Banks determine who should be given credit and closely monitor borrowers and their projects. This is a task that would be difficult for small savers to undertake. By offering customers various kinds of financial products, banks also help to diversify and redistribute risk. This function is essential in a modern market economy. At the same time, experience shows that complex financial structures are a source of increased vulnerability. Chart: Securitisation resulted in complex and vulnerable structures Ahead of the financial crisis, there was a proliferation of complex financial products, including residential mortgage-backed securities in the US. In theory, these new products were intended to improve the distribution of risk. Banks’ exposure to risk that had been shifted off their balance sheets would be limited. In reality, it turned out differently. Risk was not very well distributed, merely hidden. With so many links in the chain between borrower and saver, the responsibility for monitoring borrowers became highly fragmented. Good banking is important for a sound and stable economy. Despite thorough credit assessments and close monitoring of borrowers, banks will face unexpected losses. If banks end up with insufficient equity capital following substantial losses in bad times, they will have to tighten lending. This may amplify a downturn, as is currently the case in a number of European countries. Compared with other enterprises, many banks have limited equity capital. It is often more costly for banks to fund lending with equity capital than with deposits and borrowing from the market.

Øystein Olsen: Macroprudential policy and financial stability Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the meeting of the Norwegian Savings Banks Association, Oslo, 31 October 2013. *  *  *  Accompanying charts can be found at the end of the speech: Charts in pdf-format. Thank you for inviting me to this meeting of the Norwegian Savings Banks Association. It is a pleasure to meet representatives of Norway’s many savings banks. As a key element of the financial system, savings banks play an important role in the Norwegian economy. The financial crisis showed the importance of promoting financial stability. In the wake of the crisis, a number of reforms were introduced in many countries. These efforts have achieved results. Regulations have been tightened and have incorporated a clearer macroprudential perspective. Banks’ capital ratios have been raised. There are also initiatives aimed at bolstering the resilience of the financial infrastructure. I will devote most of my time today to the introduction of the new capital framework in Norway, including a countercyclical buffer requirement, and I will also touch upon the interaction of the buffer with monetary policy. I will conclude by saying a few words about Norges Bank’s settlement system, which plays an important role in promoting financial stability. Chart: Banks play a key role Why capital regulation? A well functioning financial market is essential for virtually all other economic activity in a market-based economy. Banks play a key role. Banks channel funds from savers to investors.