cautious in assessing the risks in a banking system merely on the basis of the size of its balance sheets. for example, imagine that nordea moved its head office from stockholm to helsinki, suddenly becoming a finnish bank. this would take sweden below the european average ( figure 6, right - hand diagram ). would the level of risk in the swedish banking system then have decreased considerably? i don ’ t think so. the risks in a large banking system have many other dimensions than just balance sheet total in relation to gdp. large banking systems can be associated with low risks and small banking systems can be associated with high risks. one important dimension of the risk is determined by the ability of the countries in which the banks are active to cooperate in a crisis, and the subsequent division of burdens. this issue deserves a lecture all of its own, so i will spend no more time on it today. another dimension is that of funding, particularly how much funding is borrowed outside the countries in which the banks operate. and this is the aspect to which i would now like to return. bis central bankers ’ speeches what matters are how the banks borrow and how they use this money of course, not all borrowing in foreign currency is a cause for concern – on the contrary. in many cases, it forms a natural part of traditional banking operations. and neither is it particularly remarkable to borrow in one currency and then exchange this for another on the market. but one of our experiences from the crisis is that it does make a difference both how you borrow and how you use this money. let me start with how borrowing is conducted. put simply, it could be said that the swedish banks borrow over the short term in dollars and over the long term in euros ( see figure 7 ). the market for short - term borrowing is very large in the united states and, both before and after the crisis, the swedish banks have been able to obtain significant volumes of funding on this market at favourable conditions. this market deals in maturities of less than one year, but the overwhelming portion of trading deals with securities with maturities of three months or less. money market funds continue to be major investors. more long - term borrowing is largely conducted in euros through the issuance of covered bonds. pension funds and insurance companies are the main investors here. 2 obviously, the risks of a bank entering into an acute liquidity crisis become smaller as borrowing becomes more long - term. consequently, the new regulations in basel iii require a greater proportion

a case, customers would have to be referred to other banks. of course, at least major customers generally also have contact with us banks, which never encounter acute liquidity shortages, as they can turn directly to the federal reserve in the event of a crisis. so they have access to a lender of last resort which can create dollars. this is exactly what the swedish banks lack. now, naturally it hurts for a bank to refer good customers to a competitor, but if you don ’ t have any dollars, then you don ’ t have any dollars. it ’ s all a question of what risks the bank is willing to take. another way of minimising the risk is for the riksbank to maintain a foreign currency reserve that the banks can have access to in a crisis, as it does at present. the riksbank has several reasons for maintaining a reserve in foreign currency, but one important argument for its current size is precisely the need to be ready to lend to the banks6. the riksbank ’ s foreign exchange reserve is currently equivalent to about sek 300 billion. it is, of course, difficult to say exactly how large the foreign exchange reserve would have to be to assist the banks with liquidity in a crisis situation. the amount could be either larger or smaller, but let ’ s assume that two - thirds of the reserve, that is sek 200 billion, is available for this purpose. what does it cost to maintain a foreign currency reserve like this? and who should reasonably pay this “ insurance premium ”? let us examine the cost first. one way of looking at the matter is that sweden, as a nation, has borrowed sek 200 billion more than we otherwise would have needed, and the cost for this, quite simply, is the average interest rate on the government debt. but this would be to disregard the fact that the riksbank can actually invest the money we have borrowed via the swedish national debt office in interest - bearing assets, let alone that choices are limited as the assets must have extremely good liquidity, that is to say that cash must be available at very short notice. if we assume that the difference between the deposit rate and the lending rate is about forty basis points, the annual cost for borrowing sek 200 billion would thus be about sek 800 million. is this a lot or a little? this can be discussed, but, last year, the four major banks had a combined balance sheet total of sek 11