– at least in the local currency. therefore, the interplay of liquidity regulation and the central banks ’ collateral requirements also warrants considerable reflection. finally, liquidity regulation will make maturity transformation more costly. we clearly need more regulation today but, in casting additional regulation, we have to consider the costs. too strict regulation would stifle competition, make financial services more expensive and, in the long run, hamper economic growth. on the other hand, too loose regulation would inspire speculation with taxpayers ’ money and also reduce economic growth. thus, the extent of financial regulation is – at least partly – a question of society ’ s risk tolerance. liquidity buffers will create a cushion. however, the root of a liquidity crunch is a lack of confidence. a major aim of regulatory reform should thus be to ensure that trust does not dissipate so rapidly and completely again. in order to do this, we need to increase capital requirements, both in terms of the quality of capital and the amount of capital. after all, capital provides protection against bad outcomes. increasing the quality and amount of capital will increase the resilience of individual banks. in addition, strengthening the ability of banks to absorb losses mitigates the risk of contagion – therefore more and better capital will also strengthen the resilience of the system. in my view, the important part of capital is loss - absorbing common equity. in addition, other forms of capital are needed to protect the state. if a bank defaults, capital typically evaporates very quickly. i have seen many examples of banks that have defaulted because they did not meet the capital adequacy rules. in my experience, when bank managers say that they have a problem, they often claim to have – say – 6 per cent regulatory capital, rather than the required 8 per cent. when the authorities eventually and realistically assess the assets, capital is often negative and the state has to bail out the bank. thus, capital should be of good quality to protect the bank on a going concern basis, but also to protect the state in the event of a default. as some banks may be too big to fail, as regulators we should also discuss the possibilities of creating debt instruments which automatically convert to equity when losses mount above certain trigger points. building trust to enhance cross - border crisis management a financial crisis is costly to resolve. the potential costs are so large that only the nation state, through its power to tax, can

one reason for not having a shorter target horizon is the time lag that applies before an interest rate adjustment normally affects the economy and inflation. but effects do arise in the shorter run, for instance via the exchange rate. we pay less heed to developments more than two years ahead partly because forecasting the longer term is normally difficult. still, although monetary policy is guided mainly by prospects one to two years ahead, there are normally grounds for paying some attention to forecasts both for the coming year and for the period beyond the two - year horizon. neither is it reasonable in practice to focus solely on inflation. for one thing, the riksbank is also accountable for the proper functioning of the payment system in general, for financial stability. for another, without prejudicing these two objectives, the antecedents to the riksbank act require us to promote other economic policy goals, such as good economic growth and increased employment. this amounts in practice to trying to make decisions that avoid major shocks and fluctuations in growth and employment. highly respectable reasons can thus be found for deviating from the rule of action. if we decide to do so, however, we must have good arguments and present them particularly clearly. general talk of financial imbalances, for example, will not do. as i see it, we must be clear about which balances we are referring to and why we consider they threaten the economic future. another point to bear in mind is that the rule of action with a two - year horizon should normally give us sufficient time in which to adjust the monetary stance. before turning to my last topic, i can mention that from time to time we are exhorted to be more pragmatic and less tied down by our intellectual framework. it is quite often suggested that we should follow the example of the federal reserve in recent years under alan greenspan. i find that basically naive. policy principles that are less clear - cut, combined with less transparency about motives and so on, would by no means guarantee a more successful policy in the longer run. just the reverse, i would say, in the light of quite a few years in the vicinity of decision - making in economic policy. economic outlook in the coming years a suitable starting point for a discussion of the economic future is the october inflation report. our assessment there assumed that international economic activity will tend to slacken but still remain relatively strong. we counted on gdp growth in the oecd area being 3. 8 %