To facilitate banks’ access to borrowing from Norges Bank during the period of financial turbulence, collateral requirements for loans were temporarily eased. In October 2009, it was announced that the temporary rules for collateral requirements would be changed. Acceptance of new securities eligible under the temporary rules was discontinued in October. Securities already approved under the temporary rules would be eligible as collateral until maturity, or at the latest until 15 February 2012. Changes in the so-called bank quota were also announced. Under the current rules, up to 35 per cent of a bank’s borrowing facility can be based on collateral in bonds issued by other Norwegian banks. Debt instruments issued by foreign banks will be included in the bank quota as from 1 December 2010. Securities issued by banks will no longer be eligible as collateral for loans as from 15 February 2012. Covered bonds will still be eligible as collateral, including, until further notice, bonds to which no credit rating has been assigned and bonds issued by a bank’s own mortgage company. This is expected to contribute to the development of the Norwegian covered bond market. The housing market – a source of disturbances in the economy Banks have had strong incentives to extend credit for house purchases. Even during the banking crisis around 1990, Norwegian banks’ losses on residential mortgages were low. This is reflected in the low risk weights for residential mortgages in banks’ risk models. For an individual bank, residential mortgages are low-risk loans.

This has the intended effect of encouraging firms to shift from a compliance focus to developing a deeper understanding of the risk drivers in their business. In turn, conversations between management and the board, and between insurers and supervisors, have moved to focus on how key risks are being controlled rather than on whether particular rules have been breached. This reflects our expectation that boards, supported by the audit and risk committees, must monitor changes to their risk profiles and actively review risk strategies and internal controls in the light of those changes. An area in which Bank Negara Malaysia is currently seeking to better understand industry practice is with respect to the interactions between the audit and risk committees of the board. Audit committees have a clear interest in risk management within their organisations. Most internal audits adopt a risk-based approach to auditing which requires an understanding of material risks within the organisation. Audit committees also obtain independent assurance from internal audit on the effectiveness of risk management processes within the organisation and this requires a reasonably deep knowledge of risk management. Conversely, risk committees must consider the quality of internal controls, including financial reporting practices, which are an important part of any risk management framework. The Walker Review of corporate governance in the financial industry acknowledged an important link between these two functions. In Malaysia, we have moved ahead of many countries in requiring an organisational separation of the audit and risk committees in order to encourage an enhanced focus on audit and risk.