Extraordinary F-Loan Scheme

To ensure that the policy rate would translate into lower money market rates, Norges Bank chose to offer extraordinary F-loans in NOK against collateral with three months maturity effective from March 13 (Norges Bank, 2020e). Norges Bank stated that this offer would be available “as long as deemed appropriate” (Norges Bank, 2020c). This was already announced on March 12 at 14.30 (Norges Bank, 2020c), only thirty minutes after Prime Minister Solberg announced the national lockdown and one day ahead of the interest rate cut. From this rapid response, two observations can be made. Firstly, Norges Bank actively used forward guidance to ensure that commercial banks could form expectations concerning their future liquidity situations despite the uncertain economic conditions. By doing this, Norges bank aimed to keep market rates stable. Secondly, the extraordinary F-loan scheme was implemented roughly at the same time as the interest rate cut, and so was deemed a critical component in the first response. The importance of this speed of action from the central bank is supported by the argument made in section 4.1, concerning how agents in the economy adjust to expected economic conditions and current ones.

Norges Bank extended the F-loan scheme announced March 12 by offering loans with maturity of 1 week, 1 month, 3 months, 5 months and 1 year on March 19 (Norges Bank, 2020f). For loans with maturity up to 3 months, the policy rate served as the effective interest rate, while for loans from 6 months, the policy rate plus 15 basis points. 30 basis points were added to the 1-year loans (Norges Bank, 2020t). For the shortest maturities, this implied interest-free loans, as the current policy rate was zero at the time.

Temporary changes to the criteria for collateral for loans from Norges Bank were also made, liberalising the requirements to enable more applicants to use the F-loan arrangement (Norges Bank, 2020f). Similar measures were taken during the Financial Crisis of 2008. Through this measure, commercial banks could obtain short-run liquidity without having to take up loans from other banks’ reserves in a stressed situation. The interest rate for loans with maturities up to three months was equivalent to the current policy rate. As opposed to the regular arrangement involving auctions, all applicants were granted loans.

Despite the increased liquidity infusions, Norges Bank stated that the overall goal of keeping the level of reserves (overnight) at 35 billion NOK with an interval of ± 5 billion NOK remained (Norges Bank, 2020f). Since the commercial banks operate with a deposit quota for which the policy rate is the applicable rate, the slightly lower reserve rate is used as an interest rate for excess reserves. In order to extract excess liquidity at the end of the day from the market, daily F-deposits with one-day maturity were issued. The goal is then to keep within the blue vertical line segment, as illustrated in figure 20.

Figure 20 - NOWA and the liquidity system, adapted from Klovland (2020d)

The F-deposits offered had the effect that banks did not need to place reserves at the reserve rate. If Norges Bank did not also withdraw liquidity, the policy rate could sink to the reserve rate.

Banks have, to a large extent, used this arrangement, which is apparent from figure 21 below.

There is a marked increase on both F-deposits and F-loans on and after March 13, 2020,

illustrated by the dotted line. Considering the favourable conditions of these loans, several Norwegian banks surveyed by Ouden and Grotle Nore (2020) in their master thesis stated that banks had taken up loans over and beyond their strict liquidity needs. This made it possible for banks to buy back their debt in the market with profits. Additionally, they were also informed that banks could use the loans to purchase municipal bonds with a solid rate of return (Ouden & Grotle Nore, 2020).

Figure 21 - Development in F-deposits and F-loans

In theory, the change in the interest rate should not change the incentives for activity in the market, ceteris paribus. However, as the banks faced what seemed to be unrestricted access to liquidity, incentives to loan or lend in the intermarket were effectively removed. There was simply no need to take on risk by lending to other banks (without collateral) when Norges Bank offered to take on the role as allocator of liquidity. Moreover, the F-deposits, which were daily offered, meant that banks with excess reserves did not need to place these to the reserve rate or trade in the interbank market. Instead, they could place their excess liquidity at the extraordinary F-deposit rate.

Recalling section 2.7, Syrstad (2011) argues that a criterion for a robust liquidity system is that it should be robust to crises which demand extraordinary liquidity measures. Essentially, this entails that supplying more liquidity into the interbank system should not lead to undesirable interest rate movements. NOWA was relatively stable in the whole period, following the policy rate closely, as displayed in figure 22.

Figure 22 - NOWA and the policy rate

It perhaps seems, then, that Norges Bank has prioritized the transmission to the money market rates criteria over fostering interbank activity and allocation of liquidity among participants.

That is, criteria (1) over (4) from section 2.7. Moreover, as figure 23 displays and illustrates with the dotted line marked March 13, it seems that the F-loans and F-deposits were quite successful in stabilizing liquidity around 35 billion NOK shortly after the covid-19 crisis hit.

Despite this, the period for extraordinary F-loans (in NOK) was extended throughout 2020, with a monthly offer of a 3-month maturity loan set at the policy rate plus 15 basis points. The withdrawal of excess liquidity using F-deposits daily would also continue (Norges Bank, 2020q).

Figure 23 - Total liquidity