The banks have also increased their capital levels over the past few years. As a result, the financial system in Norway is now more resilient to shocks. An accountable and credible macroprudential policy must be based on an understanding of how systemic risk arises. The academic research on macroprudential policy issues is growing, but is still at an early stage. Some conclusions seem, however, to be robust. Many studies single out rapid credit growth in particular as a symptom of rising systemic risk. This is in line with the recommendations from the Basel Committee and the EU, which state that decisions on the countercyclical capital buffer should be based on the credit gap. Chart: Basis for advice on the countercyclical capital buffer: key indicators In preparing its advice on the buffer decision, Norges Bank adds three other variables as key indicators. The three variables are, as shown in the chart: house prices, commercial property prices and banks’ wholesale funding ratio. Together, the four indicators contain a considerable amount of information about how cyclical systemic risk evolves. Chart: Early warning models for financial crises A number of studies have indicated that credit growth, real estate prices and banks’ wholesale funding ratio show a systematic pattern ahead of financial crises. At Norges Bank, we have examined data from 16 OECD countries to see whether such a systematic pattern exists. 2 We have developed empirical models for estimating the probability of a crisis.
Chart: Unemployment, inflation, house prices and household debt ratio in Norway, the UK, the US and the euro area Norges Bank has in periods kept the interest rate somewhat higher than implied by mediumterm inflation and output gap considerations. In other words, we have been “leaning against  1  Tinbergen, J. (1952): On the theory of economic policy, North-Holland Publishing Company, 2nd edition. BIS central bankers’ speeches  1  the wind”. Norway is a large exporter of petroleum, and our economy has benefitted from 15 years of high oil prices. Unemployment has been low and consumer price inflation close to the 2.5 percent inflation target. At the same time, house prices have been rising sharply, and household debt is at a historically high level. Hence, our monetary policy trade-offs have in recent years differed from those of our trading partners. Before I return to the interlinkages between financial stability and monetary policy, let me describe some elements of macroprudential policy in Norway. Banking regulation has recently been reformed in Norway in accordance with Basel III and directives issued by the European Union. Capital requirements have been increased and the countercyclical capital buffer has been introduced. Norges Bank is responsible for conducting analyses and providing advice on the level of the countercyclical capital buffer for banks. The responsibility for the final decision on the buffer level lies with the Ministry of Finance. The current decision requires Norwegian banks to hold a countercyclical capital buffer as from July this year.