lars nyberg : some swedish experiences with financial stability surveillance speech by mr lars nyberg, deputy governor of sveriges riksbank, at the bank indonesia, jakarta, 10 december 2003. * * * introduction first of all i want to express my thanks to the bank of indonesia for inviting me to this conference. financial stability - or the lack of it - is a very topical subject in the light of events in the past decades. furthermore, financial stability issues seem to be strikingly similar between countries, whether they are big or small. it makes good sense, therefore, to have different central banks talk about their experiences. and, as always, the best experience comes from mistakes made. with this in mind, i shall tell you a little of how we in sweden look at stability surveillance today. first, some background. systemic stability came under serious threat during the swedish banking crisis at the beginning of the 1990s. as was later the case in indonesia, the risk of severe financial instability led to government intervention. a decision at very short notice was required of sweden ’ s government and parliament in the autumn of 1992 : should they choose to support swedish banks financially without really knowing how expensive the support might have to be, or should they risk a financial crisis with unforeseeable consequences for the swedish economy? the decision that was taken was the only reasonable option - to rescue the swedish banks. the government issued a general guarantee for the banks ’ liabilities and set up a special bank support authority to cope with the banks that were in serious difficulties. the government, explicitly supported by the opposition, acted just as vigorously and promptly as the situation required. but this did entail making a decision on the basis of insufficient information about the causes and depth of the crisis - that could have burdened the government budget with at least 10 billion us dollars. having to take such important decisions at short notice and without adequate information about the financial system is an experience we do not wish to repeat. the riksbank is accountable to the swedish parliament with regard to keeping a stable price level our inflation target - but also with regard to promoting financial stability and a safe and efficient payment system. after the crises there was room for some self - criticism in this respect. in practice, we had not supported our stability target with any systematic analytical work on overall stability. to address this, we started to build up knowledge and analytical capability in the field of stability. by publishing a financial stability report in 1997, we were among

, which establishes the bounds for the operations of financial institutions. the parliament is responsible for legislation on financial operations, while the supervisory authority issues more detailed instructions. in many countries, including sweden, the experiences of the 1990s have paved the way for a thorough review of the legal structure of the financial sector. in this context, it is worth noting that laws and regulations today to a great extent are developed through international negotiations such as in the basel committee and, for us in europe, the eu. the role of the central bank in this process is the comfortable one of a knowledgeable observer, posing relevant questions in working groups and committees and pointing out inadequacies in suggested solutions. there is much to say about this process, but i shall have to leave it for a different occasion. 2. day - to - day oversight the second strand of financial stability work is the day - to - day oversight. this may be described as resting on three pillars : • the first pillar is the supervision of individual banks, • the second pillar is the surveillance of systemic stability, • and the third pillar is payment system oversight. the first pillar is clearly the responsibility of the supervisors, whether they are a separate fsa or, as in many countries, a department within a central bank. the supervisors collect data from the banks, analyse these data and make on - site inspections. prudential supervision performed by a competent authority must be the basis for all day - to - day oversight. the second pillar is the joint responsibility of the fsa and central bank. the division of responsibility is really one of perspective. while the fsa bases its work on individual institutions, the central bank looks at the banking system as a whole and attempts to assess the risks that could arise in it both in the short and the long run. of course, there is overlap in the tasks of the fsa and the central bank, but it is often fruitful to approach a problem from somewhat different angles. details are important, but looking at details you sometimes miss the overall picture. this, at least, is one conclusion we drew in sweden from the experiences of the 1990s. the third pillar of oversight is the supervision of the financial infrastructure. this is a relatively new task derived from the complicated technical and legal systems that handle all financial transactions today. the infrastructure is of particular importance to the central bank, since we would most probably have to provide emergency liquidity assistance if anything went wrong. the infrastructure is dominated by the systems for