the united states, for example. in sweden savings are also high to start with, unlike the united states where they have fallen to historically low levels. there is always a risk that house prices, and also other asset prices such as shares, which have been pushed up by exaggerated optimism or speculation, could plummet. it would appear that swedish price movements can be explained by fundamentals, and that the speculative element has happily been conspicuous by its absence. as property often functions as collateral for loans, a large fall in prices would affect the banks. in addition, developments in the property market affect demand in the economy. rising house prices mean that households can take on new loans to increase their consumption. correspondingly, falling house prices can contribute to subduing demand in the economy. an imf study of twenty property crises in different countries shows that they entailed a fall in prices of 30 per cent. the countries ’ gdp was on average four per cent lower three years after a property crisis had started than it would have been without the fall in prices. 1 the scars in the real economy may well be considerable and given this it is interesting to discuss how a central bank should react to changes in asset prices. in the international debate on asset prices and monetary policy there are several different points of view. a common view is that monetary policy should only react to changes in asset prices to the extent that these affect the central bank ’ s inflation and growth forecasts. one should thus not have a separate strategy for dealing with changes in property prices. others think that a central bank can improve the outcome for inflation and production by reacting to changes in asset prices over and above their consequences for the inflation forecast. two main arguments have been put forward. firstly, monetary policy can alleviate the effect of the price change on the real economy. secondly, the actual knowledge that the central bank will react should reduce the probability of exaggerated price movements occurring. the difficulty lies in determining whether or not prices are increasing at an exaggerated rate. it is not necessarily so that a central bank is better qualified to make such an assessment than the market participants. in addition, there is uncertainty over how monetary policy affects asset prices. the riksbank conducts what is known as flexible inflation targeting. the objective is that the annual change in the consumer price index ( cpi ) shall be 2 per cent, but we also attach some importance to attaining a balance in production and employment. asset price movements are normally included within the scope of flexible inflation targeting

of these challenges perhaps a little earlier than many other european countries. and because we share similar experiences – still fresh in our memories – of major banking crises in the nordic countries, we have perhaps a head start when it comes to recognizing and trying to deal with these challenges on a nordic level, even if much worksstill remains. here, i might add that integration on a pan - nordic level has also come a long way in the area of securities exchanges and clearing and settlement facilities. of course, the integration of the financial infrastructure poses similar challenges for authorities to cross - border banking and some additional complications as well. however, today i will focus on the challenges posed by cross - border banks. and i must stress that these challenges are not merely a regional problem. due to the dynamic changes in the banking landscape, they will indeed require solutions on a european level. my main message today is that increased coordination is imperative, and, in this, it is vitally important that future arrangements for supervision, crisis management and crisis resolution of cross - border banks must be dealt with jointly as a package, and not in isolation from each other. it is apparent that the solutions in any one of these areas will depend on the solutions in the other areas. in particular, it will be necessary to address the issue of burden - sharing arrangements for the eventuality that a border - crossing bank becomes insolvent. if we don ’ t, there is a great danger that crisis management fails and valuable time will be lost. it will not be easy to achieve the necessary coordination and not least to deal with some potentially complicating conflicts of interests, and much more analysis is needed. however, i will at the end of my speech try to sketch some possible routes ahead. coordination issues to make my points clear, i think a crisis scenario could be a useful starting point. consider a large cross - border bank encountering some financial troubles, and suppose the bank is systemically important in at least one of the countries in which it operates. the number one concern for authorities would be to limit the social costs of a potential banking failure and to stop contagion to other parts of the financial system. for this, efficient crisis management is key. the successfulness of the crisis management, in turn, critically depends on a number of factors, such as coordination of information and decision - making, which in turn depend on how well conflicts of interests can be managed. information first of all, you need access to relevant