’ speeches figure 4 : real residential property prices in sweden and other countries index 1995 q1 = 100. source : reuters ecowin and statistics sweden. ( the riksbank ’ s financial stability report 2010 : 2 ) if the current growth rates of house prices and household debt are considered to be a potential threat to future financial stability, it may be necessary to act soon, because it will take time for any measures to take effect. so the riksbank is investigating instruments ( existing or potential ) to prevent or mitigate this threat by smoothing the house price cycle, controlling household indebtedness or improving the resilience of banks. there are a range of prohibitive instruments that could be used to restrict the choices of households and financial institutions. these could include, for example, the introduction of a binding maximum loan - to - value ratio on household borrowing 5 or a maximum debt - to - income ratio, or requiring mortgage interest payments to be fixed for a certain time period. there is also a range of taxation instruments that could act on the price of the activities of households and financial institutions. this includes changes to financial institutions ’ capital requirements or changes to the reserve requirements ( sek or foreign currency that financial institutions are required to hold at the central bank ). the choice between prohibition and taxation is not new to public choice economics. and vulnerabilities are building up internationally the build - up of problems is even more apparent when looking internationally ; in particular at the recent difficulty eurozone countries with weak public finances have had in issuing government bonds. 6 investors are increasingly making similar assessments with regard to the current maximum loan - to - value ratio constrains the amount a household can borrow in a mortgage contract but places no limit on other forms of lending to that household. a binding maximum loan - to - value ratio on household borrowing could place a firmer limit on households ’ total borrowing. one of the reasons that the swedish economy is currently experiencing relatively strong economic growth is that sweden ’ s public finances were comparatively strong going into the crisis. therefore, sweden has bis central bankers ’ speeches sovereign risk as the riksbank is making for swedish household debt. for example, debt - togdp ratios give a similar picture for countries ’ ability to repay debt as the debt - to - income ratio shows for households. there are fairly well developed and commonly used techniques to estimate probabilities of default ( pd ) and loss given default ( lgd ) on banks ’ loan portfolios

( ) is influenced by regulation ( ), which is itself determined by nontime varying regulations ( ), the credit gap ( measured as actual credit volume in relation to a level deemed sustainable over the long - term ( ) ), and the output gap ( measured as the actual level of output in relation to a level deemed sustainable over the long - run, ( ) ) : together, the taylor rule for monetary policy and the rule for regulation form, through the bank lending interest rate equation, a system that describes the relationship between monetary policy and macroprudential policy. i should emphasise that this is merely an michael woodford, “ inflation targeting and financial stability ”, czech national bank seminar, september 2010. stefan ingves, “ monetary policy and financial stability – some future challenges ”, swedish economics association, may 2010. bis central bankers ’ speeches illustration of a quite loose concept, rather than a description of a concrete proposal or model. but it helpfully illustrates the type of work that must be carried out before any theory or model can be applied in practice. the riksbank has used a simple version of this rule to illustrate the effect that countercyclical capital buffers could have had in sweden between q1 1997 and q2 2009 ( see figure 5 ). under this rule, capital adequacy for the four main banks in sweden is a function of the banks ’ long - run capital adequacy ratio, the credit gap and the output gap. figure 5 : countercyclical capital buffer using capital adequacy rule source : riksbank again, this exercise is purely illustrative, but the results are encouraging, as the rule would have raised the banks ’ capital in the run - up to the recent crisis and lowered it after the crisis hit. and the results broadly match those from a similar exercise conducted by claudio borio, in which a measure of the credit - to - gdp was used to guide the size of countercyclical capital buffers in sweden since 1980 ( figure 6 ). 13 claudio borio, “ credit in monetary and ( macro - ) prudential policy ”, sveriges riksbank workshop on housing markets, monetary policy and financial stability, november 2010. bis central bankers ’ speeches figure 6 : countercyclical buffers in sweden using credit - to - gdp gap - rule vertical shaded areas indicate the starting years of system - wide banking crises. the countercyclical buffer is 0 when