Long live the revolution!’, a speech by Sam Woods, https://www.bankofengland.co.uk/-/media/boe/files/speech/2016/the-revolution-is-over-long-live-therevolution.pdf?la=en&hash=C5A74C42F5129D9505A8FA27B211BE2404C71351, and ‘Rethinking financial stability’, a speech by Andy Haldane, https://www.bankofengland.co.uk/-/media/boe/files/speech/2017/rethinking-financialstability.pdf?la=en&hash=C6F5991F2DD69E1C84610B0EBE51FB03F5F62E61 3  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  they were prior to the crisis (Chart 1). And UK banks’ buffers of liquid assets have increased by over 40 percent since 2010 (Chart 2). Basel III finalisation Turning back to last December’s Basel III package, it is important to remember the aim of these reforms. Their aim was to reduce excessive variability of banks’ risk-weighted assets, and in doing so making banks’ risk-based capital ratios more transparent and comparable. 8  This excessive variability is caused by the fact banks’ internal models can generate widely different risk weights for very similar assets. When the Basel Committee asked banks to calculate risk weights using their internal models for hypothetical portfolios of assets banks reported very different risk weights. The ratio of highest to lowest risk weights was as high as 2.3 for a hypothetical portfolio of trading book exposures (and 9  even higher for individual asset classes in the banking book). To put that in context, against the same portfolio of exposures, one bank might be holding £ of capital whereas another one might be holding £  This risk weight variability could reduce the stability of the banking system by impairing the link between risk and capital at the level of the system. It means banks with similar portfolios will not be equally resilient.

The level of the buffer must therefore be considered in the light of other capital requirements. Norway could be among the first countries to apply the countercyclical buffer. Growth in credit and in house prices in Norway has been high for a long period, and credit has reached a historical level relative to GDP. In view of this situation, banks must make extra allowance for the risk of an economic setback. Banks have taken due note of the requirements and are in the process of adjusting to them. Discussions with market participants suggest that an expected countercyclical buffer has been included in banks’ long-term adjustments. 3  Basel Committee on Banking Supervision, “An assessment of the long-term economic impact of stronger capital and liquidity requirements”, August 2010. http://www.bis.org/publ/bcbs173.pdf. 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. http://www.imf.org/external/pubs/cat/longres.aspx?sk=40790.0. 4  For further detail and references, see Norges Bank Papers 1/2013. 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.