its own capital. banknotes and coins in circulation normally comprise the largest individual item on the liabilities side. own capital is the next largest. in addition, the liabilities side in principle consists of deposits from banks and the item “ miscellaneous ”. these items are usually small and less important than banknotes and coins and own capital. the riksbank ’ s assets normally consist mainly of gold and the foreign currency reserve. the gold reserve is a remnant of the days when banknotes and coins could be redeemed for gold at the riksbank. this link no longer exists and gold is now regarded purely as a financial asset. the foreign currency reserve should primarily be used to allow the riksbank to carry out its tasks with regard to monetary policy and financial stability. it consists of securities in foreign currency that are easy to sell and have a low risk. during the financial crisis the riksbank has increased its lending to the banks to a great extent. as a result, the size of the riksbank ’ s balance sheet has increased dramatically. lending to the banks prior to the crisis was negligible, but during the crisis it has grown into the most prominent item on the assets side. the increased lending in turn results wholly in increased deposits in the riksbank by the bank system as a whole, to which i will return later. this has meant that deposits from the banks have become the dominant item on the liabilities side. the riksbank ’ s balance sheet increased in autumn 2008 within the space of three months from around sek 200 billion to around sek 700 billion ( figure 2 ). figure 2 the riksbank ’ s balance sheet total sek billion jan - 07 jul - 07 jan - 08 jul - 08 jan - 09 jul - 09 source : the riksbank. central banks in other countries have also expanded their balance sheets. owing to the nature of the crisis and the structure of the financial systems in different countries, the central banks have implemented different measures and to a different extent. however, common to them all is the fact that their balance sheet totals increased dramatically immediately after the us investment bank, lehman brothers, filed for bankruptcy in september 2008 ( figure 3 ). figure 3 central banks ’ balance sheet totals percentage of gdp the riksbank ecb federal reserve jan - 07 jul - 07 jan - 08 jul - 08 jan - 09 jul - 09 sources : respective central banks. how has the work on our two main tasks affected the

s significance for the transmission mechanism. as i have just discussed, one of the consequences of a crisis is that the regulations of banks and other institutions will become more stringent. the intention of this is to reduce the socioeconomic costs that can result from banking. however, there is also reason to consider how the regulations introduced could affect the impact of monetary policy. these regulations usually entail an increased cost for the banks which, to a certain extent, is passed along to customers in the form of an increased interest rate margin. this could be seen as a sort of “ regulation premium ”. this premium can also be seen as the price to be paid by households and companies for more stable real economic development as represented by the broken curve in figure 5. this concept can be illustrated with the equation for the lending rate by adding a variable ( z ) designating regulations affecting the interest rate margin : itlending it t ( z ). i would like to emphasise that this equation is, of course, a simplification. however, as my focus today is on the correlation of interest rates and regulations, this description will be facilitated by viewing regulations as a kind of “ shadow interest rate ”, even if they can also be analysed in terms of the supply of credit. if regulations become more stringent, the interest rate margin and thus the lending rate both increase. new regulations will not be introduced until we have emerged completely from the crisis, and they will be introduced successively. the end result will probably be a higher interest rate margin than was the case prior to the introduction of the regulations. in principle, this can be seen as a “ one - off shift ” upwards in the interest rate margin. adjustment to this higher level may be more or less protracted, depending on the rate at which the regulations are implemented and the degree towards which they are expected by the market. during this period of adjustment, the transmission mechanism will be affected. one criticism of the regulatory framework and supervision of the financial area was that, prior to the crisis, these focused excessively upon individual institutions. the assumption was that the system would remain stable as long as the individual institutions were stable. consequently, processes creating risks on the system level were ignored – processes such as a general underpricing of risk, the increased element of short - term market funding and the increasingly intimate connections between various market participants. one of the components in macroprudential policy, the package of more explicit systemic crisis preventative regulations