In 2010 Norges Bank had to maintain high liquidity in the banking system to keep short-term money market rates close to the key policy rate. To dampen demand for central bank liquidity and promote increased activity in the money market, Norges Bank’s Executive Board approved changes in the system for managing liquidity in the banking system in December 2010. Under the new regulation, only a certain amount of banks’ deposits – a quota – will bear interest at the key policy rate. Deposits in excess of this quota will bear a lower interest rate. This will give banks a stronger financial incentive to redistribute liquidity among themselves, making the Norwegian money market function more effectively. The new system is expected to take effect from 3 October of this year. 3. From financial crisis to debt crisis  Chart: General government gross debt The experience of recent years has shown the costs of financial instability in many countries. Global economic growth has recovered, but the effects of the financial crisis are still visible and will be so for some time ahead. Financial crises tend to be followed by debt crises. Fiscal policy was used actively in most countries to dampen the effects of the financial crisis. The mistakes of the 1930s were not to be repeated. But as a result, weak public balances became even weaker. On top of this, some countries provided substantial government funding to banks. Government debt quickly mounted.
The new regulatory framework will make it more costly for banks to expand rapidly. Moreover, the new framework includes macro-prudential measures that can be triggered when necessary. Basel III includes a countercyclical capital buffer that requires banks to set aside more capital against their loans. This will increase their capacity to absorb future losses, which to some extent can also dampen credit growth during an upturn. In today’s situation in Norway, with elevated debt burdens and high and rising house prices, a countercyclical capital buffer would have been a useful instrument. Chart: Inflation The interest rate affects general economic developments, including the housing market and other conditions that have implications for financial stability. Experience indicates that monetary policy alone cannot ensure stable economic developments. The objective of  4  BIS central bankers’ speeches  monetary policy is low and stable inflation, and we only have one instrument – the key policy rate. There are limits to the number of considerations the interest rate can bear. We therefore need more targeted instruments to dampen the build-up of risk in the financial system. The interest rate also has effects on other asset prices, such as the krone exchange rate. A monetary policy that aims at bringing down the value of domestic assets can easily push the value of the krone in the opposite direction. In interest rate setting we can never lose sight of the primary objective of monetary policy, which is low and stable inflation. Thank you for your attention.