Liquidity reserve requirements for banks will probably also be introduced in 2015. These are important structural measures that will all contribute to reinforcing the resilience of the banking system. In the view of Norges Bank, we neither can nor should have the ambition to fine-tune credit developments in pace with normal business cycle fluctuations. However, if systemic risk in the Norwegian economy increases, further measures may also be introduced here. It would  3  ESRB (2014): “The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector” (published 3 March 2014). 4  http://www.rbnz.govt.nz/financial_stability/loan-to-value_ratio. 4  BIS central bankers’ speeches  then be appropriate for Norges Bank to assess the level of the countercyclical capital buffer. The buffer can be increased – and to above 2.5 percent if necessary. Monetary policy and financial imbalances The regulation and supervision of financial institutions represent the first line of defence against shocks to the financial system. Macroprudential regulation is part of that defence framework. The task of monetary policy is to steer inflation and smooth fluctuations in output and employment. Even though the objectives and the instruments are different, monetary policy and macroprudential regulation cannot be viewed as separate. As I mentioned earlier, banks may adapt to an increase in the countercyclical capital buffer level by raising lending margins, which may dampen economic activity and in the next round inflation. In isolation, higher capital requirements may therefore pull in the direction of a lower key policy rate. New regulations may also affect the interest rate transmission mechanism.

The interest rate works through different channels, such as the house price channel. A lower key policy rate may lead to higher house prices via lower lending rates. This may, in turn, have a positive impact on consumption. If the ability to borrow against home equity is reduced, the house price channel will become weaker. Monetary policy, for its part, can be one of several factors that lead to a build-up of financial imbalances. History has shown that long periods of low interest rates can increase the risk that debt and asset prices reach unsustainable levels. Expectations of low interest rates may become entrenched among banks and borrowers when interest rates remain low for a long period. This may result in rapidly rising house prices. With low interest rates and rising house prices, banks may apply more lenient credit terms. We have also witnessed that low interest rates can prompt financial market participants to search for higher yields from alternative and often risky assets. Macroprudential regulation and monetary policy will often pull in the same direction. If the economy is booming, with rising inflation prospects and the risk of a build-up of financial imbalances, a tightening of monetary policy and capital requirements can underpin both objectives at the same time. Likewise, a pronounced downturn with increased banks losses can be addressed by lowering both the key policy rate and capital requirements. But in some situations, it may be appropriate to reduce the key policy rate at the same time as the capital requirements are tightened.