Common to the central bank’s different measures regarding efficiency and stability in the payment system and the financial system is that they involve ensuring that the supply of liquidity is functioning – that there is sufficient means of payment and short-term credit for the economy to grow at a good pace without severe fluctuations in interest rates or other disruptions. One might wonder whether the financial system might not be able to function entirely without central banks and other state intervention. Would not a large private bank or other large and stable company be able to guarantee that there were sufficient means of payment and credit in normal situations, and also to act as lender of last resort in a crisis situation? Historical experiences show that it has been difficult to create sufficient security in the payment and credit systems with private central banks. One such example is that the state was forced to take over Stockholms Banco when there was a bank run on it, which led to the establishment of the Riksbank 350 years ago. But in those days there were no other banks and the financial system was largely undeveloped. As the private banking system grew, it was common at first that the private banks funded themselves by issuing banknotes, in Sweden and in other countries. 3 However, during the 19th century the view emerged that this was not a sufficiently stable financial system and central banks run by the state began to be established.
The Ministry of Finance decides how the fund is to be managed and lays down guidelines in a mandate for Norges Bank. The Bank is tasked with making investment decisions and exercising the fund’s ownership rights. Norges Bank’s Executive Board sets the limits for the Bank’s asset management within the guidelines in the mandate. Operational management and investment decisions linked to individual companies are the responsibility of the Bank’s investment management organisation – Norges Bank Investment Management (NBIM). Chart: Management objectives Central to the mandate is the benchmark index. It is set by the Ministry of Finance and is constructed on the basis of sub-indexes from external index providers. The benchmark index divides the funds’ assets into global investments in equities and bonds. On the equities side, the benchmark index comprises 8 000 companies in 47 countries. The Ministry also sets risk limits for the Bank’s asset management. The objective of the management of the fund is to achieve the highest possible return net of costs within the limits set in the mandate. Chart: Enhanced indexing The fund’s investment strategy reflects the mandate’s requirement to track the benchmark index fairly closely. Since the fund is subject to an index-tracking requirement, the fund’s return largely follows the return on the benchmark index. Moreover, fluctuations in the benchmark index provide a good proxy for the risk in the fund. But this does not mean that asset management is unimportant. On the contrary. Even minor deviations from the benchmark portfolio can have a large impact over time.