be strengthened another issue that i believe needs particular attention is how to achieve better crisis preparedness, which means that i am now switching to talk about crisis management issues. as on numerous occasions in the past, many countries were ill prepared for this crisis and had to rely on ad - hoc solutions for handling it. in the case of the eu, member states quickly had to reach an improvised agreement on a co - ordinated and comprehensive financial support plan. we have had the same situation in sweden, both when we had a crisis in the early 90s and, more surprisingly, even now. despite the quite recent experience of a systemic crisis, legislators had not been able to get a proper framework for the management and closure of distressed banks in place. thus, also this time we had to rely on improvised solutions. even if these ad - hoc measures often seem to work out pretty well there is no guarantee that they will do so consistently. to let financial system stability become the hostage of improvised political processes is obviously not an optimal order. experience from previous crises also shows that improvised crisis management measures often come too late, are inadequate, and ultimately turn out to be more costly then they would have needed to be. i would say that british northern rock is the perfect example of all this. so, what is it that we need in order to achieve better crisis preparedness? as i just indicated, one important requirement is to have in place solid frameworks for the management and closure of distressed banks. such frameworks include several different aspects, everything from deposit guarantee schemes to insolvency procedures. basically, it is a quite technical mix of legal and financial measures which can look rather different from country to country. however, the basic concept applies to all. frameworks should facilitate the quick and efficient closure of banks at a low cost to the deposit guarantee system, while making shareholders and uninsured creditors bear the responsibility for their investment decisions. it must also allow for special measures to be taken in the exceptional situation where the failure of a bank risks destabilising the financial system as a whole. also in such situations, the government needs to have a strong negotiating position relative to the shareholders. necessary ingredients for achieving all this are to allow distressed banks to be put under special receivership and to enable governments to issue guarantees and make capital injections. as a countermeasure the government obviously needs to have farreaching authority to take control of the institution, for example by requiring the compulsory sale of

never exactly the same. therefore, flexibility is needed in the policy frameworks aimed at preventing and managing financial crisis. if i may start on the prevention side, it is hard – given the present circumstances – not to get in to a discussion of what role monetary policy can play in preventing the build up of economic imbalances. crisis prevention – the role of monetary policy … in recent years, perhaps the most influential view of how monetary policy should respond to a rapid increase in the price of an asset, and a possible associated credit expansion, can be described as follows. let us, for simplicity, say that we are talking about an increase in house prices that has gone hand in hand with a substantial increase in household indebtedness. monetary policy should only respond to a rapid increase in house prices and borrowing if the central bank ’ s forecasts indicate that it will lead to problems such as overheating and excessively high inflation. if this is not the case, the central bank should wait and see, but be prepared to quickly ease monetary policy if the housing market were to collapse and demand in the economy were to fall drastically. the main argument for such an “ asymmetric ” response would be that central banks are not especially good judges of whether there actually is an asset bubble or not. the fact that bubbles are difficult to identify is of course true. nevertheless, house prices and borrowing can in some cases rise so quickly and by so much that it is difficult for policymakers to remain entirely passive – even if it is not possible to ascertain that there is a bubble building up. if a severe downward adjustment in house prices were to occur later on, it is probable that monetary policy would receive much of the blame for having been too passive earlier. essentially, it all comes down to a choice between two alternatives. on the one hand, central banks can try to slow down a worryingly rapid price rise in the housing market by keeping interest rates higher than they otherwise would have been. the obvious risk is that if increasing prices actually are driven by fundamentals, then an incorrect assessment has been made and demand in the economy will be subdued unnecessarily. but if the assessment was correct, a rapid downward correction in house prices may be avoided, or at least mitigated, as well as a subsequent fall in demand. on the other hand, central banks can disregard the fears and refrain from raising the interest rate. if price increases in this case are due to fundamental