customers'deposits the government is prepared to guarantee. the legislation must also cover more than just the banks – other institutions that receive deposits from the general public must also be under supervision. as i said, deregulation was necessary – it was rather the incapacity of the banks and the supervisory authorities to manage a competitive situation that contributed to the crisis. however, the economic policy conducted also contributed. monetary and fiscal policy were not used to slow down developments at the end of the 1980s, which laid the foundations not only for increased borrowing, but also for the currency crisis. the combination of a fixed exchange rate and large budget deficit was devastating. incentives for increased saving were not actually introduced until the crisis was actually upon us and then they only helped reinforce the decline. it may seem something of a paradox that international organisations, such as the basel committee, are now implementing a number of new regulations – such as basel ii – despite the fact that the old regulations had negative effects and were therefore abolished. however, these are a completely different type of regulation. the old regulations were aimed at prohibition and other strict controls, while modern regulations give the banks plenty of flexibility to offer their services as long as they meet certain fundamental conditions. for instance, basel ii allows the banks to determine their own risktaking to a great extent, as long as they have adequate risk management and capital reserves. the experiences of regulation and the crisis also show clearly how important it is that the central bank can make independent decisions regarding the interest rate according to objectives set by parliament, for instance, to maintain inflation or the exchange rate at a stable level. if there are no guidelines for the interest rate, or if the parties that determine the interest rate have differing interests, it will often be set too low for the purpose of benefiting borrowers, investment and central government consumption. this was the case in sweden during the years of regulation. apart from leading to higher inflation and pressure on the exchange rate, exaggeratedly low interest rates also have a negative effect on the financial sector. if the real interest rate is low, even bad investments appear to be profitable and the banks'credit assessment process will not function properly. a large number of borrowers will then experience unsatisfactory profitability, particularly if the interest rate then increases slightly, and will be unable to pay their loans. the bad experiences from the time before and during the crisis led to the riksbank later being given a very independent role to determine the key interest rate within

ones. credit regulation was one of these. around half of the swedish banks'lending must be directed to the government and provided at a low interest rate and with a long duration. this was to enable the government to finance ambitious housing construction programmes and budget deficits that arose as a result of investment and social welfare measures. the banks themselves could decide who received the other half of their lending. however, the rate at which the lending could increase was determined by the riksbank through “ credit ceilings ”. the idea was to keep credit expansion in line with economic developments and thus prevent inflation from accelerating. moreover, the banks were encouraged to give priority to corporate lending so that the investment rate would not be threatened. most of the loans to the private sector were made to large, international swedish corporations. however, it was not only the banks ’ credit volumes that were regulated ; the price of the credit was also regulated. the riksbank determined both the deposit and lending rates. the charges for various bank services were also regulated. this was intended to prevent unhealthy competition and protect account - holders and borrowers. the banks had to obtain permission to open branches in other towns in sweden. this was to avoid too many banks establishing in one area so that competition became too stiff and profitability poor. in addition to the domestic regulations, there were also a number of regulations regarding crossborder capital flows. these were more or less entirely regulated. companies and individuals were only permitted to invest if they could prove the financial necessity of the investment. foreigners were allowed to invest in sweden without a permit, but these investments might not be financed in the swedish market. portfolio investment abroad was regarded as more transient than direct investment and it was therefore more difficult for a swedish company to obtain permission for this in another country. companies that earned money abroad were obliged to bring it home to sweden as soon as possible and convert it to swedish krona. swedish banks required permits to establish subsidiaries abroad and were on the whole not allowed to open branches abroad. this was because it was easier to control capital movements between parent and subsidiary than between branches, as the latter were not different legal entities. prior to 1986, foreign banks were not allowed to establish in sweden. after this, subsidiaries were permitted and later on also branches. swedes were in general not permitted to purchase shares in companies outside of sweden. those who were already in possession of foreign shares were allowed to exchange them for others or to sell their right to own shares