depositors withdrawing their savings, that triggered the crisis in the swedish bank system. it was a lack of international confidence and problems with financing in the international market. growing loan losses made it increasingly difficult for some swedish banks to obtain the necessary funds abroad. what we saw was a more modern kind of bank run. that was certainly a major reason why the swedish bank crisis coincided with an exchange rate crisis. so what induced swedish households and firms to borrow in foreign currency? the main explanation is perhaps that interest rates abroad were lower than in sweden. borrowing in a foreign currency was perceived to be cheaper. while some households and firms may have wondered why and found that the higher swedish rates were simply a risk premium to cover the possibility of a future devaluation, the consequences of this analysis were generally ignored ( a devaluation would have increased the amount of a loan expressed in swedish kronor, making the burden of repayment heavier ). the fixed exchange rate policy was perceived as credible, at least by these borrowers. they were lulled, or lulled themselves, into thinking that the exchange risk, even though it was occasioning higher interest rates than in the rest of the world, would be absorbed by the riksbank. that meant they could try to benefit from the interest rate differential with impunity. as many of these foreign currency borrowers were players who could not afford loans in swedish kronor, they had no margin when the liabilities became more costly after the krona ’ s fall and this accentuated the problems. what lessons can we learn? i have now identified three features of the swedish crisis : rising asset prices, a strong expansion of credit and short - term borrowing in foreign currency. these three factors have in fact preceded almost all the financial crises that have hit various countries in the past decade. this does not apply to last autumn ’ s turbulence over the russian suspension of payments and the ltcm hedge - fund problems. i am thinking instead of, for example, mexico, indonesia, thailand, south korea, malaysia and brazil. in these cases, inflated asset prices and both domestic and external debt had an important bearing on the subsequent course of events. one important lesson is that a floating exchange rate with an explicit inflation target makes it easier to avoid a situation with rapidly rising asset prices, an unduly strong expansion of credit and high short - term borrowing abroad. that does not mean that a fixed, but adjustable, exchange rate is bound to result in

even healthy people may be asked to leave their offices to avoid the disease from spreading, while the key employees may be asked to go to work to keep the operations running. when the principles clash, it will be vital for society that the ones needed to contain the epidemic will prevail. and if that special framework is not already in place, the politicians will need to get involved. clearly, a bank failure cannot be compared to a serious injury or sickness in terms of personal suffering. but it can be an event which will make many people ’ s lives very difficult. and a systemic banking crisis, like an epidemic, may stall the functioning of our entire economies. it is therefore important to be able to deal with an ordinary bank failure as well as a more serious systemic crisis. and just like in the health sector, when the regulations clash, it must be clear which ones will dominate. there is another similarity, i believe. like with the flu, it may be difficult at first to tell the nature of the disease. it may not be obvious at first if it will be possible to deal with the problem bank within the normal framework, or if there will be a need to take special measures. therefore, all cases should be dealt with within the same overall structure. a speedy insolvency procedure with a fast pay - out to depositors at a low cost to the deposit guarantee scheme … setting up a framework to deal with an ordinary bank failure does not need to be overly complicated. experiences from, for instance, the united states and canada show that it is quite feasible to close banks that do not follow the rules without this leading to consumers losing confidence in the financial system, and at relatively low cost. the solution is based on the deposit guarantee authority having a right, in fact an obligation, to intervene in a bank when the capital falls below a certain level. one first ensures that the depositors covered by the guarantee have access to their funds. then the authorities can choose from a broad arsenal of measures, including the transfer of the assets and liabilities to another bank or the merger with another bank, to solve the problem at the least cost to the deposit guarantee scheme. i think that there are two characteristics of these kinds of systems which merit particular attention. first, the ability to take swift measures and to write down claims quickly. it is important to restore access to the liquidity held in the bank accounts as quickly as possible not only for the insured depositors, but also more