lars heikensten : what can europe learn from other countries and former experiences? speech by mr lars heikensten, first deputy governor of the sveriges riksbank, at the joint bundesbank / bis conference on “ recent developments in financial systems and the challenges for economic policy ”, held in frankfurt, 28 - 29 september 2000. * * * let me begin by expressing my thanks for the invitation. i very much appreciate the opportunity of being here. i should confess that it is not an easy task to be the last speaker in a conference as rich as this one. perhaps i should also admit that i was not sure why i was asked to talk about what europe can learn from others ’ experiences. just for the record : sweden belongs to europe, though not yet to the euro area. my guess was that the organisers wanted me to draw on my experience as a policy maker in a country which certainly did reap some experiences in the 1990s that are relevant for both monetary policy and financial stability. more, in fact, than any one of us swedes would have wished. it is not surprising that my hair turned prematurely grey since i worked first in the finance ministry and then at the central bank during these turbulent years. after the crisis in the early 1990s the riksbank had to start more or less from scratch. the earlier policy was in tatters. in november 1992 the fixed exchange rate simply had to be abandoned, making it necessary to work out new ways of working in a credible way with a flexible rate. meanwhile, the problems in the banking system had to be sorted out, while the riksbank endeavoured to build up a future system for oversight and related matters. today i want to talk about two subjects. one is related to financial stability, the other to monetary policy. i shall be fairly practical and, as i mentioned, speak from the point of view of a decision - maker rather than an academic drawing on our own experiences. at the same time, the topics are ones that i know are currently being discussed a good deal in the european community. financial stability let me first deal with the management of a banking crisis. some of the previous speakers have touched briefly on this. our experience demonstrates that an important element in crisis management is clear - cut rules and structures. time is short and the risks are huge. i also believe that there is now an increased risk of future crises being triggered by mistakes within banks under increasing pressures. this kind of

recapitalization capacity by issuing instruments that can bear losses in the event of resolution. supervisors and firms are better equipped to deal with problems that occur. supervisory oversight of systemically important banks has learned the lessons of the crisis and has added a macroprudential perspective. the basel iii framework introduced additional capital and liquidity buffers, which are intended to be usable in a downturn to help maintain the flow of credit to the real economy. significant progress in making banks resolvable before the global financial crisis, the resolution of failing banks was a niche subject. in hindsight, most authorities around the world had given it far too little attention. this was the main reason why authorities had so few options for our global systemic banks in the middle of the crisis. things have changed, and for the better. resolution authorities have sprung up or have been strengthened around the world. and resolution frameworks provide these authorities with the powers to resolve a systemically important bank in a manner that maintains financial stability and reduces taxpayer exposure. the fsb ’ s evaluation shows that investors increasingly expect failing banks to be resolved rather than bailed out. the funding cost advantages enjoyed by systemically important banks have fallen. market prices suggest that investors are now pricing the risk of having losses imposed on them in the event of a bank failure. for most jurisdictions that are home to g - sibs, credit rating agencies no longer assume governments will bail them out. recovery and resolution planning has improved banks ’ capabilities to produce timely, accurate and granular information. timely information in a crisis is key to assessing the scale of a problem and to deciding what to do about it. this additional information has already proved helpful to both banks and authorities during the pandemic. taken together, these resilience and resolution reforms lower the probability of banks failing, reduce the consequences and costs of a bank failure, and provide additional options for dealing with failing banks that simply did not exist before the global financial crisis. reforms are achieving their policy objectives but more work is needed we have to ask ourselves, however, whether we have addressed the problem set out by mervyn king in the wake of the global financial crisis. can authorities now resolve complex international banks without recourse to public funds, while maintaining financial stability? and does the coordinated international approach we have now adopted provide for effective resolution of banks, by ensuring that while they are global in life, we also have a global solution in death? the fsb evaluation provides evidence that the reforms