A new regulatory framework for the recovery and resolution of failing banks is underway. A plan for orderly resolution must be drawn up for all banks. Large losses must be absorbed by writing down the bank’s equity capital and debt. The bank can then recapitalise by converting existing debt to new equity capital. The bank’s creditors step in as new owners. The bank’s losses can be allocated to both owners and creditors, while core banking services continue. A market functions best when there is scope for new entrants and for the closure of lossmaking companies. The same applies to financial markets. The banking sector is characterised by large entities and complex products. Banking regulation is also complex and rich in detail. If the authorities succeed in developing a system for resolving failing banks, perhaps we can take one step back with regard to other detailed regulations. The work on reforms that has been engaged abroad must be followed up in Norway. A national bank resolution authority must be designated. It should be placed in a unit under the Ministry of Finance. This is not a natural role for a central bank. 4  See e.g. the box “Historical monetary statistics for Norway” in Norges Bank Annual Report 2007. BIS central bankers’ speeches  5  Building wealth for future generations Among Norges Bank’s key tasks is the management of Norway’s foreign exchange reserves. This responsibility has followed the Bank since its establishment in 1816, first in the form of silver and gold reserves.
There are many self-regulating mechanisms in the economy, but inflation does not regulate itself. The inflation target of 2.5 per cent also provides a framework for the social partners. Over time, nominal wage growth above 2.5 per cent will entail higher real wages and higher purchasing power. Real wage growth that exceeds productivity growth may lead to higher inflation and higher interest rates. In government-financed enterprises, which are often labour-intensive, budgets are adapted to expected wage growth. This is usually in line with assumptions about cost inflation in the economy as a whole and with the inflation target. If wages rise more than this, efficiency must be increased in order to minimise the adverse impact on service production and customers. 2  Calmfors and Driffill (1988): “Bargaining structure, corporatism and macroeconomic performance”, in Economic Policy, April, 14-61 and Driffill (2006): “The Centralization of Wage Bargaining Revisited. What have we learned?” in Journal of Common Market Studies, Vol. 44, no. 4, November, 731-756. BIS Review 122/2007  3  All economic agents can plan ahead on the assumption that inflation will be about 2.5 per cent over time. This is the most valuable contribution Norges Bank can provide the social partners and other economic agents. Thank you for your attention. 4  BIS Review 122/2007  BIS Review 122/2007  5  6  BIS Review 122/2007  BIS Review 122/2007  7  8  BIS Review 122/2007