In other cases, where a business is rotten through and through, a more “traditional” break-up of a group may be needed, perhaps using a “bad bank” in some cases. Planning for that will not be easy, and so for those extreme cases there is a special need somehow to ensure continuity in the provision of absolutely critical services to the economy. In the UK, that is one way that ring-fencing fits into resolution planning. Implications for supervision All this has important implications for prudential supervisors. In the first place, supervisors get some allies: debtholders. The prospect of taking losses will incentivise bondholders (and fellow banks) to monitor the risks taken by banks – pricing or rationing accordingly. This is market discipline: an extra line of defence. Risk being priced into bank bonds will not, as some suggest or threaten, kill the market. It would be uncertainty  4  BIS central bankers’ speeches  about the regime governing what happens in the event of distress that would kill the market because that kind of uncertainty could not be priced. Supervisors won’t be idle though. Resolution needs preparation. Hence the international agreement that firms should prepare Recovery Plans and contribute to Resolution Plans. To be clear, while the firms will own the Recovery Plans, the authorities will design and own the Resolution Plans. It has to be that way. To a much greater extent than ever before, supervisors will need to work backwards from the end game, working with resolution authorities.
Thus, three successive governments have been loyal to this guideline and it still enjoys a substantial majority backing in the Norwegian parliament. Adherence to this policy is also scrutinized closely by the public who have developed a sense of ownership of the Fund. Another important feature of the model is that there is consistency between the size of the Fund and Norway's net financial wealth. This is ensured by the Act relating to the Government Pension Fund where it is stated that the government cannot borrow as long as the balance of the Fund is positive. The Fund has become large and is still growing very rapidly. It is projected to reach 200 per cent of Norway's GDP around the year 2010. The huge cash flow into the Fund has posed an operational challenge, which I will return to later. In 2006, the name of the fund was changed from the Government Petroleum Fund to the Government Pension Fund – Global. But the name change did not imply any operational changes and the return (the 4 per cent) continues to be a general support to the budget, not ear-marked for any specific purpose. This reflects that the Fund has no formal link to a liability side. Let me turn to the management of the Fund. The Fund is formally owned by the Ministry of Finance, while operational management is delegated to Norges Bank. This arrangement is formalised through a management mandate given to the Bank by the Ministry.