When banks are required to hold more capital in a period of high credit growth, they will be more robust to large loan losses. In addition, increased capital requirements could restrain credit growth. The Ministry of Finance has the overriding responsibility for regulating the financial industry, but Norges Bank will be given the primary responsibility for elaborating the basis for the establishment of the countercyclical capital buffer. With a buffer ceiling of 2.5 percent of banks’ risk-weighted assets, the buffer will probably have a limited downward impact on banks’ lending enthusiasm in good times. But banks that have solid capital reserves can take larger losses before having to limit lending to creditworthy customers. The countercyclical buffer comes on top of a new, comprehensive regulatory framework. Equity capital requirements will be tightened. Banks will face stricter maturity requirements for funding, limiting their share of short-term funding. They will be required to hold more liquid assets. All in all, the new regulatory regime will contribute to a more robust financial system and reduce fluctuations in credit growth. BIS central bankers’ speeches  7  The turbulence in Europe, which started with the problems in Greece, has now prevailed for close to two and a half years. Financial market sentiment and banks’ access to funding have varied widely during the period. The nascent market optimism may continue, but it is fragile. Should the economic situation abroad worsen again, and credit markets dry up, other tools can be put to use in Norway.
During the financial crisis in 2008, several measures were deployed, such as the so-called swap arrangement, which provided banks with access to liquid government securities in exchange for covered bonds. Smaller banks were given loans with longer maturities. The measures aimed at improving banks’ access to long-term funding. The measures enabled banks to maintain virtually normal lending standards for Norwegian households and businesses. Norway’s swap arrangement and quantitative easing have some common features: bonds shift from private to public hands, and banks’ funding costs become lower than would otherwise have been the case. But there is an important difference. The swap arrangement was reflected in the government’s balance sheet – not the central bank’s. Quantitative easing, which increases the size of a central bank’s balance sheet, as observed in the US and the UK, is still not a relevant approach for Norway. Normally, the provision of capital and liquidity by authorities is not to replace banks’ own sound liquidity management and long-term market funding. Any decision relating to the use of the creditworthiness of government or taxpayers to finance banks and businesses rests with the Government and the Storting (Norwegian parliament). Chart: Liquidity and EUR/NOK exchange rate International turbulence can push the krone in both directions. On the one hand, in periods of severe market turbulence, investors have tended to shy away from presumably less liquid currencies. The krone market is among the less liquid markets. One indicator of liquidity is the so called bid-ask spread.