hand they should not be so stringent as to impose unnecessary costs on the financial sector. it is a matter of finding just the right level of regulation. handling the interactions between monetary policy and macro - prudential policy poses further challenges. during the recent financial crisis, we observed the difficulties of conducting monetary policy in a non - stable financial environment. interest rate signals from the central banks were sometimes dwarfed by contradictory events in the markets. conversely, financial stability is dependent on smooth and predictable monetary policy. thus, policy makers must always keep in mind that the increased use of regulatory tools will inevitably affect monetary policy in different ways. regulations will affect the interest rates that firms and households meet and this is something that the central bank needs to take into consideration when setting the policy rate – in much the same way as monetary policy has to take into account changes in interest - rate spreads due to changes in financial conditions. a key element in handling the interactions between monetary policy and macro - prudential policy will be putting an appropriate governance structure in place. how should we structure the decision - making process in order to take account of the nexus between monetary policy and financial stability? it seems clear that the central bank should have some role in setting macro - prudential policy but that precise role may differ depending on the regulatory structure preferred by different countries. for example, responsibility for macro - prudential policy could be given to a committee in which a representative from the central bank would sit ( like in the united states ) or it could be given to the central bank ( like in the uk ). and central banks can adopt different internal governance approaches : some have a separate board for monetary policy ; others also have a separate board for financial stability. most central banks have the same board for both, but may have separate deputy governors responsible for each of the two strands. what matters, as i see it, is that “ the buck stops somewhere ”. there must be a decision at some high managerial level which balances the interests of monetary policy and financial stability as well as other central bank responsibilities. the organisation and processes of the central bank must also be structured so that there are analytical tools and resources available to help policy makers take a balanced view in their decisions concerning both monetary and financial stability policy objectives. for instance, there should be interdepartmental working groups. it is also important to remember that systemic risks can quickly spread between countries and reducing the build - up or impact of such risks will require coordinated

set up and banking system which threatened to increase the severity and length of the downturn. the major swedish banks are heavily reliant on international funding and liquidity in these markets fell sharply following the collapse of lehman brothers. to protect the banking system, the riksbank provided general liquidity assistance in the form of loans in sek and usd at long maturities. this liquidity assistance was substantial : it peaked at around 15 per cent of gdp and lasted for over two years. some swedish banks were also exposed to significant risks through their operations in the baltic countries. when the financial crisis hit europe, gdp in the baltic region fell sharply as foreign investors withdrew and demand for exports fell. and even if the global financial crisis had not arrived when it did, a combination of lax fiscal policies and rapid growth in wages and lending in the baltics meant that the economies were overheating and were not on a sustainable path. in addition, global financial inter - linkages produced serious negative externalities for sweden and many other countries. this was a situation we had not encountered before. to some extent, the reliance on international funding markets and exposure to the rapidlyexpanding baltic region were vulnerabilities that could have been identified before the crisis. it is now clear that in the past financial regulation and supervision did not function satisfactorily in sweden and in many other countries. macro - prudential policy is needed prior to the crisis, financial regulation focused excessively on individual institutions under the erroneous assumption that the system would remain stable as long as the individual institutions were stable. consequently, processes that create risks on the system - wide level were ignored. one important lesson from the global crisis is that we need to include more explicit systemic - risk preventive regulations, or macro - prudential regulation, in the regulatory framework. the european systemic risk board ( esrb ) and the financial stability oversight council in the united states are leading the development of formalized macro - prudential policy arrangements. many other countries, sweden included, are thinking seriously about how to implement and conduct macro - prudential policy in their jurisdictions. macro - prudential policy needs to be operational soon, but some difficult hurdles remain to be overcome. bis central bankers ’ speeches an important challenge for the design of a new regulatory framework will lie in finding an appropriate balance : on the one hand, the regulations will need to be sufficient to effectively reduce the risk of financial crisis ; on the other