Rather than slowing lending, Norwegian banks have reduced their risk-weighted assets through lower risk weights and changes in the composition of their lending portfolios. Lending has increased more in the residential mortgage market, which features lower risk weights than in the corporate lending market. Norwegian banks’ adjustment strategies remind us that macroprudential policy can influence economic activity through various channels, and thus have an effect on price stability, the main objective of monetary policy. Macroprudential policy could also have an impact on the transmission mechanism of monetary policy. For instance, if new regulations reduce households’ ability to borrow against home equity, the credit channel of monetary policy is likely to become weaker. Monetary policy, for its part, can be one of several factors contributing to a build-up of financial imbalances. We have learned again that long periods of low interest rates can increase the risk that debt and asset prices will reach unsustainable levels. And, as we have witnessed, low interest rates tend to prompt financial market participants to intensify their search for yields from high-risk assets. Hence, even though the objectives and the instruments are different, monetary policy and macroprudential policy cannot be viewed as separate. Indeed, monetary and macroprudential policy instruments can work in the same direction. If the economy is booming, with rising inflation prospects and the risk of a build-up of financial imbalances, a simultaneous tightening of both monetary policy and a macroprudential tool – the countercyclical capital buffer – can underpin the objectives of both policies.

The model-based predictions can be interpreted as the probability that the economy is in a precrisis period. The chart shows estimated crisis probabilities for the US, Spain, Norway and the UK. The band reflects various combinations of explanatory variables and trend estimation methods. 3 The dataset covers the period from 1970 to 2013, with a total of 27 events defined as crises, of which 11 are associated with the financial turmoil in 2008–2009. As you can see from the chart, the estimated probability of a crisis increased markedly in the years ahead of the financial crisis in 2008–2009, although the UK is the exception in that context. Crisis probabilities also increased in the US ahead of the US Savings and Loan crisis, in the UK ahead of the UK’s small-bank crisis and in Norway ahead of the banking crisis in the late 1980s and early 1990s. All these episodes featured rapid growth in credit and rising real estate prices. 2  See Anundsen, A.K., F. Hansen, K. Gerdrup and K. Kragh-Sørensen (2014): «Bubbles and crises: The role of house prices and credit», Norges Bank Working Papers 14/2014. 3  The indicators are incorporated in growth form or as deviations from estimated long-term trends. 2  BIS central bankers’ speeches  The empirical results support our choice of key indicators of financial imbalances. Household and corporate credit, house prices and banks’ wholesale funding ratio are statistically significant in the models and clearly influence the estimated probability of a crisis.