Previously, liquidity was also influenced by purchases and sales of foreign exchange to influence the krone exchange rate. This has not occurred for the past 11½ years. Banks as a group cannot directly influence the level of their liquidity in Norges Bank. The level of banks’ liquidity is determined by the central bank’s liquidity supply and any changes in other central bank balance sheet variables. Changes in banks’ demand for central bank reserves lead instead to changes in market interest rates. For example, banks’ demand for more liquidity will be reflected in an increase in money market rates. Liquidity in the banking system  BIS Review 113/2010  7  Norges Bank determines market rates by providing sufficient liquidity to ensure that the shortest money market rates fall to a level close to the rate banks receive on their deposits in Norges Bank. Interest rates cannot fall below this “floor” as no bank will want to provide loans at a rate lower than the rate they can obtain from Norges Bank. Banks’ loans from and deposits in Norges Bank have been substantial and increasing over time. Demand for loans was particularly high during the financial crisis. It would appear that banks have grown accustomed to dealing directly with the central bank instead of redistributing liquidity in the interbank market. We are having to supply more liquidity now than previously in order to hold down money market rates close to the floor.
In order to dampen shocks in a country and mitigate the contagion effects on other countries, close collaboration between a financial corporation’s home country and the host country in which it operates is necessary. In its latest annual report, the BIS writes the following: “Close cooperation between home and host authorities will be inevitable. And some responsibility will have to shift to host authorities for deciding on the settings that apply to exposures in their jurisdictions and for advising home authorities of local financial conditions.” Norwegian banks are part of a common Nordic banking market. The rapid expansion of foreign banks in the Norwegian market in the growth period from 2004 to 2008 was trimmed back during and after the crisis. I am afraid it must be said that they have amplified fluctuations in Norway. However, we assume that the decline in their market share is due to the impact of the international crisis, which has generally been more severe for foreign banks than for Norwegian banks. BIS Review 113/2010  9  Under the Basel Committee proposal, the time-varying capital buffer requirement will apply to all banks operating in a country, including branches of foreign banks. Home country authorities will enforce the buffer requirement imposed by host country authorities. This means that Norwegian supervisory authorities, for example, can impose a supplementary capital requirement in periods of high credit growth in Norway. The requirement will apply to Norwegian, Swedish, Danish and other banks that provide loans to Norwegian households and businesses.