6  BIS central bankers’ speeches  Chart: Household debt burden and interest burden In Norway, house prices and household debt have reached historically high levels. The rapid growth in incomes has been a primary driving force. The high household debt burden in Norway represents a risk of financial instability in the longer term. Households can be a source of both direct and indirect losses for banks. Banks’ loan losses will depend on households’ capacity to pay interest and principal, and to the value of the underlying collateral, which is primarily in the form of dwellings in Norway. Banks are also exposed to the economic repercussion effects that may occur in the event of a fall in household consumption. In the short run, the risk of disturbances is probably small because interest rates are low and the vast majority of households have job and income security. Chart: Household financial wealth by debt burden Household saving has been high in recent years, but households with the highest debt have the lowest financial wealth. In 2009, only about ten percent of financial assets were held by households with a high debt burden – that is to say those with debt that was more than five times their disposable income. These households also accounted for around one third of total household debt. Chart: High population growth and low residential construction rate In recent years, pressures in the housing market have been amplified by high population growth.

Structural macroprudential objectives motivate regulatory tools such as additional capital requirements for systemically important banks (“SIFI surcharges”), which aim to reduce the probability that a large institution fails, and resolution and recovery planning, which seeks to limit the damage in the event of failure. The second set of macroprudential objectives are cyclical objectives, focusing on the build-up of risks during credit and asset price booms and the consequent pull-back in financial intermediation during periods of stress. Cyclical macroprudential goals motivate regulatory and supervisory tools that “lean against the wind” in good times and “lean into the wind” during stress, such as the countercyclical capital buffer, the design of stress test scenarios, and time-varying loan-to-value restrictions, which are imposed in some countries. The macroprudential objectives of the SCAP reflected both structural and cyclical concerns. The primary goal was to ensure that large banks had sufficient capital to withstand an even-worsethan-expected economic downturn and still be able to lend—a structural perspective. Each of the 19 banks was required to raise additional capital if the stress tests indicated a shortfall relative to the supervisory target. However, the SCAP’s objectives also embodied cyclical concerns, namely, to provide confidence that banks could continue current lending (“leaning into the wind”) and thus reduce the likelihood of a worse-than-expected economic outcome. In the paper, we identified six elements that we argued made the SCAP a successful macroprudential exercise: comprehensiveness; consistency; multiple, independent estimates; diverse perspectives; transparency of process and results; and clear and predictable goals and actions.