. the countries which participate in the international capital market tend to have higher per capita growth rates than other countries. the globalisation of production and trade calls for new solutions for payments and financing. it is also a great advantage to have a financial system that is capable of channelling savings to those parts of the world that need them most for investment. however, participation in the international capital market presupposes that a country has an adequate banking system with accounting regulations and other institutions, such as thorough supervision that ensures sound banking practices. this has evidently not been the case in a number of the countries that are now affected by the crisis. nor should we forget that the banking system in sweden was not fully prepared at the time when our credit market was deregulated. if loans from the international capital market are channelled to a country where the banking system and other financial institutions are not ready to function in this community, the result may thus be loan losses. but, as you know, it takes two to tango. it may well be asked why banks in the industrialised countries have arranged loans to countries that evidently were not yet sufficiently sound borrowers. capital has been flowing to emerging markets in a broad stream in recent years. it has been channelled directly through the banks as well as indirectly, for instance via hedge funds. a good many such funds have obtained large loans from banks in the industrialised countries and, in pursuit of favourable yields, invested the money in emerging markets. this indirect lending can be likened to the swedish banks ’ earlier lending to finance companies. this brings us to the nature of banking in a more profound sense. traditional banking involves accepting deposits from the non - bank public and lending these funds to various borrowers. moreover, the equity capital on which banking is based is small, which implies high leverage and low solvency. if all the banks ’ capital had consisted instead of equity, incurred losses could have been handled more or less painlessly. with a large proportion of borrowed capital, however, there are liable to be chain reactions that successively spread through the banking system. it is precisely this that necessitates comprehensive, efficient supervision and a functional set of regulations in order to avoid unnecessary losses. that is also why central banks around the world have been assigned the function of safeguarding the financial system ’ s general stability. what can be done? the current problems in the global financial system need solutions for both the short and the longer run. in the short run it is a

world economic impact of the problems in the emerging markets can be divided into effects on real economic activity and influences via financial markets. the latter are transmitted both by falling prices for shares and possibly other assets and by a higher degree of prudence on the part of firms, households and banks. let me begin with the real economic effects. in the emerging economies that are currently affected, the problems have led to sharply falling demand and output. imports from the rest of the world are therefore declining, too. at the same time, currency depreciation has improved the competitiveness of exports. thus, a weakening of western exports to the emerging markets is being accompanied by a gradual increase in western imports from these countries. for overall growth in the oecd area, however, the aggregate real economic effects are probably not all that large. so what about the effects transmitted by financial markets in the west? a falling stock exchange reduces the value of households ’ share portfolios, which may influence the propensity to consume. it also increases the cost of capital procurement, which may likewise affect demand via a weaker propensity to invest. the recent global fall in share prices - more or less wiping out the increase in the past two years or so - should be seen in the light of the strong upward trend that share prices have followed in the 1990s. in sweden the omx index is still around 300 per cent above the low in the autumn of 1992. in the united states the dow jones index is about 200 per cent higher than at the beginning of 1991. this provides a perspective for the impact of falling share prices on international growth. it should also be borne in mind that the us economy is more sensitive than europe to a falling stock exchange. when it comes to confidence, it is more difficult both to quantify and to arrive at more definite conclusions about consequences of the crisis. we do not know to what extent the present course of events is affecting how households and firms appraise both their own and their country ’ s economy. a good many people and businesses will no doubt become more cautious about buying a car or making investments for the future, for example. here we have a potentially larger effect that must be monitored very carefully. some guidance is to be had from various countries ’ survey data. a number of the results point to a fall in consumer confidence. neither can one draw any precise conclusions about the magnitude of the effect that may come from increased prudence in banking around the world. the global unrest