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Ensuring financial stability in turbulent times

Governor Øystein Olsen at the Finance Norway conference

12 April 2001

(2)

-10 -5 0 5 10 15

-10 -5 0 5 10 15

2007 2008 2009 2010

World

Emerging economies Advanced economies

High cost of financial crises

GDP. Percentage change on previous quarter converted to annual rate.

Source: IMF

(3)

Run-up to financial crises – clear similarities

80 90 100 110 120 130 140 150 160

80 90 100 110 120 130 140 150 160

1995 1998 2001 2004 2007 2010 Debt/GDP

60 80 100 120 140 160 180

60 80 100 120 140 160 180

1995 1998 2001 2004 2007 2010 Real house prices

20 30 40 50 60

20 30 40 50 60

1995 1998 2001 2004 2007 2010 Share of market funding

(4)

Vulnerability also built up in Norway

80 90 100 110 120 130 140 150 160

80 90 100 110 120 130 140 150 160

1995 1998 2001 2004 2007 2010 Debt/GDP mainland Norway, index 2000=100

60 80 100 120 140 160 180

60 80 100 120 140 160 180

1995 1998 2001 2004 2007 2010 Real house prices, index

2000=100

20 30 40 50 60

20 30 40 50 60

1995 1998 2001 2004 2007 2010 Share market funding and

other debt excl desposits

(5)

Vulnerability still exists

80 90 100 110 120 130 140 150 160

80 90 100 110 120 130 140 150 160

1995 1998 2001 2004 2007 2010 Debt/GDP mainland Norway, index 2000=100

60 80 100 120 140 160 180

60 80 100 120 140 160 180

1995 1998 2001 2004 2007 2010 Real house prices, index

2000=100

20 30 40 50 60

20 30 40 50 60

1995 1998 2001 2004 2007 2010 Share market funding and

other debt excl deposits

(6)

Level of debt high for many households

Percentage of private households

1)

with net debt ratio

2)

of more than 500 per cent by net debt ratio. Annual figures 1987 - 2008

0 2 4 6 8 10 12

0 2 4 6 8 10 12

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Above 900

Between 700 and 900 Between 500 and 700

1) Excl. self-employed.

2) Net debt ratio equals debt minus bank deposits as a percentage of disposable income

(7)

Wages, prices and

unemployment

GDP Export demand

Exchange rate

Real economy Financial sector

Credit to households

House prices

Equity

prices

Credit to

enterprises

(8)

Basel III provides for a more robust system

Assets Liabilities

Equity capital

Deposits

Long-term market fund.

Short-term market funding Lending

Securities - liquid - illiquid

 Capital

 Requirement for higher and better quality capital

 Liquidity

 Quantitative

requirements for

liquidity buffer and

stable funding

(9)

Previous and new minimum capital adequacy requirements, and new capital buffer requirements.

As a percentage of risk-weighted assets

Common equity 2.0

Common equity 4.5

Conservation buffer

2.5

Hybrids 2.0

Hybrids 1.5

Tier 2 4.0

Tier 2 2.0

0 1 2 3 4 5 6 7 8 9 10 11 12 13

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Gamle Nye med buffere New incl. buffers

Sources: Basel Committee and Norges Bank Countercyclical buffer

2.5

Capital requirements in Basel III

Old

(10)

0 1 2 3 4

Standardised approach, risk weight 35% IRB, risk weight 10%

Maximum countercyclical buffer Common equity + capital

conservation buffer Required capital per NOK 100 of residential mortgage lending

Possibility of low risk weights on residential

mortgages

(11)

Crisis resolution – some possible improvements

Objective: Uninterrupted operations without use of public funds

 Creditors must bear losses

Banks must draw up plans for orderly liquidation

Early intervention by crisis resolution authorities must be possible

 Authority to split up and sell an institution in parts

 Possibility of establishing bridge bank

 Possibility of converting debt to equity

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