Ingves: Financial crises and financial regulation – thoughts after five turbulent years
When a bank experiences problems, this can lead to high economic costs. The authorities of a country therefore have an obligation towards the citizens to attempt to prevent and manage crises in financial companies, such as banks. These were two of the points made by the Governor of the Riksbank, Stefan Ingves, in a speech at the Swedish Economics Association in Stockholm. Mr Ingves emphasised that there is thus a great economic value in creating a well-reasoned financial regulation of the banking sector. Naturally, regulations for banks and other financial institutions can often meet with resistance from private interests, but both international experiences and experiences from the Swedish banking crisis in the early 1990s show the importance of clearly identifying and managing problems in the banking sector. The role of the banks is a highly topical issue in the ongoing sovereign debt crisis in Europe.
Mr Ingves pointed out the benefits and risks in a financial system, and described how these can be balanced against each other. He also explained why the differences between private costs and social costs justify a strict regulation of the financial sector. The very same differences virtually ensure that such regulation will always encounter resistance from private interests.
Mr Ingves also spoke about the global financial crisis, how it was managed, and how it developed into a sovereign debt crisis in the euro area. Weak public finances, a fragile financial system and low growth have created a vicious circle in large parts of Europe. The Governor said that increased transparency and drive are needed to deal with the problems in the European banking sector.
Mr Ingves concluded by speaking about some of the lessons learned during the crisis years and how they can now be used to enable society to better avoid such crises in the future. He highlighted the Basel III Accord, which imposes stricter requirements on the banks than previously, as an example of the way forward. He also emphasised macroprudential policy, a new policy area that complements the traditional supervision of individual institutions with the supervision of the financial system as a whole.
Read the entire speech in the PDF file.
