On past loss performance, this standard reduces the probability of failure to extremely low levels, and the probability of simultaneous failures that drive crises to even lower levels. And that past performance includes the global financial crisis. In the UK, even the two biggest failures of the crisis – Royal Bank of Scotland and Halifax Bank of Scotland – suffered losses comfortably within these baseline standards. Using Basel III definitions, both suffered losses – even over three years – of around 5% of risk weighted assets. 10 So going further could have a sharply diminishing further effect on the probability of banking failure. And it could run the risk of economic cost. Our standard recognises those risks. By not taking it higher, we are seeking to strike a balance; to be macroprudential. That balance is also served by the make-up of the requirements. Hard floor capital requirements don’t help the real economy. They simply move the point of failure and distress of banks to a higher level of capital. They may make banks more resilient, but they don’t make credit supply and essential service provision more resilient. So a large slice of bank capital should take the form of a useable buffer: a cushion that sits on top of minimum capital requirements that can be run down and built up gradually afterwards. The emphasis is on useable.
Climate change has been among the focus areas of management since 2006. Our work on financial risk as a result of climate change is incorporated in the investment strategy and the financial objectives of the GPFG. The Ministry of Finance is now working to introduce a new behavioural criterion for companies’ climate emissions in the guidelines for observation and exclusion. Such a criterion must then be managed in line with the highest defined threshold for exclusion. BIS central bankers’ speeches  1  It is important that the overriding principle for Norges Bank’s investment management continues to be that the GPFG is a responsible investor with a financial objective. If the GPFG is increasingly used as an instrument for pursuing objectives other than financial ones, it may reduce the clarity of the GPFG’s role as a financial investor. If the GPFG investment scope is subject to considerable restrictions, it may entail increased risk or lower returns. The management of the GPFG has been successful to date. The total return since the establishment of the GPFG amounts to more than NOK 2 500 billion, or about 40 percent of GPFG capital. Through its management, Norges Bank will continue to promote its overriding objective: to safeguard the Fund’s assets over time. Thank you for your attention. 2  BIS central bankers’ speeches