avoided. the reason is simply that such features, which do not seem to matter in most states of the world, end up being treated how many “ once - in - a - lifetime ” events happen to us every year? bis central bankers ’ speeches as if they will never matter. in other words, market participants need to make sure that an exercise of an option is seen as just that, a normal exercise of an option. no more and no less. sophisticated market participants should not be genuinely surprised ( or feign surprise ) by another market participant trying to optimise its behaviour consistent with a contract. the implications of a contract should be clear and the structures should be as transparent as possible. as the debate about adequate capital levels for banks rages on, we feel that it is important to keep these lessons in mind. whatever is decided in terms of capital requirements, the numbers should be calculated with tail event analysis in mind. a new example : contingent capital securities one present issue is that, given banks will need to hold much more capital in future, how could that best be achieved? some have called for very high levels of equity capital in banks16 ; others have been focusing on requirements to raise new equity before it is too late, e. g. mandatory rights issues17. we find contingent capital securities – so - called “ co - co ’ s ” – to be a potentially attractive proposition for a number of reasons. one has to evaluate contingent capital on how it would perform in a crisis. first, the funding for extra capital is already in place. in other words, no one has to scramble to execute a contingency plan, or convince someone to come up with new cash in a difficult situation. obviously, conversion is consistent with a bank being under stress, but if conversion was always automatic, not discretionary, that could help to avoid signalling even wider problems. second, and related to the examples in this paper, because the contingent conversion feature is explicit, no investor should be able to say that “ equity conversion ” could never have been anticipated. as new mechanisms are being explored, we believe that it is crucial that investors correctly assess and price the probability of conversion into common equity. third, sufficient level of contingent capital should enable a well - run bank to still operate with significant leverage and thus earn a healthy return. in the more extreme suggestions for the amount of contingent capital, one would very substantially change the return profile of common equity for banks, perhaps creating an entirely new

urban backstrom : the monetary policy situation in sweden opening remarks by mr urban backstrom, governor of sveriges riksbank, to the riksdag's finance committee, stockholm, 19 march 2002. * * * first i want to express my thanks for this opportunity of discussing the swedish economy and monetary policy with members of the finance committee. the riksbank is required by law to present your committee with a written account of monetary policy at least twice a year. the first of this year ’ s accounts was handed over this morning. it contains a description of the riksbank ’ s view of economic developments and the prospects for inflation. in my opening remarks i shall summarise the report and then discuss the consequences the riksbank ’ s executive board draws as regards monetary policy. then i look forward to a discussion with members of the committee and shall do my best to answer your questions. brightening outlook for the world economy the discussion at our previous meeting last autumn was coloured to a high degree by the terrorist attacks in the united states on 11 september and their effects. at that time there was considerable uncertainty about the extent to which economic activity, which was already weak, would be affected. there was a risk of the attacks making households and firms even more uncertain and eroding their confidence in the future, with negative consequences for demand. as inflationary pressure varies with the state of demand and resource utilisation, the events influenced the formulation of monetary policy in many countries, including sweden. six months later, however, we are now seeing more and more signs of an imminent improvement in activity abroad. the attacks ’ impact on the global economy were fortunately limited, though certain sectors, such as air transport and insurance, have been heavily hit by the attacks and their repercussions. production last year was constrained by excessively large stocks but it now looks as though stock adjustments have come a long way, which is a good sign for output. a certain amount of optimism is beginning to spread. order books are becoming more stable and in some cases even improving. then there is the additional impetus that comes from the expansionary economic policy in many countries. a proper global recovery that becomes increasingly strong does, however, presuppose a broad and sustained increase in demand. an increase in production that is generated solely by an end to stock reductions is liable to be relatively brief. in this respect there may be some uncertainty. there are still large imbalances in the