in the event that the state did acquire shares, the agreement stipulated that the preference shares would be converted to common stock with extra voting rights if they were not redeemed within three years. the internationalisation of the financial system – a challenge cross - border banks generate a particularly negative external effect. if a cross - border bank experiences problems in one country, the costs incurred are distributed between the countries in which the bank operates. from the authorities ’ point of view, the problem is that it is difficult today to prevent a systemic risk that arises and develops in another country. the principle that is applied in the eu today, the so - called home country principle, states that it is the authority in the country where the company concerned has its registered office that is responsible for supervision. this means that if a bank has a branch in another country the authority in the bank ’ s home country is responsible for supervision, but if a bank has a subsidiary bank in another country then the authority in the country concerned is responsible. the crisis has demonstrated that the home country principle in its current form is inadequate for preventing cross - border risks. an example inspired by the situation in the baltic countries may clarify the problem that cross - border banks pose to national authorities. assume that we have a swedish bank that borrows in foreign currency on the international market. the bank then forwards this money to a subsidiary bank in another country. the subsidiary in turn lends the money to an end customer. if we now assume that the borrower is unable to repay the loan, for example because he has borrowed in a currency other than the one he has his income in, then the subsidiary bank may find it difficult to repay its loan from the parent bank. the parent bank may then in turn find it difficult to repay its loan. this means that the liquidity risk in foreign currency ends up in sweden although the lending that created the risk took place outside sweden ’ s borders. the best solution for limiting the liquidity risk is that the central bank or the supervisory authority in the country where the risk develops takes action. however, if the authority in this country does not deal with the situation we must ask ourselves whether the situation poses a serious risk to the swedish banks and, if so, whether we should act, for example by introducing a reserve requirement in foreign currency for the swedish bank. action on the part of the riksbank is a second best solution, but this alternative is probably still better than doing nothing at all. we will

information on aggregate changes and mean values with regard to household indebtedness, for a review of how different studies evaluated the housing market in the united states prior to the crash, see gerardi, k. s., c. l. foote and p. s. willen, ( 2010 ), “ reasonable people did disagree : optimism and pessimism about the u. s. housing market before the crash ”, public policy discussion papers no 10 – 5, federal reserve bank of boston. bis central bankers ’ speeches how much of their income goes on paying interest, etc., this type of data can disguise a substantial underlying variation. if we view it uncritically, there is a risk we will be lulled into a false sense of security. it may be enough for some households to be so much in debt that a fairly modest increase in the mortgage rate forces them to sell their homes. if a sufficiently large number are in this situation, it may start up a spiral of falling prices forcing further sales and leading to further price falls. but as i said, we do not know how many households are in this situation. we also need to gain a better idea of the extent to which households amortise their loans. we hope to achieve this now. together with finansinspektionen, we are currently working on producing better and more detailed statistics on the mortgage market with the aim of gaining a better insight into potential causes of future problems. because although – as i mentioned earlier – we will never obtain a clear, objective indicator that tells us when it is time to take action, there is every reason to reduce the uncertainty in our assessments of the situation. the second priority concerns a serious discussion of the level of risk weights for mortgages in sweden. 3 our risk weights are actually among the lowest in europe ( figure 3 ). the risk weight of a loan determines how much capital a bank needs to hold per krona lent. lower risk weights thus mean that the banks need to hold less capital. but the less capital a bank holds, the less resilience it has to loan losses. the low risk weights also contribute to some extent to the credit boom in the mortgage sector, as lending to buy housing thus becomes cheaper for the bank in relation to other lending. why do we have such low risk weights? the reason is that the current risk weights are based on actual data on historical losses on mortgages. and these were not particularly high even