and the possibility of combining it with the policy of inflation targeting that we have followed for some years has engaged the riksbank earlier, above all in the period 1995 - 97. at that time the riksbank was legally responsible for the choice of exchange rate regime and erm participation was considered simply as a way of preventing the flexible exchange rate regime from becoming a formal obstacle to sweden's possible full participation in the monetary union. when the government then judged that there was insufficient public support for sweden's adoption of the euro, the question of altering the exchange rate regime ceased to be relevant. when the independence of the riksbank was formalised in 1999, the legislation on exchange rate policy was amended. today the exchange rate regime is chosen by the government, while the riksbank decides on issues of its implementation. so it is the government that decides if and when the krona is to join erm2, whereupon the finance ministry and the riksbank discuss the sek / eur exchange rate that is compatible with a stable economic development. i want to make it clear that, contrary to the impression one is liable to get from reports in the media, this process is not to be seen as a struggle between the riksbank and the finance ministry. there are extremely good reasons for these two institutions to agree on a joint line of action. otherwise it is likely to be difficult to argue sweden's case effectively in the subsequent discussions with our european partners. decisions about erm2 participation and the exchange rate on entry are made jointly by the finance ministers of the euro countries, the ecb and the central bank governors and finance ministers of other erm2 participants ( at present denmark ). the first step is taken in practice in the framework of the eu's economic and financial committee. it is only if this committee fails to reach a consensus that the central bank governors and finance ministers concerned engage in direct negotiations. when the time comes - in the event of full participation in the monetary union - for the conversion rate with the euro to be locked irrevocably, this is decided unanimously by the euro - country members of the ecofin council together with sweden. on every previous occasion, these decisions have been based on the central rates in erm / erm2. the choice of a central rate and a

out on interest - free funding, as the riksbank pays interest on the monetary policy liabilities. although this is not so relevant at present when the repo rate is at zero, in the long run the riksbank ’ s profits will shrink in line with the decline in the use of cash. i should perhaps take the opportunity to say here that the riksbank is in general positive towards developments on the payments market that in many cases lead to both safer and more efficient payments. but one cannot disregard the fact that a decline in the use of cash will also reduce the riksbank ’ s opportunities for interest - free funding. the riksbank borrows instead of lending the changes in the riksbank ’ s balance sheet that i have mentioned here have led to a major change in the liquidity position of the banking system towards the riksbank. ten years ago, the banking system had a structural deficit of liquid funds with regard to the riksbank. this means that the riksbank had to regularly lend money to the banking system. since 2010, the banking system has instead had a structural surplus of liquid funds and the riksbank now borrows these funds from the banking system. the most important explanations for the banking system moving from deficit to surplus are that the dividend payments to the government have not been taken from the assets ; the riksbank has instead borrowed money to pay the dividends, and that the general public ’ s demand for cash has declined. this change is reflected in the riksbank ’ s balance sheet in that we now carry out our monetary policy operations on the liabilities side of the balance sheet. but it makes no difference to our ability to implement monetary policy. 4 regardless of whether the banking system has a deficit or a surplus of liquidity in relation to the riksbank, our monetary policy system works by means of our determining the conditions for the banks ’ deposits and loans with the riksbank, which determines the shortest interest rate – the overnight rate – so that it comes closer to our policy rate, what is known as the repo rate. the repo rate thus states which level the riksbank wants for the overnight rate, which is currently zero per cent. the overnight rate in turn affects interest rates charged to the general public and thereby activity and prices in the economy. the riksbank ’ s need for funding is increasing the most important fundamental consequence in the changes to the balance sheet between 2004 and 2014