This is probably ascribable to cyclical divergence more so than a divergence in assessments and response patterns. In recent years, many of our trading partners have pursued an accommodative monetary policy with the aim of preventing the downturn from becoming deeper and longer and staving off falling inflation expectations. In the euro area and the US, low interest rates have probably contributed to improving the balance sheets of banks, households and firms. Financial stability considerations have thus pulled in the same direction as inflation and employment considerations. This may change as the economic outlook changes. As the Chair of the Federal Reserve, Janet L. Yellen, put it: “There may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risk to financial stability.”6 The quote reflects to a large extent the assessments we have made in Norway in recent years. In order to illustrate this, we can construct a simple analytical framework. Chart: Framework The point of departure is a central bank with a flexible inflation targeting regime. The central bank weighs deviation from the inflation target against deviations from potential output. The future paths for inflation and output are included in the assessment. We have included a variable that captures the transmission of financial stress to the wider economy. This framework thus differs from the normal one presented in the monetary policy literature. In the stylised model, we have called this stress impulse zt. First, the size of the effect on the real economy depends on the level of financial stress.

The buffer rate will be increased when financial imbalances are building up or have built up, thus bolstering resilience when we need it most. The countercyclical capital buffer can thereby have an impact on both the probability and the costs of a crisis. The buffer may thus also reduce fluctuations in the economy. We are now in a phase where banks are facing a number of new capital requirements. Banks can choose to adapt to the higher capital requirements by, for example, increasing lending margins or by tightening lending. Thus, higher capital requirements could curb economic activity in the short term. As the new requirements are phased in, the buffer will have to be adjusted to the economic situation and other requirements applying to banks. This does not mean that the countercyclical capital buffer should be changed frequently in pace with normal cyclical fluctuations. Once the buffer has been built up, the costs of maintaining capital levels will probably be low. The buffer rate should not be reduced automatically even if there are signs that financial imbalances are receding. This is in line with the international guidelines for the countercyclical buffer. The countercyclical capital buffer is only one of the elements in the new international regulatory framework for banks. The European Systemic Risk Board (ESRB) provides, among other things, for sector-specific capital requirements and limits on loan-to-income and loan-to-value ratios. 3 In New Zealand, the authorities have introduced limits on banks’ share of high LVR residential mortgage lending.