From 2003 and up to the end of 2007, growth in the Norwegian economy was high and gathered momentum both more quickly and more markedly than in the business cycles in the1980s and 1990s. The interest rate has by and large curbed the effects. The interest rate was low in the years between 2003 and 2005 while activity in the economy was still moderate, and has gradually been raised since then. Because inflation was low, the interest rate was kept low in a period of high growth and increasing capacity utilisation. Three factors were important: First, labour has flowed into Norway from other countries. The opening of the labour market to the new EU countries has provided us with access to a reserve of labour. Inward labour migration rose towards the end of the cyclical upturn and has contributed to sustaining the high level of growth. In 2007, the population expanded by more than 56 000, with net immigration at 40 000. This is the highest population growth ever recorded in Norway. Second, businesses in Norway have become increasingly efficient, resulting in lower costs. It has been profitable to hire more employees despite the high wage level in Norway. The business sector has made use of new technology and businesses have been restructured. The many sweeping reforms of the 1980s and 1990s – the fundamental shift in the Norwegian economy 1 – resulted in more efficient markets. Over the past few years, we have reaped the benefits of the measures implemented then.
It will lay down minimum standards for banks to hold some resiliently liquid assets and about the funding of illiquid assets. To date, much more prominent has been the work on capital. Although there has been some dilution of the proposals from a few months ago, real substantive progress is being made in reforming the minimum standards and in introducing various buffers, taking into account credit cycle conditions and the circumstances of SIFIs. The key element of the overall package is that “capital” will mean capital. The world of hybrid instruments – pretending to be so-called capital instruments but which in fact cannot truly absorb losses in a going concern – should become more or less a thing of the past. The Bank of England would like it to be completely consigned to the past. Only equity can absorb losses. For that reason, in calculating regulatory capital, deductions from capital should really be from equity. As part of the emerging compromise, there will be some derogations from that, but the derogations should be transparent. Markets should learn to evaluate bank’s capital adequacy on the basis of what is made transparent about the makeup of that capital. The other really key change will come in stages – partly in the package this autumn and partly during next year and beyond – which is reducing the pernicious regulatory arbitrage that has existed between “banking book” capital requirements and “trading book” capital requirements.