german d - mark was postponed indefinitely. i had reason to return to these calculations later on during the 1980s and i could observe that they were pretty accurate on most points, except with regard to price and wage developments. i had assumed that inflation and wage increases would adjust downwards to the international level. for devaluation to be successful, price and wage developments must be kept down after the devaluation. however, this was not the case. sweden had an inflation rate much higher than that in germany every year of the 1980s. economic policy was not sufficiently strict during the 1980s to keep down price and wage increases after the devaluations in 1981 and 1982. although public sector finances improved substantially, this was primarily due to automatic improvements resulting from a number of years of good growth. while monetary policy was strict in the sense that both nominal and real interest rates were kept at a high level to protect the krona, at the same time credit regulations were abolished in 1985, which led to a huge credit boom that increased demand and pushed up property prices. the excessive price and wage increases led to sweden's cost level once again deteriorating substantially in relation to other countries. at the end of the 1980s, relative costs per produced unit had increased to the level prevailing prior to the devaluations at the beginning of the 1980s and we once again had problems with the twin deficits in the current account and public finances. the problems were aggravated by an international economic downswing at the beginning of the 1990s and by the fact that household saving increased considerably after the tax reform implemented at the beginning of the 1990s. the property bubble that had arisen in the wake of the deregulation of the credit market burst, which resulted in the whole of the swedish banking system being on the verge of bankruptcy in 1992. large currency flows in autumn 1992 made fiscal policy spending cuts necessary and led to a powerful defence of the swedish krona by the riksbank with interest rates creeping up in stages. in the end, it was necessary to give up. the krona was allowed to float, leaving the peg against the ecu in november 1992, and it depreciated by 20 - 25 per cent. the conclusions i have drawn from developments during the 1970s and 1980s are that the economic policy conducted together with the functioning of the economy during this period could not lay a foundation for macroeconomic stability and good economic growth. price and wage formation that got out of hand in the 1970s, a series of deval

share of their portfolio in a given market segment above historical levels, they must ensure that their risk - management processes and controls are commensurate with the level and complexity of their exposures. all banks – large and small – need to consider whether they need greater capital cushions. the largest banks should consider whether their changing business model means that they need to hold more capital against some of the newer risks i discussed earlier. it is especially concerning that so many of these newer risks have arisen at the same time. smaller banks must make sure their capital is sufficient to protect against the risk associated with the greater concentrations that have seemed to accompany the increased competition from securities markets. banks might find the current circumstances to be especially favorable for raising new capital. not only would more capital provide a cushion against the sorts of unexpected declines in creditworthiness and asset values that have marked recent months, it would also position banks well for expansion. the safer, more resilient financial system that will emerge from this episode is likely to be characterized by a greater reliance on bank financing, as borrowers and lenders take on board the weaknesses that have become evident in securities markets. it also is likely to offer more generous compensation for risk - bearing. for banks with plenty of capital, that adjustment process is likely to present a chance to pick up business that, appropriately managed, will prove quite profitable over time. i acknowledge that this is a formidable " to do " list for banks. but it has been a formidable episode of financial turbulence that has revealed major weaknesses in our financial system, including the business practices of many banks. and this episode has also left the regulators with many issues to consider. the federal reserve and other regulators need to respond at the federal reserve and at other bank regulatory agencies, our job is to reinforce the incentives and actions that are building a more resilient financial system. we need to make sure that regulatory minimum capital requirements and liquidity management plans protect reasonably well against shocks becoming systemic. our supervisory guidance needs to be in place to prevent backsliding when, over the coming years, the memories and lessons of the current market turmoil fade, as they certainly will. to these ends, we are reexamining a host of things ranging from basel ii to liquidity to transparency. working with our domestic and international colleagues, we are looking to raise the basel ii capital requirements on specific exposures that have been troublesome, such as super senior cdos of asset - backed securities and off -