The advice will build on the Bank’s professional judgement and take into account factors other than the indicators mentioned. The weight given to different indicators may vary. As we gain experience and insight, the set of indicators can be developed further. 1  http://www.regjeringen.no/en/dep/fin/news/news/2013/systemically-important-credit-institutio.html?id=726797. 2  The trend is estimated using a one-sided Hodrick-Prescott filter (lambda = 400000) extended using a forecast. The mean is for the entire period in the chart. BIS central bankers’ speeches  3  Uncertainty and the need for resilience suggest that the buffer should not be reduced automatically even if there are signs that financial imbalances are receding. In periods of prolonged lending growth and low losses, banks should normally hold a countercyclical capital buffer. Banks will be allowed to draw on the buffer in the event of an economic downturn and large bank losses. If the buffer functions as intended, banks will tighten lending to a lesser extent in a downturn. This may mitigate the procyclical effects of tighter bank lending. The four key indicators are not well suited to signalling whether the buffer should be reduced. Other information, such as market turbulence and loss prospects for the banking sector, will be more relevant. The benefits of higher capital requirements for banks must be weighed against any costs the countercyclical capital buffer imposes on the economy. Several analyses, such as those conducted by the Basel Committee on Banking Supervision, suggest that higher capital requirements will not give rise to considerable, permanent economic costs in the longer term.

The amendments also authorise the Ministry of Finance to issue regulations on the use of other macroprudential instruments. Preferably, such instruments should focus directly on the sources of systemic risk. This is the principle that is applied when taxes are imposed directly on environmentally hazardous products. However, in practice, this is difficult to accomplish in the financial system. Systemic risk can be difficult to identify and has numerous sources. The financial system and its interaction with the real economy is complex, and problems spread across borders. The financial crisis was a clear reminder of this. We have experienced on previous occasions that some financial sector operators find ways to evade regulations. New sources and forms of systemic risk may also arise. It is difficult to imagine instruments that can fully prevent financial crises from developing. Yet it is still appropriate to increase banks’ resilience to losses when systemic risk increases. This is the primary purpose of the countercyclical capital buffer. Countercyclical capital buffer The new framework contains a number of new capital adequacy requirements. There are new buffer requirements in addition to the minimum Common Equity Tier 1 (CET1) capital  2  BIS central bankers’ speeches  ratio requirement. Banks that do not meet the buffer requirements will face restrictions on distributing dividend and paying out bonuses. The capital conservation buffer is permanent and independent of systemic risk. The systemic risk buffer is designed to act as a buffer against more persistent systemic risk and will apply to all Norwegian banks.