Banks can reduce lending volumes. Banks can also change the composition of their lending portfolio by shifting into lower risk-weighted assets, by, for example, tightening lending to enterprises and increasing lending to households. Norwegian banks are well on the way to adjusting to new and higher capital requirements, including a countercyclical capital buffer. Developments in banks’ earnings indicate that banks can increase their CET1 ratios by around 1 percentage point a year without reducing lending growth. 5  3  Basel Committee on Banking Supervision, An assessment of the long-term economic impact of stronger capital and liquidity requirements, August 2010. For an updated collection of references to studies of the costs and benefits of macroprudential regulation, see Annex 1 in IMF Working Paper WP/13/167, by Arregui et al. “Evaluating the Net Benefits of Macroprudential Policy: A cookbook”, July 2013. 4  See Norges Bank Memo No. 1 2013 for further discussion and references. 5  In the calculation there is an assumption of an annual increase in banks’ risk-weighted assets of around 4%, earnings in line with 2012 and all profits are used to increase equity capital. It is also assumed that the transitional arrangement is retained and is binding. 4  BIS central bankers’ speeches  Capital requirements and monetary policy The countercyclical capital buffer and the key policy rate are two instruments serving different objectives. The objective of the countercyclical capital buffer is to increase banks’ resilience to losses in a downturn. The primary objective of monetary policy is low and stable inflation.

Øystein Olsen: Macroprudential regulation and monetary policy Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME)/BI Norwegian Business School, Oslo, 7 October 2013. Please note that the text below may differ slightly from the actual presentation. *  *  *  Accompanying charts can be found at the end of the speech. Original presentation is on Norges Bank (Central Bank of Norway) website. Charts in pdf  International economic developments in recent years have presented a challenge to the economic policy framework. An important lesson from the financial crisis is that regulation of the financial system must be improved and that the macroprudential perspective in particular needs to be strengthened. Development of macroprudential regulatory frameworks is therefore underway in a number of countries, including Norway. Experience shows, however, that financial crises are very difficult to predict and prevent. The aim of macroprudential regulation is to reduce the probability of a crisis and counteract harmful effects in the financial system when a crisis occurs. A related issue is how monetary policy should respond to financial imbalances, and more specifically, what the implications of the new macroprudential policy tools will be for monetary policy. How monetary policy is conducted and communicated is also evolving, both abroad and in Norway. Norges Bank has decided to launch a major research project with a view to further developing the framework for flexible inflation targeting. I will return to this topic towards the end of this address.