the large international investment banks ). when interest income from the underlying assets starts coming in, it is distributed according to the order of priority of the tranches, or their seniority. first, the most senior tranches receive their allocation. after that the income is distributed to the second most senior tranches, and so on. investing in a junior tranche thus entails greater risk than investing in a senior tranche, but on the other hand the earnings are higher. at the bottom is an equity - like part, which is only paid when all the others have received their share. but then they receive everything that is left. the advantage with prioritising the payments in this way is that one can sell the tranches to investors with different risk appetites. those with a high risk appetite can buy the higher risk tranches, while more cautious investors, such as insurance companies and pension funds, can buy the tranches that are assessed to have the lowest credit risk. but although there are advantages to packaging together securitised loans in a cdo, there are also disadvantages. one disadvantage is that it is expensive, time - consuming and difficult to assess the credit risk in the different tranches. the underlying assets may be of a heterogeneous nature. moreover, there are products where a cdo is repackaged and in turn included as a component in another cdo, which will of course make it more difficult to gain an overview of the risk content. the credit risk in the structured products is often assessed by the credit rating agencies, which also rate the different tranches, at least the more senior ones. the credit rating agencies thus play an important role with regard to the structured products. pricing is another problem. tailor - made products are not in general subject to regular trading and price listings are rare. one is often reduced to employing mathematical models, which are based on estimated default frequencies for various credits, given the development previously observed. quite simply, one calculates a price of what the instrument should be worth and hopefully the theoretical price will not differ too much from the price one gets if one actually sells it. the credit rating is often a decisive factor in the pricing. the structured products are thus more adapted to investors ’ needs than the purely securitised products. but this has been at the cost of poorer liquidity. special investment companies soon emerged it is essentially a good thing that new instruments make it possible to trade credit risk. insurance companies,

to a broader slowdown in the us economy. the situation remains uncertain and there is considerable sensitivity to new negative information and to other shocks. and there will probably be more bad news from the united states and europe. we were all taken by surprise this autumn has seen a number of unpleasant surprises and, as i have said, there is reason to believe that the unrest will continue. the riksbank, like most other central banks, had previously warned that there were difficulties in the credit market, particularly the low risk premiums. the situation we have seen was therefore not entirely unexpected. however, something that was underestimated was how quickly and by how much the price of risk rose, as well as how quickly problems in a distant part of the us credit market could spread throughout the world and have such a strong impact on the interbank market, which is the actual core of the international financial system. to those wishing to learn more about the market turbulence, i can warmly recommend the riksbank's financial stability report, which will be published soon. 4 the report is celebrating its 10th anniversary and also contains an article on how central banks need to adapt their analysis and find new approaches to meet the challenges of operating in a constantly changing financial landscape. this is a task that is as exciting as it is important. thank you. financial stability report 2007 : 2 will be published on 4 december 2007.