Svein Gjedrem: Hearing before the Standing Committee on Finance and
Economic Affairs
Introduction by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at a
public hearing before the Storting's Standing Committee on Finance and Economic Affairs,
together with Mrs Kristin Halvorsen, Minister of Finance, and Mr Bjørn Skogstad Aamo,
Director General of The Financial Supervisory Authority of Norway, Oslo, 13 February 2009.
* * *
Government finance fund and government bond fund
The crisis in the banking sector was initially a problem of liquidity. In October and November,
there was considerable turbulence and fear was spreading among banks. Credit premiums
were high. The situation has improved.
The improvement is to a considerable extent the result of action taken by the authorities. The
swap arrangement whereby banks can exchange covered bonds for government paper has
been important. The arrangement is oriented towards larger banks, and a number of banks
have made use of this facility, in an amount so far totalling more than NOK 70 billion.
Norges Bank has proposed an extension of the arrangement to provide banks with funding at
5-year maturities. Maturities so far have been up to 3 years. The extension is important to
ensure that maturity dates do not all fall within a short period.
The arrangement provides banks with Treasury bills. Banks have used these as collateral for
loans, sold them or kept them as liquidity reserves. There has been high demand for
Treasury bills. However, the Treasury bills have to be exchanged every six months. Norges
Bank has proposed that banks be supplied with government bonds at floating rates and a
maturity equivalent to the duration of the swap agreement. This may simplify the
arrangement.
Norges Bank has also expanded its use of its ordinary instruments. We have supplied
additional liquidity through our loan facilities and made arrrangements for banks to furnish a
greater range of securities as collateral for the loans. We have also provided loans with
longer-than-usual maturities. 89 banks signed up for a two-year fixed rate F-loan, and two
days ago 100 banks signed up for a three-year floating rate F-loan. These F-loans are
geared to small banks. As shown in the chart, more than half of the bids have been below
NOK 100 million.
Norges Bank has also supplied NOK through currency swaps and offered USD loans to
Norwegian banks.
In all, these measures have provided banks with good access to short and long-term funding.
However, the interbank market is still not functioning satisfactorily.
We have now moved into a phase where the main challenge may be banks' financial
strength. This is partly due to the downturn in the global and Norwegian economies, which
over time will result in higher losses, but also because higher capital adequacy is now being
required in the markets. The same view has been expressed by the Norwegian supervisory
authority.
We see that many banks abroad are raising new capital, with or without assistance from the
authorities.
But additional equity capital is now very expensive and perhaps also difficult to procure. The
alternative for banks may be to hold back on lending. If they do this on a large scale, it will
have considerable negative effects on output and employment. It is understandable that
credit growth is now slowing, both because demand for credit is lower and because fewer
investments are profitable.
But in addition, it appears that banks are applying stricter criteria in credit assessments and
rationing credit. Norges Bank's Survey of Bank Lending shows the banks' own perception of
this practice. The chart shows that over the past year banks have reported a tightening of
credit standards. It appears that credit flows to households have improved somewhat, but
banks are still tightening credit standards for corporate loans.
An important lesson to be learned from this economic crisis is that compelling banks to
increase their equity capital when the downturn has already started has a considerably
negative impact. It is important that banks have sufficient capital to make them resilient even
if the downturn should persist over a longer period. For this reason, we have proposed
government capital injections in banks.
The government bond fund will buy bank and corporate bonds. In Norges Bank's view, it is
particularly important helps to improve demand for corporate bonds. The fund shall primarily
buy high quality bonds. The chart shows that it is on the whole borrowers with weaker ratings
that are now being excluded.
Norges Bank is nevertheless of the view that higher demand for the best bonds will have a
positive effect. This will reduce the pressure on banks, and it may result in a shift in private
demand towards bonds with a lower credit rating.
Thank you for your attention.
BIS Review 17/2009
BIS Review 17/2009