The problems started in the US mortgage market, but quickly spread to other financial market segments. Banks, funds and financial undertakings had to bring bonds back onto their own balance sheets, they began to doubt the financial position of their counterparties and held on to their money. As a result, premiums on interbank loans rose markedly. Norwegian banks rely heavily on international markets for their funding. The rise in money market premiums in the US and Europe therefore rapidly spread to Norwegian interest rates, even though Norwegian banks are profitable, enjoy confidence and have limited loss exposure. When banks would no longer lend to each other, many central banks provided liquidity with a longer maturity and lower collateral requirements than usual. Norges Bank has also, in periods, increased the volume of lending to Norwegian banks. We have provided extra shortterm liquidity, for example through currency swaps. We have also offered banks loans with longer maturities than earlier. We have not changed the collateral requirements for loans. This is because we already accepted a broad range of collateral than those central banks. This is because – for reasons we appreciate – the Norwegian government bond market is very thin. For a long time, nor did we have a well developed market for other bonds. At the same time, bank demand for loans from Norges Bank is considerable in some periods of the year.
15  In a letter of 27 June 2008, the Ministry of Finance has asked the Financial Supervisory Authority of Norway to assess the need for regulatory revisions to the Norwegian Banks’ Guarantee Fund. BIS Review 110/2008  7  Conclusion The experience so far is that inflation targeting has provided a good basis for stabilising inflation and inflation expectations. Interest rate setting and interest rate forecasts have also contributed to stabilising output and employment and prices in property markets. In some areas, regulations and frameworks can result in amplifications of fluctuations in asset prices and credit flows. For example, tax subsidisation of homeownership can be a source of recurrent instability in house prices and credit. The turbulence in financial markets has prompted many countries to consider measures to improve regulation and the functioning of markets. In Norway, the authorities can also strengthen the work on preventing systemic risk. With our cross-border banks, broader Nordic cooperation, particularly between finance ministries and supervisory authorities, would be appropriate. But there is also work to be done at home. Norges Bank is proposing, for example, revisions to the Norwegian Banks’ Guarantee Fund with a view to reducing moral hazard. Thank you for your attention. 8  BIS Review 110/2008  BIS Review 110/2008  9  10  BIS Review 110/2008  BIS Review 110/2008  11  12  BIS Review 110/2008  BIS Review 110/2008  13  14  BIS Review 110/2008  BIS Review 110/2008  15  16  BIS Review 110/2008