Of significance, proportionate regulation protects the stability and integrity of the financial sector, and at the same time encourages innovative financial inclusion solutions. It is important to recognise that regulation that is proportionate to risks does not necessarily equate to “lighter regulation” as many perceive. For example, there are fundamental differences between the risk drivers in microfinance and commercial banking. Microfinancing is labour-intensive, usually highly decentralised, and among the borrowers, the factors that are predictive of repayment capacity are very different from commercial bank borrowers. These differences need to be better understood to achieve well-designed regulatory frameworks. For example, Mexico’s tiered bank account approach prescribes different degrees of KnowYour-Client (KYC) requirements and transaction restrictions that are proportionate to the value of the account. A low value account requires less KYC requirement due to typically lower money laundering risk. However, the lower KYC requirement is compensated by more transaction restrictions. The proportionate approach expanded access to bank accounts. On stability, Pakistan introduced proportionate capital requirements for microfinance institutions based on the size of the population they intended to serve. Microfinance institutions at district, regional, provincial and national levels have varying capital requirements, so that they could serve distinct market niches sustainably without the burden of holding excess capital that is disproportionate to the risk. The global Standard-Setting Bodies (SSB) have adopted proportionality as a principle in developing risk-based standards. SSBs are collaborating with developing countries through the Alliance for Financial Inclusion (AFI) to clarify implementation of standards, build supervisory capacity and address data issues.

As shown in Chart 3, there was also a clear build-up of financial vulnerability in Norway prior to the financial crisis.   The rise in both house prices and debt in Norway was on a par with countries that were much harder hit by the crisis.   In addition, Norwegian banks had also increasingly financed strong lending growth over a long period with market funding, of which a considerable share was shortterm funding. The Norwegian banking sector became increasingly dependent on well functioning international money and capital markets, enabling banks to roll over their funding. Nonetheless, the liquidity crisis never developed into a solvency crisis in Norway. Perhaps financial sector operators had learned from the previous banking crisis and engaged in more responsible banking during the upturn. Furthermore, they were subject to stricter banking regulation in some areas. But other factors also played a role.   Macroeconomic developments after the outbreak of the financial crisis were more favourable in Norway than in other countries. The decline in output and the rise in unemployment were far more limited. Because of particular features of the industry structure in Norway, it took time for the full impact of the international downturn to reach our economy. In the meantime, an expansionary monetary and fiscal policy had begun to take effect. Against the background of relatively favourable macroeconomic conditions, the vulnerability related to a high household debt burden and elevated house prices never translated into higher losses for banks.