Since 2007, many branches of foreign banks have become members of the Norwegian scheme to increase their deposit to loan ratio. This is not purely coincidental. The Norwegian scheme is probably slightly naïve in its design. As mentioned, the amount guaranteed is very high, and there has been a period without fee payments. At the same time, the competition for deposits has intensified at home and abroad. There is an element of moral hazard associated with any insurance scheme. In Norway, even depositors with very large deposits do not have to assess the financial strength of a bank. Our deposit guarantee scheme has a flypaper effect, and under the protection of the scheme the banks have bid up deposit rates to strengthen their liquidity. This will eventually have an effect on lending rates as well.
15  In a letter of 27 June 2008, the Ministry of Finance has asked the Financial Supervisory Authority of Norway to assess the need for regulatory revisions to the Norwegian Banks’ Guarantee Fund. BIS Review 110/2008  7  Conclusion The experience so far is that inflation targeting has provided a good basis for stabilising inflation and inflation expectations. Interest rate setting and interest rate forecasts have also contributed to stabilising output and employment and prices in property markets. In some areas, regulations and frameworks can result in amplifications of fluctuations in asset prices and credit flows. For example, tax subsidisation of homeownership can be a source of recurrent instability in house prices and credit. The turbulence in financial markets has prompted many countries to consider measures to improve regulation and the functioning of markets. In Norway, the authorities can also strengthen the work on preventing systemic risk. With our cross-border banks, broader Nordic cooperation, particularly between finance ministries and supervisory authorities, would be appropriate. But there is also work to be done at home. Norges Bank is proposing, for example, revisions to the Norwegian Banks’ Guarantee Fund with a view to reducing moral hazard. Thank you for your attention. 8  BIS Review 110/2008  BIS Review 110/2008  9  10  BIS Review 110/2008  BIS Review 110/2008  11  12  BIS Review 110/2008  BIS Review 110/2008  13  14  BIS Review 110/2008  BIS Review 110/2008  15  16  BIS Review 110/2008