for improvement. the analysis of borrowers abroad will be enhanced. the riksbank needs to acquire a better understanding of how the banks manage their liquidity, select sources of funding and the effects of this on their durability. the analysis of stability also needs to be supplemented with methods for stress tests, that is, ways of analysing the sensitivity of bank durability. to obtain further inspiration for the work of improving the analysis, the riksbank has commissioned an external evaluation of the work on financial stability. this evaluation is in the hands of a trio representing the international research frontier, the central bank world and the swedish bank sector. they will be bringing their individual perspectives to bear in a joint effort to evaluate the quality and focus of the work we have built up. we intend to publish their report and then issue invitations to a broad discussion on our work ’ s future direction. in conclusion i would like to say something - without prejudicing the trio ’ s findings - about the issues that i believe will have growing importance in the future. a natural starting - point for such a discussion is to identify forces that will be driving future financial developments. three of the main forces are : – growing cross - border integration in europe, – more advanced risk management by the banks, and – more and more of a focus on aspects of efficiency. consequences of european integration it is perhaps the increased international dependence that affects us most clearly. while the banking systems in europe are still largely national, integrated systems have started to appear in certain regions. this trend seems to have come furthest in the nordic - baltic region but there are grounds for expecting greater integration elsewhere, too. as a result, national banking systems will become increasingly interdependent. this has a number of dimensions for the riksbank ’ s work on stability. one component of our work consists in promoting integration by influencing the construction of rule systems. we do so out of a conviction that integration as such favours economic growth. the current rule systems were not designed for an integrated european bank market that transcends national borders. moreover, the common legislation takes integration into account to only a limited extent. in order to achieve an inner market for financial services, the eu is striving to produce as uniform a set of rules as possible for financial companies throughout the union. banks can then compete on equal terms and give rise to a common market with the most competitive enterprises. the riksbank supports this admirable

ambition. but it is also important to avoid conceivable pitfalls that may hamper this development. one danger is that the rule system becomes excessively detailed, that harmonisation starts from the strictest existing system instead of proceeding from an entirely open discussion. integration also affects the regular supervision and oversight. the current principle is home - country supervision. in other words, a bank ’ s legal country of domicile is responsible for the supervision of the bank ’ s branch offices ; a banking subsidiary, on the other hand, is supervised by the country in which the subsidiary is legally domiciled. but it is still the legal country of domicile of the parent bank that is responsible for supervision of the bank group as a whole. this solution ought to work as long as the foreign operations of the banks are fairly modest. but what will happen when the banks ’ foreign branches become systemically important? how much responsibility are the home countries willing to take for financial stability in the countries where foreign branches are located? and are the authorities in the latter countries prepared to relinquish the responsibility for an essential part of their financial system to the home country of the parent bank? these are not just abstract issues, as can be seen from the fact that nordea, domiciled in sweden, is now the largest bank in finland and that swedish banks own the major part of the banking systems in the baltic states. thus, it seems that the supervision of international bank groups could lead to problems of coordination and duplication. on the whole, there appears to be no lack of incentives to supervise cross - border banking operations. the problem is rather that in certain cases the rule system prevents the most active countries for exercising supervision, so that this is liable to fall between two stools. on the other hand, an excessively generous right to supervise can lead to the burden of supervision being unduly heavy for individual banks. that could hamper integration as well as efficiency. formalising crisis management is more difficult than other parts of the work on stability. discussing crisis management can be perceived as sensitive and troublesome because to some extent it concerns the state ’ s willingness to assist the financial sector with liquidity. the dividing line between whether or not this should be discussed openly often runs between countries that have experienced a financial crisis and those that have not. those which have lived through a crisis are generally in favour of a transparent process. a clear - cut arrangement for the management of crises can be