##ff have described how economic problems and bursting speculation bubbles have led to financial crises and subsequent sovereign debt crises time and again over the last 800 years. developments in the banking system, 2007 and on so far, the european banks have not regained their credibility in the same way as the us banks did in 2009 and the swedish banks did in 1992 and 1993. a great deal of uncertainty still prevails over which european banks are robust in the long - term. according to one estimate, the total decline in the value of assets on the european credit markets amounted to eur 184 billion by the summer of 2011. the same publication made the assessment that losses over the years to come could amount to over eur 200 billion, of which eur 125 billion would derive from losses linked to government securities. 6 the imf has calculated that the effects of the sovereign debt crisis may amount to eur 300 billion. 7 even so, the european banking sector was reported to have a larger balance sheet total in 2010 than in 2008. this reflects the fact that the problem assets have still not been addressed. for long periods, european banks have had problems obtaining funding on the market. this uncertainty is also reflected in the riksbank ’ s calculations of the stress index for europe. ( figure 1 ) credit suisse ( september 2011 ) : “ european banks ”. imf ( september 2011 ) : global financial stability report. bis central bankers ’ speeches figure 1 : european stress index state support to the banking sector has been significant. in addition to eur 90 billion in direct public expenditure, governments and central banks have paid out the equivalent of 13 per cent of gdp, eur 1. 6 trillion, in emergency liquidity assistance and support for the banks. the total commitments amount to triple this figure. 8 the problems in the banking sector have still not been addressed the management of the present european banking problems can be contrasted with the way we handled the swedish banking crisis twenty years ago. of course, although we are often considered to have succeeded well in sweden in 1992, this was due to a relatively beneficial political environment, rather than intellectual superiority. even so, the differences illustrate an important insight from economics – more specifically, the significance of asymmetric information. like other central banks, the ecb intervened in 2008 to support liquidity by various means, including offering loans at longer maturities. unlike in sweden, these extraordinary loan facilities continue to be available. furthermore, the ecb has supported the markets for both covered

company is unable to meet its payments, it will have to file for bankruptcy. if a bank defaults on its payments, the consequences for the financial system – and the real economy – can be enormous. this means that it is difficult to let banks go bankrupt, at least if these banks are large and times are troubled. so other disciplinary mechanisms must be found – such as tougher regulation and thorough supervision. special legislation covering banks in distress is also needed. of course, bank regulations are primarily a way of allowing the public sector to safeguard the public interest. but the regulation of banks is also a way of mitigating principal - agent problems between a bank ’ s management and borrowers on the one hand, and the bank ’ s owners and lenders on the other. for this second category, it is often difficult or expensive to monitor the risks on the bank ’ s asset side. one important aspect of bank regulation is the requirement for the amount of capital the banks should maintain. as capital adequacy requirements play a central part in the discussion of financial stability, i would like to examine them in a little more depth. there is a difference between the private and social benefits and costs of financial regulation demands for bank regulation are not infrequently met with resistance from interested parties who claim that regulation is too expensive. not least, this resistance is aimed at higher requirements for banks ’ capital adequacy, as the interested parties claim that capital is more expensive than loans. but in this context, it is important to make a distinction between private costs and social costs. higher capital adequacy requirements entail private costs for the banks. but we public sector participants should primarily be discussing the social consequences. bis central bankers ’ speeches one cornerstone of modern financial research is the basic theory that was established by modigliani and miller over 50 years ago. 1 this says that the value of a company does not depend on how that company is funded – under certain assumptions. in principle, the model shows that the form of funding is only significant if there is a difference between the debts of companies and those of private individuals. and there is, of course – a limited liability company is basically a means of protecting its owners from the private consequences of the company becoming bankrupt. being able to fund a business operation through borrowing is, of course, necessary and, in most cases, effective. in efficient markets, lenders ’ risks are handled by means of interest rates and contract clauses