luxury of selling their loans. recent events have shown that during times of systemwide stress, liquidity shocks can become correlated so that the same factors that can lead to liquidity problems for the bank's assets or off - balance - sheet vehicles can simultaneously put pressure on a bank's own funding liquidity. again, we see the trouble that risk concentrations can cause if an institution has not tried to identify them in advance and has not taken steps to mitigate their effects. as i mentioned earlier, we also have noticed the potential for liquidity risk to have an impact on capital adequacy. in a few cases, unplanned increases in a bank's balance sheet led some banks to take measures to bolster their capital. because risk concentrations have the potential to manifest themselves during times of stress and at that time adversely affect capital positions, it is particularly important that firms assess how liquidity events could place pressure on capital levels. in a nutshell, liquidity problems always have the potential to affect bank balance sheets and, in doing so, bank capital adequacy. governance and risk control the third fundamental, governance and risk control, has been a key factor that differentiated performance across financial institutions during recent events. 4 clearly, senior management of financial institutions must take on a very active and involved role in risk management. in some cases, it appears that managers were not fully aware of the extent to which the risks of the different activities undertaken by the firm could, first, become correlated in times of stress see, for example : senior supervisors group ( 2008 ), " observations on risk management practices during the most recent market turbulence " ( new york : federal reserve bank of new york, march 6 ). and, second, result in high concentrations of risk exposures. for example, those in senior management may not have been cognizant of a firm's overall concentration to u. s. subprime mortgages, because they did not realize that in addition to the subprime mortgages on their books, they had exposure through off - balance - sheet vehicles holding such mortgages, through claims on counterparties exposed to subprime, and through certain complex securities. senior managers should encourage risk managers to dig deep to uncover not only risks within each business unit, but also risk concentrations that can arise from the set of activities undertaken by the firm as a whole as well as latent risks – such as hidden risk concentrations that can arise from correlation

mr heikensten discusses global capital : advantages, problems and remedies speech by mr lars heikensten, first deputy governor of the sveriges riksbank, the swedish central bank to the institute of international affairs in stockholm on 3 may 1999. first a word of thanks for the invitation to talk here about the global financial markets. many of the questions raised by financial developments in recent years are clearly connected with foreign policy. the crisis in the international financial system that began in asia in summer 1997 developed, to cite president clinton, from being just ‘ a few small glitches in the road ’ into ‘ the worst financial crisis in fifty years ’. the extensive financial turbulence has fuelled the debate about globalisation and the increasingly integrated world economy. in certain respects it can be said that, compared with the present situation, the degree of economic integration was greater at the beginning of this century. expanding trade was accompanied by innovations that simplified international dealing. a common currency was available in the form of gold. in the years before world war one the net financial flows between countries, represented by current - account deficits, were even larger than today. in certain periods, moreover, migration was higher than at present. all in all, however, integration is presumably more extensive today. many more countries are now participating in the global exchange, gross capital flows are larger and market reactions are much swifter. new technology has paved the way for continued integration and is likely to go on contributing to further developments in this direction. against this background my talk today focuses on global capital : its advantages and problems and the remedies for the latter that are being discussed internationally. let me begin by looking at what has shaped the global financial markets as we know them today. emergence of today ’ s global financial markets today ’ s global financial markets largely date from the 1970s, when the oil - exporting countries needed to invest surpluses and many western countries had incurred budget deficits that had to be financed. there was thus a need for a more efficient international market for capital. another factor behind the development of financial markets was that after the collapse of the bretton woods system in the early 1970s, the major world currencies started to float in relation to each other. this generated a demand for instruments that would render the exchange rate movements less deleterious for exporters and importers. the evolution of the financial markets has been promoted by rapid technical advances that, besides facilitating international communications and transactions,