But additional equity capital is now very expensive and perhaps also difficult to procure. The alternative for banks may be to hold back on lending. If they do this on a large scale, it will have considerable negative effects on output and employment. It is understandable that  BIS Review 17/2009  1  credit growth is now slowing, both because demand for credit is lower and because fewer investments are profitable. But in addition, it appears that banks are applying stricter criteria in credit assessments and rationing credit. Norges Bank’s Survey of Bank Lending shows the banks’ own perception of this practice. The chart shows that over the past year banks have reported a tightening of credit standards. It appears that credit flows to households have improved somewhat, but banks are still tightening credit standards for corporate loans. An important lesson to be learned from this economic crisis is that compelling banks to increase their equity capital when the downturn has already started has a considerably negative impact. It is important that banks have sufficient capital to make them resilient even if the downturn should persist over a longer period. For this reason, we have proposed government capital injections in banks. The government bond fund will buy bank and corporate bonds. In Norges Bank’s view, it is particularly important helps to improve demand for corporate bonds. The fund shall primarily buy high quality bonds. The chart shows that it is on the whole borrowers with weaker ratings that are now being excluded.
Svein Gjedrem: Hearing before the Standing Committee on Finance and Economic Affairs Introduction by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at a public hearing before the Storting's Standing Committee on Finance and Economic Affairs, together with Mrs Kristin Halvorsen, Minister of Finance, and Mr Bjørn Skogstad Aamo, Director General of The Financial Supervisory Authority of Norway, Oslo, 13 February 2009. *  *  *  Government finance fund and government bond fund The crisis in the banking sector was initially a problem of liquidity. In October and November, there was considerable turbulence and fear was spreading among banks. Credit premiums were high. The situation has improved. The improvement is to a considerable extent the result of action taken by the authorities. The swap arrangement whereby banks can exchange covered bonds for government paper has been important. The arrangement is oriented towards larger banks, and a number of banks have made use of this facility, in an amount so far totalling more than NOK 70 billion. Norges Bank has proposed an extension of the arrangement to provide banks with funding at 5-year maturities. Maturities so far have been up to 3 years. The extension is important to ensure that maturity dates do not all fall within a short period. The arrangement provides banks with Treasury bills. Banks have used these as collateral for loans, sold them or kept them as liquidity reserves. There has been high demand for Treasury bills.