changes, as future economic developments are uncertain. the stand we take regarding the development of the repo rate at our monetary policy meetings is based on the information available at the time the decision is made. our considerations can and should change if the economy develops in a manner different to that we had expected. this is further described in the box entitled, ” changes in the riksbank ’ s forecasting methods ”, inflation report 2005 : 1, in irma rosenberg ’ s speech ” the riksbank and monetary policy ” at danske bank, 29 september 2005 and in lars heikensten ’ s speech, ” thoughts on how to develop the riksbank ’ s monetary policy work ”, at the swedish economics association on 22 february 2005. managing risks in monetary policy decisions as monetary policy must be based on uncertain forecasts of the future, there is a need to manage the risk that the economy will develop in a way different to what was expected by the central bank. the former federal reserve governor alan greenspan called this the risk management approach to policy. given this way of thinking, our inflation reports contain a special section where we discuss alternative scenarios for inflation and the real economy and the probability that these will materialise. it is the forecast of inflation and the real economy taking into account the risks of alternative scenarios that forms the basis of our monetary policy decisions. of course, it is not appropriate for a risk analysis to take into account all imaginable risks ; not even all those that would have dramatic consequences if they were to materialise. for instance, it is not reasonable, in my opinion, to allow monetary policy decisions to be governed by the risk of global imbalances, as we are unable to affect this development through our own monetary policy. 3 on the other hand, i consider that it is important to always take into account risks that arise from the monetary policy conducted, even if it is sometimes difficult to quantify these risks and calculate their consequences. one problem faced by many central banks with inflation targets, and which relates to this, is the risk of unfavourable developments in property prices and household indebtedness as a result of a long period of expansionary monetary policy. sweden is no exception here. both cyclical and structural factors justify the growth rate in household debts and property prices being high over a period of time in sweden and there is thus reason to take this into account in the normal analysis and forecasting work. rising house prices lead to

in the event that the state did acquire shares, the agreement stipulated that the preference shares would be converted to common stock with extra voting rights if they were not redeemed within three years. the internationalisation of the financial system – a challenge cross - border banks generate a particularly negative external effect. if a cross - border bank experiences problems in one country, the costs incurred are distributed between the countries in which the bank operates. from the authorities ’ point of view, the problem is that it is difficult today to prevent a systemic risk that arises and develops in another country. the principle that is applied in the eu today, the so - called home country principle, states that it is the authority in the country where the company concerned has its registered office that is responsible for supervision. this means that if a bank has a branch in another country the authority in the bank ’ s home country is responsible for supervision, but if a bank has a subsidiary bank in another country then the authority in the country concerned is responsible. the crisis has demonstrated that the home country principle in its current form is inadequate for preventing cross - border risks. an example inspired by the situation in the baltic countries may clarify the problem that cross - border banks pose to national authorities. assume that we have a swedish bank that borrows in foreign currency on the international market. the bank then forwards this money to a subsidiary bank in another country. the subsidiary in turn lends the money to an end customer. if we now assume that the borrower is unable to repay the loan, for example because he has borrowed in a currency other than the one he has his income in, then the subsidiary bank may find it difficult to repay its loan from the parent bank. the parent bank may then in turn find it difficult to repay its loan. this means that the liquidity risk in foreign currency ends up in sweden although the lending that created the risk took place outside sweden ’ s borders. the best solution for limiting the liquidity risk is that the central bank or the supervisory authority in the country where the risk develops takes action. however, if the authority in this country does not deal with the situation we must ask ourselves whether the situation poses a serious risk to the swedish banks and, if so, whether we should act, for example by introducing a reserve requirement in foreign currency for the swedish bank. action on the part of the riksbank is a second best solution, but this alternative is probably still better than doing nothing at all. we will