In Spain, banks have had to provision for potential losses through the cycle. They were required to provision using non-tax deductible amounts for future losses at the time the loan was extended. Such dynamic provisioning has probably functioned effectively also because this system did not require that the supervisory authorities or the banks themselves had to decide that capital should be increased. 12  BIS Review 131/2009  Nordic cooperation  Equal competition considerations require that banking rules are practiced as evenly as possible across countries. For Norway, there are limits to how effectively regulations specific to Norway will be because we are part of the Nordic banking market. The Nordic region, however, is a well-suited region for an active use of regulatory measures. Nordic banks engage in cross-border operations. At the same time, they have little activity outside of the Nordic region. Nor are foreign banks from other regions large in this region. The conditions are therefore in place for effective cooperation in the area of banking regulation and crisis management between the political authorities, supervisory authorities and central banks. In the growth period from 2004 to 2008, foreign banks expanded rapidly in the Nordic market, but during and after the crisis they curbed their activity. I am afraid it can be said that they have amplified fluctuations in Norwegian markets. However, we assume the decline in their market share over the past year is attributable to their being harder hit by the international crisis than Norwegian banks.
15  Financial Services Authority (2009): “Strengthening Liquidity Standards”, Policy Statement 09/16, UK October. BIS Review 131/2009  15  House prices in Norway have risen sharply and probably excessively. We must take account of developments in equity prices and property prices when projecting inflation and output. Norges Bank’s interest rate setting does not rely solely on one simple rule. Instead, we seek to take account of all factors that influence inflation and output in the medium term, and the key policy rate is set on the basis of an overall assessment. Asset prices such as house prices, the exchange rate and credit growth therefore have a bearing on Norges Bank’s interest rate setting. A written formulation of Norges Bank’s monetary policy reaction function would be fairly comprehensive and include all the variables that are considered. However, a reaction function must not be confused with the monetary policy target – our target function. The fact that we give weight to variables such as the exchange rate, house prices and credit growth in interest rate setting does not imply that there are specific target for these variables. The operational target for monetary policy is annual consumer price inflation of close to 2.5 per cent over time. Interest rate setting in a small, open economy can be particularly challenging in periods of strong credit growth and a wide interest rate differential against other countries.