speech date : 31 / 05 / 2021 speaker : governor stefan ingves venue : swedish economics association sveriges riksbank se - 103 37 stockholm ( brunkebergstorg 11 ) tel + 46 8 787 00 00 fax + 46 8 21 05 31 registratorn @ riksbank. se www. riksbank. se new financial environment - how is the riksbank meeting the new challenges? 1 thank you for inviting me here to the swedish economics association to speak again this year. i always enjoy coming to speak to you as it gives me the opportunity to discuss a subject in greater depth. but this year i intend to take a somewhat broader perspective and talk about the riksbank's three main business areas : payments, monetary policy and financial stability. in the public debate, there is often a tendency to focus on one area at a time. recently, for instance, payments have been in focus as a lot is happening in the payments market. monetary policy is almost always in focus, but often without mentioning that financial stability is a necessary condition for price stability. but it is fairly natural that this is the case, if only because it is difficult to be an expert in all of these areas at the same time. during my professional life, i have had the privilege of being responsible for each of these areas at some point. i have also experienced what it is like when one of them is not functioning, and how this affects the other areas. this has helped me to better understand how the different areas are inter - dependent. if we do not have financial stability, then monetary policy will not function as it should and the payment system risks failing. if the payment system does not function, this leads to risks for both financial stability and monetary policy. if we do not have price stability, there will be consequences for both financial stability and payments. 1 i would like to thank hanna armelius and magnus jonsson for their help in writing this speech and elizabeth nilsson for help in translating it into english. i would also like to thank emma bylund and petra frid for help with data and diagrams and also meredith beechey, frida fallan, david farelius, gabriela guibourg, jesper hansson, iida hakkinen skans, jens iversen, stefan laseen, pernilla meyersson, cecilia roos - isaksson, asa olli segendorf, marianne sterner, ulf soders

offered clear advance signals of impending distress. for example, the market - based capital ratio of crisis banks began to fall in april 2007, well over a year ahead of the lehmans crisis. to formalise that visual impression, table 1 shows type i and ii errors for the three market - based capital measures. these now cannata and quagliariello ( 2005 ), gunther et al ( 2001 ), krainer and lopez ( 2004 ). berger et al ( 2000 ). calomiris and herring ( 2011 ) prefer a variant of the first measure. largely, because even marked - based measures of solvency will rely on disclosures by banks, which will themselves be model - dependent to some degree. bis central bankers ’ speeches comfortably outperform a coin toss. replacing the book value of capital with its market value lowers errors by a half, often much more. market measures provide both fewer false positives and more reliable advance warnings of future banking distress. taken together, then, market - based solvency metrics perform creditably against first principles : they appear to offer the potential for simple, timely and robust control of a complex financial web. contractual prompt corrective action but how should these market - based metrics be put to use in the design of a regulatory framework? market warnings are useless unless they are acted on, either by the market itself or by regulators. it is not too difficult to devise a reconfiguration of banks ’ capital structure that would bake - in the benefits of simplicity, robustness and timeliness. this would involve a cocktail of revised regulatory capital standards fortified by market discipline. it might work as follows. alongside equity, banks would be required to issue a set of contingent convertible instruments – so - called “ cocos ”. these instruments have attracted quite a bit of attention recently among academics, policymakers and bankers, though there remains uncertainty about their design. 12 in particular, consider cocos with the following possible design characteristics. triggers are based on market - based measures of solvency, as in charts 6 – 8. these triggers are graduated, stretching up banks ’ capital structure. 13 on triggering, these claims convert from debt into equity. although novel in some respects, cocos with these characteristics would be simple to understand. they would be easy to monitor in real time by regulators and investors. and they would alter potentially quite radically incentives, and thus market dynamics, ahead of banking stress becoming too acute. to see why