The Ministry of Finance has been tasked with setting the level of the countercyclical capital buffer. Norges Bank has been tasked with preparing a basis for the buffer decision and providing advice to the Ministry of Finance regarding the level of the buffer. In preparing the basis for the buffer decision, Norges Bank will exchange information and assessments with Finanstilsynet. Since March of this year, Norges Bank has published an assessment of the need for a countercyclical capital buffer in the Monetary Policy Report in addition to its monetary policy assessment. Norges Bank will give its first advice on the level of the buffer to the Ministry of Finance in connection with the next Monetary Policy Report, to be published at the beginning of December. Text slide: Criteria for an appropriate countercyclical capital buffer In line with the purpose of the countercyclical capital buffer, Norges Bank has formulated three criteria for setting an appropriate buffer rate. The buffer should ensure that the resilience of banks is strengthened during an upturn. The buffer requirement should be viewed in the light of other requirements applying to banks, particularly when new requirements are introduced. One of the most important purposes of the capital buffer is to alleviate stress in the financial system. History shows that the foundation for banking crises is laid during upturns. When financial imbalances build up, this increases the likelihood of substantial losses in the entire banking system.
Banks determine who should be given credit and closely monitor borrowers and their projects. This is a task that would be difficult for small savers to undertake. By offering customers various kinds of financial products, banks also help to diversify and redistribute risk. This function is essential in a modern market economy. At the same time, experience shows that complex financial structures are a source of increased vulnerability. Chart: Securitisation resulted in complex and vulnerable structures Ahead of the financial crisis, there was a proliferation of complex financial products, including residential mortgage-backed securities in the US. In theory, these new products were intended to improve the distribution of risk. Banks’ exposure to risk that had been shifted off their balance sheets would be limited. In reality, it turned out differently. Risk was not very well distributed, merely hidden. With so many links in the chain between borrower and saver, the responsibility for monitoring borrowers became highly fragmented. Good banking is important for a sound and stable economy. Despite thorough credit assessments and close monitoring of borrowers, banks will face unexpected losses. If banks end up with insufficient equity capital following substantial losses in bad times, they will have to tighten lending. This may amplify a downturn, as is currently the case in a number of European countries. Compared with other enterprises, many banks have limited equity capital. It is often more costly for banks to fund lending with equity capital than with deposits and borrowing from the market.