Government bonds were swapped for covered bonds issued by banks and normal lending activity was restored. However, this was not the first time the Government had used swaps to stimulate the real economy. We did so around 200 years ago...  A swap of government bonds for privately issued securities was used already in 1819 when Norway emerged on the scene as a sovereign country after the Napoleonic wars. The 1819bonds were swapped for bills of exchange issued by farmers and merchants in the domestic market. With these bonds as collateral they managed to raise sufficient credit to import seed to secure important supplies to farmers and merchants in this difficult period in Norwegian economic history. This is a historical example of how financial markets underpin economic growth. BIS central bankers’ speeches  1  More generally, financial markets contribute to economic growth in three ways:   They create credit to make it available for real investment.   They allocate credit to the most profitable investment projects.   And they improve risk sharing in the economy. The caveat is that they create the credit volumes that they find privately optimal, and allocate it to the projects that are most profitable to them. Neither the credit volume nor the credit allocation is necessarily socially optimal: this is one basic reason why financial markets are and should be regulated. The next question is: How strictly should they be regulated? When does regulation severely impair the positive effect from financial markets to economic growth?
Let me again make some observations from my home country:  Norway had a severe banking crisis around 1990. Three of the four largest banks failed and the direct capital injections required were alone more than 3½ per cent of GDP. Just to put this figure into perspective, the 106 billion euros the European banks need for recapitalisation now is less than 1 per cent of GDP in the euro area. Ever since the Norwegian banking crisis in the early 1990s, our banking industry has been regulated more strictly than banks in comparable countries.   For instance, bank capital definitions have been tighter and the financial supervisor has been more actively restricting banking activities.   Another example is that packaging loans into complex financial instruments was in practice not permitted until 2007 when new regulations provided for the issuance of covered bonds. The complex instruments central in the creation of the subprime crisis were never introduced, and Norwegian banks did not invest in them. Our GDP growth rates have still been high during the years up to 2008, also outside the petroleum sector. And the downturn we experienced in 2009 was modest in relation to comparable countries. At the early stage of the banking crisis in the1990s, the Norwegian central bank provided a large liquidity loan to a savings bank. It soon became clear that the loan would not be paid  2  BIS central bankers’ speeches  back. A liquidity problem turned into a problem of solvency.