We set the main scenario that the banks must use, and the banks were required to apply the stress test in the manner they deemed appropriate in assessing their capital adequacy. Supervisors used independent quantitative techniques both as a check on firm estimates and to assist in their evaluation of the firms’ tools and processes. We evaluated their efforts in terms of: 1) how the stress test is applied, 2) what this implies in terms of capital adequacy, and 3) their capital plans and requests to pay dividends and/or conduct share repurchase programs. Our evaluation of their capital planning processes and their requests to make capital disbursements was based mainly on three factors: 1) capital adequacy, 2) the quality of the capital planning process, and 3) the credibility of their plans to meet the Basel III capital requirements. Elements of a good planning process include: 1) description of risk appetite and capital targets, 2) robust internal controls, 3) incorporation of stress testing and stress-test results into the decision making process, 4) good governance with respect to the role of senior management and the board of directors, and 5) well-articulated capital distribution policies that describe how decisions are made relative to the expectations of future outcomes. Some outside observers ask why supervisors would ever want to use bank-run stress tests rather than supervisory stress tests. The answer is that they serve different purposes.
Since summer 2005, the key policy rate has gradually been raised again to a more normal level in order to prevent inflation from becoming too high. As mentioned, external interest rates are again moving down and the interest rate differential against other countries has widened recently. This may lead to a stronger krone, but there are also opposing forces in the foreign exchange market. In the long run, the krone exchange rate is determined by changes in the terms of trade and permanent differences between domestic and external inflation and productivity. But the krone exchange rate also shows monthly and yearly fluctuations. The krone was strong towards the end of the previous cyclical expansion, but depreciated when interest rates declined in 2003. Thereafter, the krone appreciated again as growth in the Norwegian economy recovered. Over the past two years, the krone has appreciated by close to 5 per cent. Inflation has nevertheless picked up and is now fairly close to 2½ per cent. 3  3  Norges Bank uses different measures of underlying inflation. In January, the twelve-month rise in the CPI-ATE was 1.9 per cent, a weighted median showed a rise of 2.4 per cent and a trimmed mean 2.9 per cent. The twelve-month rise in the CPI was 3.7 per cent following a sharp increase in energy prices. 4  BIS Review 18/2008  The sizeable basic balance deficit may result in a renewed depreciation of the krone.