surprise. in other words, the 1936 episode might be considered as an example of a badly calibrated and badly communicated exit, rather than a wrongly timed exit. in this context, it is worth mentioning the 1994 episode, when the fed ’ s 25 - basis - point increase in its funds rate caused turmoil in the bond market. even with the benefit of hindsight, that decision can be regarded as neither tardy nor brutal. the problem was that it took markets by surprise and led to a major reassessment of the yield curve, with substantial valuation losses on long - term positions. these experiences confirm that not only is the timing of the exit crucial, but also its communication to market participants. indeed, the impact of any withdrawal of monetary stimulus on financial market participants depends on whether they have fully anticipated it. if they have, then the decision tends to have less impact on the yield curve, and thus on the valuation of banks ’ assets and on the rate that banks charge to their customers, especially on fixed rate loans. as confirmed by a growing body of literature, the main mistake relating to the 1936 – 37 decisions was that they were badly communicated to economic agents. 3 to sum up, a key element of the exit strategy is that the policy authorities must guide expectations. how can they do this? let me first of all consider how it should not be done. first, it may be better for central banks not to become embroiled in the debate on whether exiting too early or too late is better or worse, and especially not to give signals that the latter is less risky. such an approach could encourage market participants to become less riskaverse and to expect the period of low interest rates to be extended beyond what is necessary. this would induce them to take on further risks, in particular in terms of maturity mismatches – borrowing short - term to buy long - term bonds – which might be profitable in the short term but could lead to substantial capital losses when the exit takes place. ben bernanke, “ monetary policy and the housing bubble ”, speech at the annual meeting of the american economic association, atlanta, georgia, 3 january 2010. daniel leigh, “ monetary policy and the lost : decade : lessons from japan ”, imf working paper, october 2009. g. eggertsson and b. pugsley, “ the mistake of 1937 : a general equilibrium analysis ”, cfs working paper, november 2006. second, any commitment to prolonged periods

lars nyberg : are the risks growing in the banking system? speech given by mr lars nyberg, deputy governor of the sveriges riksbank, at an analyst meeting at enskilda securities, held in stockholm, on 14 june 2000. * * * i would like to thank you for inviting me to today ’ s analyst meeting and giving me the opportunity to discuss financial stability issues with such a qualified audience. i would like to start by briefly explaining the riksbank ’ s analysis of financial stability. in addition to the inflation target, the riksbank has another primary task, namely that of being responsible for financial stability. these two important functions are closely linked. a stable financial system is important for price stability since financial imbalances can threaten the inflation target. likewise, an inflation target policy contributes to stability in the financial system, as it has a levelling effect on cyclical fluctuations. the riksbank ’ s analysis of financial stability can be interesting for analysts of bank and property shares, since we closely monitor the banking sector and property market within the scope of this analysis. our perspective is somewhat different, however, since we are mainly interested in risks which can threaten the stability of the financial system and which often appear to be relatively improbable, while stock analysts attempt to assess the most likely developments in the market. however, the information about the markets is largely the same and analysts also need to consider the risks in the companies which they are covering. after this introduction, i will then go on to discuss the strong credit expansion in sweden and the measures that a central bank can take if it assesses that this development constitutes a potential threat to financial stability. i will conclude by looking at international developments, since the development in sweden is by no means unique. the riksbank and financial stability the comprehensive changes that have taken place in the financial sector and the financial crises that have occurred in various parts of the world have meant that the work on securing financial stability has become increasingly prioritised. those countries which have undergone severe banking crises in modern times are now leading the way in terms of the work on financial stability. for example, sweden was the first country in the world to regularly and openly publish special stability reports analysing the situation of the financial system. we would say that the initiative was received with mixed feelings by other central banks, some of which were concerned that these kinds of reports would cause problems rather than preventing them. however, the attitude of the