, but we now have a completely different direction. we closely follow - and sometimes even try to influence - how risks are managed in the financial sector. risk management should be governed primarily by the needs of the customers, markets and intermediaries. it is only necessary for authorities to intervene with regulation and other means of control where there is a risk of market failure, i. e. when the interests of the institutions and the markets do not coincide with the interests of society as a whole - the lenders ’ short - term market - share philosophy at the end of the 1980s is an example of this. if means of control are needed, they should be designed as far as possible to lead to solutions that are compatible with the normal working of the institutions and markets. some problems we can all see that interest in risk management has increased and that considerable resources are being invested here. the interest applies to both the production of new financial instruments, the emergence of new markets and the practical measuring and management of various risks. in addition, awareness is being stretched to cover new types of risk that did not previously receive the attention they deserved, such as operational risks, interest risks throughout the bank, liquidity risks and legal risks. this is essentially a positive development, but let me nevertheless conclude by pointing out some phenomena and situations, which indicate that the new developments have also brought about problems that need to be discussed and hopefully solved. the best known example is perhaps the ltcm debacle. the hedge fund suffered a sudden decline in value, which led to a confidence crisis among customers and it had to be shored up with liquidity infusions of many billions of dollars from a group of banks. the federal reserve even assessed the situation to be a possible threat to the overall stability of large financial markets. how could this happen with two nobel prize - winners responsible for the strategy and risk models, which should guarantee that they were designed according to the latest research? the weakness lay in the fact that these models, like all others, were based on a given probability of history repeating itself. however, in autumn 1998, reality in the form of various simultaneous political and financial events took a different turn than was usual. it should also be added, for accuracy, that ltcm also suffered because its risk strategy was not very transparent. investors were unable to assess to what extent the fall in value was temporary or permanent and therefore preferred to recall their investment. the main conclusion is nevertheless evident. don ’ t rely too

heavily on historically - based models. a further potential problem is that risk models are standardised. the demands from the supervisory authorities that the models should meet a number of minimum criteria could lead to the management and assessment of the risks becoming more and more similar. there is a fear of a destabilising lemming effect, with all financial agents running in the same direction when new data is received. in addition, there are fears that the standardisation leads to certain categories of borrower experiencing more difficulty in obtaining loans in future. the possibility of going to a different bank to get a loan could be reduced if all banks apply largely the same credit assessment system. i believe that these worries are exaggerated, on the basis of studies made by the riksbank and others that have indicated that different banks tend to assess individual customers differently, even when they use similar risk models. this could be because they have unique knowledge of the customers, or because their present loan portfolio favours accepting a particular customer. although i am not excessively worried on this account, it is important to ensure that international and swedish regulations do not lead to unnecessary standardisation. operational risks have come to the fore in recent years, partly through a number of events, september 11, of course, as well as others such as large - scale power failures, it and telecommunications breakdowns and the basel committee ’ s capital adequacy requirements. the development of methods to manage operational risks has not come very far. attempts are currently being made to rectify this. an increasing number of bank managers - both in sweden and abroad - are showing a positive attitude to the focus on operational risk management, as they see these risks as potentially large ones. from the riksbank ’ s stability perspective, i can only agree - events affecting practical operations in the financial system could threaten stability. i therefore consider it important that the banks continue to build up their risk analysis and their protection against risks in this field. it is possible to view the development in itself as a risk in that it has created new, potent instruments and possibilities for speculation. if used incorrectly or carelessly, these instruments could destabilise the financial system or in other ways lead to inconvenience. it is therefore important that both the financial agents themselves and the authorities responsible in this field closely follow developments in both theoretical and practical work and are prepared to take action if they identify risks to stability. of course, it is another matter in this context - as in others